EDITORIAL: by Peter WestmoreNews Weekly
Can Australia weather the storm?
, October 25, 2008
Commodity prices, which have underpinned the economy, have fallen dramatically.An effect of the massive financial crisis in the United States and Western Europe is that the mantra of modern corporate capitalism, that markets should be allowed to operate free from government interference, has been completely reversed by the government takeover of leading banks and financial institutions - a necessary step in restoring confidence in the banking system.
The scale of government acquisitions over recent weeks of troubled financial institutions on both sides of the Atlantic has been breathtaking.
The Bush Administration in the United States has taken over Fannie Mae and Freddie Mac, the two largest mortgage institutions in the country, and Congress has voted billions of dollars to provide liquidity to the financial system.
In Britain, Gordon Brown's Labour Government offered to take minority non-voting shares in troubled banks, but when this failed to arrest the collapse in asset values, injected £20 billion ($50 billion) to buy about 60 per cent of the Royal Bank of Scotland, and a further £17 billion ($43 billion) to buy a 40 per cent stake in Lloyds TCB, which recently took over Halifax Bank of Scotland.
The German Government has taken similar steps. It has promised €100 billion ($200 billion) to buy into German banks, and provided financial guarantees of €400 billion ($800 billion) to the banking system.Forced to reverse
Other countries in the Euro-zone have taken similar measures to guarantee money to banks, and to re-capitalise their banks. Why have governments been forced to reverse free market policies which have been in place for the past 30 years?
The short answer is that, in the absence of effective regulation of the banking system, the banks have expanded by risky borrowings on over-valued assets.
Over recent years, European banks followed their American counterparts by increasing their holdings of risky debt and relying on short-term loans, rather than deposits, to finance their operations.
What triggered the European collapse was the realisation that European banks will be forced to find $500 billion in debt maturing in the fourth quarter of 2008, and a further $400 billion maturing in the first quarter of 2009.
With the rising cost of borrowing, and a freeze up in inter-bank loans, the danger was that earnings would collapse and banks would default.
Welcome though the government intervention is, it is still not certain that the European governments will be able to bail out their banks.
The New York Times
recently pointed out that, in proportion to each country's GDP, West European countries such as Britain, Switzerland, Iceland, Germany and France have a far higher exposure to short-term debt than the United States. In each of these cases, the banks' short-term liabilities are greater than their respective countries' national debts.
As the global financial crisis spreads from the stock market to the banking industry, Australia is increasingly affected. Commodity prices, which have underpinned Australia's economy over recent years, have fallen dramatically in recent months.
Five Chinese steel mills have revealed plans to cut steel production by 20 per cent from October, with immediate consequences for Australian iron ore and coal exports.
Additionally, job advertisements have fallen for five successive months; both personal and business borrowings have fallen dramatically; and business confidence has also taken a hit.
Mr Rudd's response to this has been to use the Federal Government to restore confidence to the economy, through his unprecedented guarantee on deposits in banks, building societies and credit unions, and the promise of a mini-budget using the government's huge surplus to reverse the current economic contraction.
The Prime Minister has clearly decided that his earlier options - talking down the extent to which international events will impact on Australia and talking up the management of the Australian banking system - are no longer effective.
A measure of the government's alarm was clear from comments by the Finance Minister Mr Lindsay Tanner to the Financial Review
. He said, "We don't have the luxury of sitting back and the consequences flow through, and then thinking about how to respond. It's clear there are considerable risks to economic activity generally and that those pressures are starting to mount."
While the timing of the current crisis could not be predicted, it has been obvious for years that as Australia became more closely integrated with the global economy, and domestic primary and secondary industries collapsed under the weight of free trade policies pursued by successive governments, and Australia became critically dependent on borrowings which have forced the foreign debt into the stratosphere, the day of reckoning would come.
Unfortunately, the victims of the collapse, when it comes, will be those on pensions, fixed incomes and in vulnerable industries, without the financial resources to withstand the economic tsunami.- Peter Westmore is national president of the National Civic Council.