ECONOMIC AFFAIRS: by Patrick J. ByrneNews Weekly
Can Rudd save Australia from the global slump?
, February 21, 2009
Neither side of Australian politics is offering a sustainable program to cope with the international financial crisis that is pushing Australia towards an economic precipice. Patrick J. Byrne reports.Prime Minister Kevin Rudd has produced a $42 billion stimulus package and published a long essay, "The global financial crisis" (The Monthly, February, 2009), which accurately describes the world financial meltdown.
He cites George Soros - the financial speculator who famously broke the Bank of England on Black Wednesday, 1992 - as rightly saying that this financial crisis "is not caused by some external shock; this crisis is generated by the system itself".
Mr Rudd points out that Alan Greenspan, former head of the US Federal Reserve and a leading architect of the international financial system, has also admitted that the system has failed. When questioned on the issue by Henry Waxman, head of the US Federal Government's Committee on Oversight and Government Reform, Greenspan admitted that "the whole intellectual edifice" of modern financial management has collapsed.
Waxman asked him: "In other words, you found that your view of the world, your ideology, was not right; it was not working?"
Greenspan replied: "Absolutely, precisely."
In other words, both Soros and Greenspan acknowledge that the system is fundamentally and fatally flawed.
However, Mr Rudd fails to acknowledge - either in his stimulus package policies or in his long essay on the financial crisis - that the fundamental cause of the current crisis is the huge trade imbalances created by the now failed, radical free-trade ideology.
Further, Mr Rudd says that the solution requires financial regulation and the application of social democratic principles, but neither can solve the crisis.
The world economy (world GDP) is about $US60 trillion, but the world liquidity market adds up to about $US600 trillion - that is, 10 times the world output - and 75 per cent of this is in the inflated derivatives market.
Derivatives are a form of traded securities that were supposed to spread risk across the system. Instead, they have destabilised the financial system, sending it into crisis.
The British banks, which hold about half of the world's derivatives, face technical bankruptcy.
The funding that has fed the derivatives market has come from several sources, a major one being the huge trade surpluses of big exporting nations, such as China, Japan and the oil-producing nations.
Under a system of free trade and floating exchange rates, the currencies of countries like the US with big trade deficits were supposed automatically to adjust downwards, making their exports cheaper on world markets. Conversely, the currencies of countries with big trade surpluses, such as China, were supposed to adjust upwards, making their exports dearer. In this way, the system was supposed to be self-correcting.
However, contrary to orthodox international trade theory, the opposite has happened. China and Japan (and others) have invested their trade surplus trillions back into the US stock and bond markets. This has pushed the US dollar up in value, making US exports less competitive and thereby crippling more and more of US industry. Meanwhile, Asian and oil-exporting countries have accumulated vast trade surpluses that have become "the slush funds for casino capitalism".
The merchant banks, with the backing of US and British politicians and regulators, invested this money, using financial leverage to create the huge derivatives bubble.
Both Mr Rudd and Mr Turnbull have failed to grasp that this crisis could not have happened but for the flawed radical free-trade model. It is collapsing, but they still appear to support it.
There is a further dimension to this crisis. As Martin Wolf, editor of London's Financial Times
explained, the method by which these trade "imbalances" were created "grew out of the Asian financial crisis in 1997".
He said: "Countries that had grown used to incoming foreign capital suffered terribly when it suddenly flowed back out again. To protect themselves in future, they started to run current-account surpluses and to amass foreign-exchange reserves. Spendthrift America and Britain were happy to help Asia save, even if that meant running the corresponding deficits." (The Economist,
November 13, 2008).Casino capitalism
Consequently, Mr Rudd's proposal for new and more comprehensive regulation of financial markets may help, but it won't solve the problem. So long as huge trade surpluses provide slush funds for casino capitalism, then the problem will reoccur.
Essential to resolving this crisis will be restoring a semblance of balance back into world trade, thereby reducing the excessive trade surpluses of nations like China and Japan.
This will require specific policies to rebuild industries that have been lost overseas, but which are now needed to cut the US and Australian dependence on imports, and to boost exports.
Hence the importance of a having a government-backed consortium to buy out one or two of the foreign-owned major car companies operating in Australia, and using them to build an Australian-owned car industry to provide for domestic needs. Some imports can be balanced with exports.
Australia's agricultural industries need rebuilding, before the nation becomes a net importer of food and loses a large number of farmers who are crucial to the nation's food security.
With the falling Australian dollar, the price of oil imports is set to skyrocket. To curb our increasing dependence on imported fuel, greater use of gas, synfuel and domestically-produced sugar-cane ethanol for cars will be required.
Such industry policies will require specialist funding that can only come from a government-backed development bank.
Mr Rudd's stimulus package is not directed towards industry policy, and proposals for a development bank - reportedly advocated by at least two Labor state treasurers - have so far been rejected.
While he claims that social democratic principles can provide answers to the financial crisis, social democracy has a fundamental flaw. It too easily becomes big government in bed with big business, at the expense of the democratic process.
It has been big business - the financial institutions and the world's multinationals - that have used their financial resources to wield undue influence over government policies worldwide.
Without this abuse of financial power to manipulate the economic policies of Western democracies, the conditions for the current crisis could not have happened.
Today's social democracy is unlikely to solve this problem. This problem can only be solved by applying that particularly European concept of "subsidiarity", the favouring of the small and local over the large in business and government. This comes out of the European Christian Democratic tradition.
That tradition sits well with long-gone, old-style Labor principles. It also sits well with the Menzies brand of liberalism that championed the "forgotten people". In contrast, both the Coalition and Labor today have attached themselves to the big end of town.- Patrick J. Byrne is national vice-president of the National Civic Council.