Swan’s greatest failure

John Howard once famously described himself as “Lazarus with a triple bypass” but there is another political survivor who has shown every bit as impressive political cunning to push his star to new highs despite a series of policy debacles that have brought down those around him. That man is the Treasurer, Wayne Swan.

Consider for a moment Mr Swan’s record in the top fiscal job. The Rudd government was barely elected when it was tested by an historic event in the GFC. Swan’s Treasury responded impeccably with a well thought through staged stimulus package that kept the economy growing as other Western nations tumbled.

As I have argued before, the stimulus was largely well conceived. Allegations of waste are pretty silly when the point of stimulus is literally to waste money as quickly as possible. That’s its entire purpose, to keep money churning in the economy.

But there are still two major criticisms one can make of the stimulus package. The first is that it clearly over-stimulated housing. The huge First Home Buyer Grant was too much in tandem with finance supply side measures and slashed interest rates.  It dramatically boosted Australia’s private debt stock at a time when it was clear that the world was heading in a new direction in which household leverage was going to be wound down, by force if necessary.

The First Home Buyer Grant was not in the original stimulus proposal sent from Treasury to the Government. It was inserted by Ministers. As Treasurer, Swan is responsible.

The second criticism one might make is political. It is that the success of the overall stimulus package has failed completely to convert into political capital for the government. Indeed, that the stimulus package is a mill stone around the government’s neck is a direct reflection of the Treasurer’s failure to sell it to the people.

The next great failure of Wayne Swan was the Resource Super Profits Tax (RSPT). As I think most in the old services economy will now quietly acknowledge, this was a desperately needed reform to help counter-balance the Dutch disease now sickening the national economy.

The Henry Tax Review that proposed the tax was commissioned on a schedule that showed a bizarre lack of political judgement vis-a-vis timing. To have a twenty year blueprint for major tax reform issued just six months from an election and to cherry-pick a dramatic new tax as the centre piece of policy with no industry consultation and no softening up of the polity, showed a cataclysmic lack of political judgement. The botched reform cost a Prime Minister his job, pushed another to sell out as much as $100 billion in public revenue for power and ended with the sad spectacle of three foreign-owned corporations writing their own tax rates in the people’s Cabinet Room.

The reform was in Wayne Swan’s brief yet he was promoted to Deputy Prime Minister.

Yet, although both of these political episodes hint at Wayne Swan’s limitations as a policy strategist and orator, neither is his greatest failure. That resides elsewhere, set the scene for both, and will have longer repercussions for the national economy than either. That failure is the banks.

From the very outset of the GFC, Treasurer Swan has sustained a simplistic narrative of exceptionalism around Australian banking. There has been no inquiry into what went wrong with Australia’s banking system from around the late nineties when credit began to flood unproductive housing assets. There has been no inquiry into how Australia’s fiscal, monetary and financial stability structures contributed to that credit surge. There has been no inquiry into how Australia can extract itself from the bubble in credit in which it finds itself.

Swan’s exceptionalist rhetoric has taken on various guises.  First, we were just different. Then, we were going to boom from mining. More recently, as it became clear to the drover’s dog that the economy is neither different nor booming, we suddenly lacked “confidence”. Now, we are going to try European-style austerity, slash and burn public spending even as the private sector, and households especially, obviously want to rebuild their savings. A surplus will lower interest rates and solve all of our problems, according to Craig Emerson yesterday from the AFR:

“We want to create the capacity for the Reserve Bank to further reduce its cash rate,” he said, adding that was important to boost the confidence of small businesses and home-loan borrowers.

And there is the rub. The Reserve Bank of Australia has acknowledged the necessity for households to contain their leverage. Yet the government is setting about creating fiscal settings that will either force them to reverse doing so or force the economy to slow further towards recession.

I have written extensively about how Australia is caught in a trap. In the new normal, ratings agencies will not allow the banks to expand their offshore borrowings to any extent, nor allow the government to run consistent Budget deficits because it implicitly guarantees those bank borrowings. This is a difficult context for macroeconomic policy and is not this government’s fault.

What is their fault, however, is the total failure to address it. Wayne Swan has not asked a single question of this context, nor addressed it with any policy measure. He has simply stuck the nation’s head in the sand, denied we have any debt issues whatsoever, allowed the banks to go on operating in this bastardised context of public support for private profit and left the RBA and APRA to pick up the pieces.

That is Wayne Swan’s greatest failure. He has created an environment in which Australians are ill-prepared to adjust, in which corporations feel they can get a bailout any time things get tough and in which our various arms of macroeconomic management are working with dated tools and at cross-purposes.

He has left us with a dated economic model that is taking us nowhere.

David Llewellyn-Smith
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  1. Ronin8317MEMBER

    Keeping the banks afloat was the greatest priority during the GFC, which is why housing prices must not be allowed to fall. If Steve Keens scenario of 40% fall in house prices have come to pass, the banks simply cannot survive.

    The Resource Minieral Superprofit Tax was a disaster for a good reason. The original tax proposal involves the abolition of royalties, which means negotiation with the States. It really should have been sold as a broad ‘tax reform’, rather than a tax grab. The biggest political problem was that QLD and WA are seeing their ‘money’ from mining being siphon off to NSW and VIC. If Rudd had taken the ‘mining money from QLD stay in QLD’ stance, he will still be PM right now.

    I blame it on his heart medication. It was a really stupid political blunder.

    As to austerity, Labor’s only chance to avoid a wipeout like QLD relies on a surplus. This is a political necessity. Even if unemployment hit 10%, that means there are still 90% of people who are employed, and they will demolish Labor unless there is a surplus. Most voters only understand this : deficit bad, surplus good. This is the political reality. In a sense, we are voting for our own demise.

    • Agree with the direction of your comment on RSPT. A shabbily drafted, ill-conceived tax grab. Deserved failure. And as we have all witnessed recently in the internecine ALP leadership struggle, had no direct bearing on the change of leadership which was going to happen in any case – the numbers men had played their game, Rudd was loathed and Gillard was keen. Incompetence and personal ambition in equal measure.

      • So … the co-ordinated response by the mining lobby had nothing to do with the demise of the RSPT?

        • Of course it did. A great campaign and a pleasure to have been one very small part of it. The RSPT as proposed was a travesty, grossly inequitable, a shambles bordering on appropriation.

          The campaign against the RSPT was mild when compared to Labor’s own internal (equally successful) campaign to assassinate Rudd. They achieved their desired goal.

          One, (RSPT), was a mere sideshow to the real game in town (the destruction of an elected Prime Minister by his own colleagues). Labor did it to themselves.

  2. +100 HnH. Treasurer Swan’s payback of course will come at the next election where decimation of the Labour Party is likely to see him lose his seat as well. People are very angry and most dont really understand why but you’ve explained at least why Swan is responsible for a great deal of that anger.

    The one point missing re GFC response was the bank’s receiving the direct government guarantee with zero conceived policy around its consequences, moral hazard and how to extract any guarantee from the system. The direct guarantee has turned into an implied guarantee with denials from all those involved, a very dangerous siutation

  3. The country gets the politicians it deserves. Only a tiny minority think banks and private debt are a problem. For example, how many FHBs thought FHOB was a bad idea? Not many.

    • I agree with you Mav – I do not think the analysis “Swan’s Treasury responded impeccably with a well thought through staged stimulus package that kept the economy growing as other Western nations tumbled.” ; is incorrect though, as ALL the other Western nations responded in the same way and it sure did not work for them (except as a can kick down the road exercise), H&H you are sounding like the MSM – Australia, we are different, are foundations and fundamentals are better, blah, blah, when in reality we had China and no Government debts. And now we have the highest real estate prices of anywhere except Hong Kong and a populace that is struggling to keep up. We were just in a different and better cycle, but now we must face reality.

      • “except as a can kick down the road exercise”

        Thats exactly what it was here too…we just werent as far down the road as other nations at the time so the can-kick wasnt as obvious.

        But it has merely kicked the can and made the housing issue worse.

      • Neil that criticism of the analysis is a little harsh. At the time no one knew what would happen, so erring on the excessive side is understandable.

        It’s easy to criticise the effort, but had the outcome been what many expected, the impact on the man and woman in the street would have been quite severe.

        Many commentors here express glee when they talk about a crash, but in countries where that has occurred I don’t see a lot of glee being expressed by working men and women.

        We should ask ourselves why that is so.

        • I don’t express glee when talking about a crash in our housing market.

          I see it as a necessary evil and the quicker it happens, the less damage it will do. (Relatively speaking – it will still do massive damage.)

          I believe our massive private debt levels and off-shore borrowing mean we’re far past the the stage where we can survive unscathed.

          • AB – may I ask why you see it as a necessary evil that must happen quickly.

            Can you explain why a slow correction wouldn’t be better for the economy, and for the average man and woman?

            I don’t see the benefits, but you may be able to enlighten me.

          • Peter, maybe it is a generational thing. IMHO, Gen Y/X don’t want to wait half their lives before the crisis is over ala Japan. Do you expect them to just sit there drinking the slow poison that is not of their own making? They want to get over it and move on.

            Personally, I don’t mind it going either ways.

          • Fair comment MAV – I understand that attitude, but it may not be the best for society as a whole.

            Can I raise two points:

            1. None of us here gets to choose the outcome, we can only speculate on what might happen.

            2. Our modern society and economic system is very young in historical terms – it’s still in the experimental stage. If we were living in the not too distant past we would have been victims of the european class system. I have no noble blood in me, I would be working at a forge or hauling bags of coal on my back, and most others here would be in a similar position.

            Western society hasn’t suddenly discovered Utopia – it’s been a hard fought battle to this point, and not every battle is easily won.

            That doesn’t answer the wants of the many who just want an affordable home for their family to live in, but in the past that was just a dream that the common man would rarely achieve.

            History isn’t written in advance.

          • unfortunately PF I don’t think that a slow melt scenario will do enough to damage the nations psyche in regards to the unproductive allocation of capital into unproductive assets rather than productive ones. A dramatic crash would achieve this. Look at america where its cheaper to buy a house than rent and yet people still dont

          • +0.5 element of truth in this. A slow melt is very tricky – you dont want to reignite via too low interest rates or fiscal stimulus/policy changes along the way – the temptation would be great. Look at all the calls for interest rate cuts now, even though the economy is still growing in real terms…the tightrope is very hard…

            Imagine the outcry of the Australian households, business sector, government et al in even a minor recession – remember, we havent had one in 20 years, so no-one is really prepared to have even a mild one.

          • That’s a good question Peter and I probably should have expanded on it.

            I see our economy slowly being strangled by the amount of money we direct to investment in existing housing stock rather than towards more productive business lending. (I think MB had a post showing how the percentage of business versus mortgage lending had changed over time but I can’t find it.)

            If you don’t believe that our current private debt levels are sustainable (as I don’t), then it’s clear that they must be reduced.

            A relatively quick correction means more pain in the short term (particularly for the heavily indebted), but allows our economy to more quickly purge debt and reduces the number of new people who commit themselves to large levels of debt.

            An slow correction extends the length of the correction and economic under performance as well as the time that people will continue to borrow such large amounts of money. It also means extended periods of low or zero interest rates which means reduced income for many as well as increasing the likelihood of future malinvestment.

          • “None of us here gets to choose the outcome, we can only speculate on what might happen.”

            Of course! Speculation at best, semi-intellectual masturbation at worst (myself included).

          • Thanks Serenco and AB for your considered replies.

            I am not in disagreement with much of what you say, but my method to correct would be different.

            I agree that banks lend far too much into residential housing, and too little into small business and SME. The large corporate lending has largely been replaced by raising capital on the markets, so they will probably only be involved in banking services in that arena.

            I presume you know that banks lost interest in SME’s and small business during the collapses of the Eighties and the Nineties, and so opted for what was seen to be a safer play in housing.

            Governments could force them back through regulation, or they could entice them back through policy changes – I favour the latter although I am light on what policy changes may work – others more enlightened than me can figure that out.

            Rather than just taking a wrecking ball to the economy, I would rather see it be adjusted incrementally to redress the lending imbalance to the various sectors, and slowly adjust reserves to shore up the risk aspect, although I appreciate my preferred way would take years to implement, and it won’t solve anything overnight.

          • dumb_non_economist

            My concern with a slow melt is we will not learn our lesson about RE and once the economy picks up so will the same RE problem we now face. No pain, no gain!

          • Thanks 3d1k – it is a genuine question. It’s not just house prices, it’s our wages and our dollar as well.

            Funny but when someone says our house prices must fall they never volunteer a wage reduction and nor do they wish to lose their PPP on Ebay, or at the petrol pump.

            I received a request from a borrower in the USA yesterday. A couple – she is on $468 per week as a machine operator, and hubby is a Core Driller on $30 per hour or $1200 per week or about $62,400 pa.

            What would a core driller earn here? You would have an idea.

            I suspect more than that?

          • Core driller, top of my head circa, $150K (often more, depends on drill rig, mineral etc).

            As to your question, I don’t have the answer. I agree with you and have said as much on these threads before. The lust for collapse is beyond me!

            And you’re quite right, those in countries that have experienced housing collapse are not happy with the outcome. Yes, houses may be cheaper but concomitantly the broader economy a mess, jobs fragile and banks reluctant. Those that wish for collapse my find themselves on the wrong side of game!

          • Yes house prices have collapsed, but no one can buy them because they are unemployed or can’t get finance.

            In fact it’s usually the wealthy who profit in those situations.

            That’s the paradox.

          • “Those that wish for collapse my find themselves on the wrong side of game!”

            That’s assuming that the game is simply buying a cheap house. What if the game is purging our economy of its massive private debt levels?

            Those who “wish” for collapse are likely to be the ones who come out best if that’s the game.

        • “At the time no one knew what would happen, so erring on the excessive side is understandable.”

          true no one knew what would happen but its clear now that the governemnt panicked and implemented short term policy without thinking for a second about the long term effects of either the GFC itself or their ill conceived “stimulus” measures. only weak leaders panick in a crisis and as we have now seen we are worse off now than we were then.

          the excessive side you refer to as understandable also comes with a cost. what sort of govt goes and gives $900 to every one to go shopping? has that helped retail on a sustainable basis or just wasted money? or give $30K so people with out a deposit can qualify for a mortgage? has that helped housing on a sustainable basis? its ridiculous. it distorted markets more than they already were and now the snap back to reality is ever worse. Epic fail by the worlds greatest tresurer

          • Agree.

            I wonder how every gen x/y who bought a house under the Rudd & Swan post GFC sucker bonus feel about the fact that their negative equity was all about keeping bank shareholders in the money and bank execs in their Maseratis.

            These monkeys shouldnt get a youth vote for about ten years!

    • Theres a fair few out there that thinks the FHOG is bad. Its all supply and demand. Artificially increase the demand on a sector by giving an ‘offer too good to refuse’ and watch the demand inflate prices higher then the incentive actually gives. Anyone remember the rush to beat the GST on the construction industry? It was far better to built in the aftermath of the GST. Then in the six months leading up to it.

    • drsmithyMEMBER

      Only a tiny minority think banks and private debt are a problem. For example, how many FHBs thought FHOB was a bad idea? Not many.

      In all fairness, why would they be expected to ? Economics isn’t exactly a science, and isn’t (or at least, wasn’t when I was at school) taught to everyone.

      • Private debt isn’t a problem when the bulk of it is being used to monetize investments for production of tradable goods and services.

        It is when it becomes a driver for ever-increasing consumption that the problems begin.

        I think it is important to make the distinction.

        • Michael Hudson emphasised this in the link yesterday saying UK and US banks books were 80% housing – dysfunctional financial system that instead of lending to create the means to repay debt (investments for production of tradable goods and services) lending which increases the overhead (housing/consumption).

        • Jumping jack flash


          We borrowed to spend, or worse, borrowed then gave it all to someone else to spend.

          And spend we did. Mostly on foreign manufactured trinkets that really did nothing to build any kind of solid foundation for growth.

  4. Swan’s first mistake was sticking to the tax cuts promised at the 2007 election.

    His second mistake was not reversing the stimulus when the ToT rebounded after the GFC.

    Treatment of housing and the banks has been a never ending bipartisan mistake.

  5. Exactly. I hope Swan regrets that First Home Vendor’s Boost and the serious financial injury inflicted on young adults. We know Treasury and the RBA do.

    Discerning which part of our policy drift is the bureaucracy’s and which is the agony of a minority government wont be clear for years.

    Meanwhile, we prepare for economic chaos with equity-lite personal balance sheets and a gross overexposure to residential land.

    Don’t Buy Now!

    • I think that’s actually way too kind. These politicians, in total disregard to the available evidence, debt enslaved a generation of Australian kids because they were too busy snuggling up to the bankers in the GFC aftermath.

      Every Aussie kid that bought got suckered and sits in negative equity should rip up the mortgage and send the bill to Swan – guilt free!

      • Terrible that these unfortunate young adults were offered no choice other than that of being coerced, forced, compelled, arm-twisted into the property market. Whatever happened to independent decision making and free choice. These are educated young, are they not?

        • Two words: parental influence.

          Our parents bought up big in the 90s (during their prime earning years) and received the dividends, now they pressure us to buy because “housing always goes up” based on their own limited experience.

        • The free choice sclock again – free choice does not absolve the immorality of the scammer…

          I’m sure there were plenty of kids that had good advice from well educated thoughtful parents and didn’t get scammed. The politicians were relying on the nativity of the kids and their parents who did get scammed.

          • No way. The politicians didn’t think that far ahead. At the time I reckon they felt they really were helping.

            Always, at the end of the day, assuming no illegalities, one must assume responsibility for one’s own behaviour. It could have turned out very well, it may not.

          • Do you really belive that? The politicians transferred losses from bank shareholders (and let’s face it bank execs) to mug punters.

            If the politicians didn’t realize (and I’m not buying it) then it was only because the banking lobby was in their ear as early as possible – this played out pretty much as predictably as all other housing pump-ups.

            Stupidity or bowing to their corporate masters the outcome was the same.

          • aj, yes. in essence i believe it. that is, i don’t think it was deliberate policy by politicians to indebt the next generation (holding some sort of knowledge that it would turn bad – don’t forget property was doubling every 7 years – pollies (in their minds) were doing FHB a favor).

            As to influences, they were many and varied (and wanted by the uptakers of the grants). Look at all the interest groups calling for special representation right now – in what remains one of the better performing economies of the world.

            Special interests are the economy.

          • Fair point gross stupidity of politicians in the face of vested interests is the norm. But the vested interests most definitely knew what they were doing.

            But it doesn’t change my point that the scammed should mail their mortgages back to the politicians who facilitated the scam.

          • +1 aj, both Labor & Liberal knew exactly what was going on.
            Libs initiated 2004 FHO Report, Labor the 2008 A Good Home is Hard to Find Report.
            * First Home Ownership Inquiry report 2004
            * 2004 Executive Summary of RBA submission to FHO inquiry
            * 2008 A good house is hard to find: Housing affordability in Australia

            Both reports identified the underlying causes of housing unaffordability.
            Both majors completely ignored recommendations.
            MSM buried its head in the sand, thus protecting the RE lobby & Lenders who applauded the outcome.
            Labor showed its arrogance in 2010 when it rejected 135 of the 138 recommendations of the Henry Review.
            That recent FHB got roped into this on-going bankster profiteering /RE scam is not surprising.
            Those responsible should be held to account, and in time they will be – not just by small numbers of readers of sites like this but by the general public.
            How that will pan out I don’t know, but I am glad I am on this side of the equation.
            PS, great insights again H&H

  6. TheRedEconomistMEMBER

    Swan and the Labor party may have made some mistakes, but solid growth and low unemployment have been dominant feature of the Australian economy during Swans stewardship.

    The Liberals let the public believe that interest rates would go sky high under the ALP in the 2007 election. Have they? I wish they did to spook investors and stop household inflating the property bubble we have.

    But rates has been static and quite low by historical standards.

    Do we honestly think Joe Hockey and his “Hockenomics” could do any better. The guys is dumb as a box of hammers in terms of economics and big Joe and Tony Abbott will say anything to get elected and then once elected will do nothing and blame the Gillard/Rudd Goverments.

    It may be a good thing for the deflating of house prices if the Liberal get in. From memory all that pork barrelling and tax cuts for the rich during the last days of the Howard government push inflation above the RBA settings. The RBA had no option but to raise rate pushing many investors to the wall and forcing households to really look at the cost of debt.

  7. Quote: ‘The stimulus was largely well conceived’

    I believe the BER whilst a good concept it was very poorly implemented especially by the State Governments. It has been well documented that the independent schools especially in Victoria and NSW used the funds far more efficently. The project managers in the state system essentially skimmed 10% off the top of the availble funds before it hit the schools for ‘management’. This 10% would be in addition to any other consultant fees required.

    There was also one size fits all approach to the buildings the schools could have and these didn’t take into account existing conditions etc… and what the schools actually needed. However in the independent system, the schools with their Architects/consultants where able to customise the buildings to the school’s masterplans.

    The building work all was tendered at once and actually inflated the building prices. The construction needed to be staged to avoid these issues. Now in the aftermath of the BER, building contractors are all fighting tooth and nail to get on any tender lists. From personal experience there is little work for commerical builders at the moment. Good if you need something built. Very competitive tenders.

    I could go on.

    To counter the items above, people will argue there wasn’t many compliants from the schools themselves. I find if you give poeple something ‘free’ building they aren’t going to complain loudly, even if there are vaild ones.

    (I must disclose that my profession benefited from the BER and what I say is from direct experience)

    Also I still think the $900 cheques stimulus could have been implemented in a different way.

    Better insulation if it wasn’t frauded is actually a good way to reduce the energy waste of households. New buildings have far higher insultaion and glass requirements. However the flaws of the ‘pink batts’ stimulus are well known.

    Anyway good overall article.

    • +1 Good points Chaos. Re schools that’s the feedback I get from people in country school P&C’s. They requested to spend the money in more productive ways on things they needed but were not allowed to do so. It was a widespread problem.

    • Why don’t we have any long term infrastructure planning? In the early 90s Keating wanted to use infrastructure investment to pull us out of recession but by the time the planning was done the economy was already recovering. The smart lesson would be to have a 20 or 30 year plan on major infrastructure with projects ready to go when the economy slows. Instead we have this ongoing buck passing between Federal and State Governments. Under Howard, the Feds not handing over money because there’s no political benefit, the States not doing anything because they have no money. This is a very broken Federation when it comes to infrastructure. When the GFC came along there were no plans ready to go so we got rushed school building. Was the one size fits all building program an implementation problem or (I would argue) a reflection of a Federation that’s has no long term planning for infrastructure.

  8. It is all water under the bridge now.
    Will he wake up? Will he do something now his position is on the line?
    He must know that he is up for the chop if carries on in this fashion.
    Make a name for ya self son.

  9. “As I have argued before, the stimulus was largely well conceived. Allegations of waste are pretty silly when the point of stimulus is literally to waste money as quickly as possible. That’s its entire purpose, to keep money churning in the economy.”

    The money wasn’t kept churning within the economy. 23%, on average of GDP, heads straight off into imports. Marginally, and especially for this ‘stimulus’ package, one could surmise that around 40% of it headed straight off into Foreign debt.
    That’s a simple fact. Government ‘stimulus’ is not whooopeee dooo free money! Even if you think the Govt can print it without limit the fact is that debt arises somewhere as a result.
    In the year following the stimulus Australia had to either borrow or sell off the equivalent in assets $100 Billion dollars. That’s a simple fact.
    Swan in his ignorance swanned around the world bragging that we were absorbing 10 (or 15?)( my memory fails me for he moment – one or the other)percent of total world savings.

    Her portrayed this to the Australian people as some wonderful thing. – the old ‘everybody loves us’ political spin.

    So we bag the MSM for its ignorant economic commentary. Let’s get this right.

    • I agree, but this is the structural flaw with the economy not the stimulus program. I know it sounds like an odd point to make but I think it is important one because I don’t have a problem with the stimulus program per se.

      I think it is important that the government is there to provide a financial backstop at times when the private sector’s wealth is falling rapidly and this presents a systemic risk to the economy. In the same way that I think it is important that it gets the hell out of the way when the opposite is occuring.

      The problem, as you talk about above, is the structure of the economy. This is something that should have been addressed prior to, and since the GFC. But that doesn’t mean that the stimulus itself was the wrong policy.

      • DE
        It’s such a mess it is hard to argue the point. Yep it should have all been fixed long ago. It wasn’t.
        I think you CAN argue for stuff like the BER but it was itself badly directed…minor point for the moment.

        The great fallacy here is that the Govt provided the financial backstop. Foreign lenders and investors provided the financial backstop together with our attaining the debt. Without our ability to sell off assets the govt could not have provided anything.
        For Govt to be able to provide the backstop it must have a balanced economy.
        Again as you say ‘I know it sounds like an odd point’ 🙂

        Can we just once, somewhere in MB, concede that the stimulus created a combination a mountain of foreign debt and/or asset sales!

        • > The great fallacy here is that the Govt provided the financial backstop. Foreign lenders and investors provided the financial backstop together with our attaining the debt. Without our ability to sell off assets the govt could not have provided anything.

          The point of the stimulus is to provide additional financial assets ( money ) to the private sector to support economic demand at a time of lost wealth ( that is wealth not just money ). Yes the nation borrowed from the the external sector to do this, but private sector wealth was maintained so economic activity continued.

          >For Govt to be able to provide the backstop it must have a balanced economy.
          Again as you say ‘I know it sounds like an odd point’

          Not sure what you mean by “balanced” here.

          >Can we just once, somewhere in MB, concede that the stimulus created a combination a mountain of foreign debt and/or asset sales!

          I agree, and I know you have read and commented on my post on the structural issues with the Australian economy so you know I am not conceding anything.

          • ‘Balanced’ in ways that you have written about DE. Also balanced to a certain extent as illustrated by Hudson (despite my other negative comments). I won’t go into a long discourse.

            Simply we have an over-large service economy (as you’ve written about) Worse that service economy overpays itself (as per Hudson) but the evidence is everywhere to see.

            Thus we have too small a productive sector with all the bad characteristics that go with that.
            The end result is our chronic CAD’s, Foreign debt and Asset sales. When a Govt runs a deficit, we retain low (negative RAT) interest rates, so most of the deficit ends up imports (finally)

            If we had a more ‘balanced’ economy more of any Govt stimulus would end up as more productive activity and remain within the economy. (the desired churn that HnH references) Thus you get an increase in economic activity more tax receipts etc. Less of it ends up in the external account as debt. Conceivably much of it might be saved by teh private sector and used for investment in more production. None of it need end up in the external sector.
            We are NOT structured like that socially, politically or economically.

            Sorry I’ve mixed up talking about Govt ‘deficit’ and stimulus…they are two different things. Conceivably one could have a ‘stimulus’ that didn’t result in a deficit if one had a high surplus starting point…which was Keynes original idea (I think)

    • Dont forget that every single club recorded record profits for the entire month from pokies when the stimulous was given.

    • “Allegations of waste are pretty silly when the point of stimulus is literally to waste money as quickly as possible. That’s its entire purpose, to keep money churning in the economy.”

      It’s short term gain for long term pain. I wish at least some of that stimulus money have gone into venture capital which was very hard to come by at that time.

  10. Excellent article. I’m glad someone in this country is evaluating politicians in a public forum. They have to believe someone is watching.
    I personally disagree with the stimulus. I don’t think there was any evidence that it worked in the US before it was applied and there doesn’t seem to be any view on what might have happened had there been no stimulus.
    It makes people think the government will bail them out no matter what, when pretty soon, they won’t be able to afford it.
    I’m the only person I know who disagrees with it by the way…

  11. For one of the posts above going on between Mav & PF. The reason we need the crash is to fix the imbalances in the economy. It’s as simple as this.

    A slow correction won’t fix the notion that “house prices only go up”.

    In a slow melt scenario people will blame the issues around the world for their poor property returns and will still hold the notion that “If I had my money in shares or bond’s it could be worth $0 the next day and property is always a sure bet”

    Roughly 50%-60% of our entire economy is poured into residential property. THIS IS NOT PRODUCTIVE!!!

    We need the full blow hard crash so we can educate the population that borrowing from overseas to use the money to outbid property prices between us is not productive. Reset the economy and start again.

    I would rather 5 years of pain over 20 years of can kicking and a slow/dead economy. I think a slow correction is a terrible option as it could lead to eventual capitulation and then a loss of confidence in investing for an entire generation. The crash/burn/reset is a far better option.

    • Georgie, I think a crash (rather than a slow correction) is more likely to lead to a capitulation and complete loss of confidence, but I don’t see that as a bad thing.

      I’m with Robert Schiller from one of this morning’s links – “HOUSING IS NOT AN INVESTMENT” at http://pragcap.com/robert-shiller-housing-is-not-an-investment.

      “There’s no guarantee that home prices are going to go up. I think we’ve gotten into an illusion about that. We got into an illusion and it created this spectacular bubble. We have to reflect now that we had a kind of crazy mind-set in the last couple of decades, and we have to get back to thinking like people used to think. Housing is a depreciating asset, goes out of style; it’s going to end up in the wrong place. People will want to live somewhere else, so it’s not any automatic capital gain.”

  12. ” Allegations of waste are pretty silly when the point of stimulus is literally to waste money as quickly as possible.”

    Only someone who is addicted to Keyensianism could make such an inane comment. Are you SERIOUS or just pulling my proverbial?

  13. Swannie’s done a pretty terrible job, but the noises coming out of the Coalition suggest that they don’t deserve my vote either.

    As my father would say; “pack of bastards, the lot of em”.

    • Jumping jack flash

      The parties may be different but the lobby groups behind them remain the same.

      Therefore we get identical, or very similar policy coming out of each, just “flavoured” slightly differently depending on which party is in.

    • Jason that IS true.

      The sort of illogical claptrap coming from the coalition is just amazing…even in a single sentence they say things that are totally contradictory.

      • More of the same. Minus the carbon tax, the MRRT, Wayne Swan’s devisiveness, Julia Gillard’s untrustworthiness, Rudd’s disappointment, Craig Thompson’s abject sneakiness, Bill Shorten’s ambitiousness, Nicola Roxon’s nanny-ness, Bill Carr’s self-importanance, Penny Wong’s charm and the continued union stacking of Slowwork Australia.

        This is not to be overly critical. As the observations above demonstrate, a similar list could likely be prepared for Liberal’s first term!

        Oh dear.

        • You forgot to add –

          More of the same … plus the 1.5% surcharge on big business to pay for the enlargement of middle class welfare.

          And in the interest of a balanced superficial generalisation about politicians

          … Tony Abbott’s abject sneakiness, divisiveness and nanny-ness all rolled into one, Malcolm Turnbull’s trio of disappointment, ambitiousness and self-importance, Christoper Pyne’s one note charm, and Joe Hockey’s stack of pancakes.

      • Waynes Black Swan

        I think the majority have. Polling suggests the punters prefer the Libs in a two party preferred race but as preferred PM, Abbott is about as, or even less popular than Gillard. This screams of “give us change but give us someone who we have confidence in”. Unfortunately the MSM is in a rabid state about Labour but this will change once an election is called where Abbott and Hockey will come under greater scrutiny.

      • Agreed TP, but I think they’re both as bad as each other.

        Now with Bob Brown gone, you can’t even vote for them, in protest.

  14. As someone of only 25 I have watched property in my area go from 2.5 x average annual income (1 individual working) to over 6 times over average household income(in most cases dual income). This is only in the last 15 years.

    Its simply not sustainable and as someone who has saved a suffecient amount for a deposit on a reasonably priced home (3-4 x average annual income) I say burn baby burn.

    Gen Y should not be expected to fund the retirements of baby boomers and the bottom lines of Gen X investors who caught the property bug. If it blows up in their face so be it. That is capitalism, sometimes you win, other times you lose. The government can’t be expected to bail people out just because they were foolish and listened to the spruikers.

    In my very biased opinion we need a quite paninful correction in our economy to get on the road to recovery otherwise risk a Japanese style Zombie economy with little to no growth and ever increasing levels of government debt.

    • Tarric, I sympathise with your position as it matches mine. Although I am older than you, I missed out on the boom, as I graduated in the last Aussie recession in 1991 and live in Eurpoe until 2010.

      I am afraid we all find it very hard to separate what is good for us personally and what is good for society.

      What is good for Gen-Y will be a disaster for the Boomers. Gen-X will probably be net losers as well.

      Expect the Aussie government to fight tooth and nail to protect the Boomers windfall gains of the last 20 years, as the demographics mean their political power is great.

      IMHO the USA has by accident managed to solve the problem of an over indebted household sector by having a full-on housing crash and massive household defaults. There has been a significant shift of relative wealth from the Boomers to Gen-Y.

      It has caused a great deal of pain in the US, but I believe they will see the rewards in the next 20 years.

      Countries like Australia and the UK where the governments have managed to avoid a proper housing crash are IMHO going to see decades of low growth interspersed by several recessions.

      • “What is good for Gen-Y will be a disaster for the Boomers. Gen-X will probably be net losers as well.”

        No really, I hope they really suffer.
        The ‘boomers’ are collectively, morally culpable for the position this country is in.
        They’re the ones who decided to (metaphorically) feast upon the flesh of their children. Every dollar of capital gains that they’ve reaped is ultimately debt on the shoulders of somebody who had the misfortune of being born too late.

        They set up and maintained the the rotten tax system, it was the politicians they elected, acting in their interest who left negative gearing in place, who halved capital gains tax and instituted and repeatedly boosted those stupid grants.

        They wooped and cheered as the bubble inflated.
        At this point in time, I’m going to be thrilled to see this crash as violently as possible.

        What exactly have these bloated parasites left to future generations? massive infrastructure deficits in every major city, ownership of Australian capital still bleeding offshore despite the mining boom, a massive debt bubble set against assets that are in DCF terms as much as 40% overvalued (assuming that rents are basically exogenous, ho ho ho. Wave that and who knows how low housing can go) – they’ve turned prosperity and opportunity into penury. When this finally falls apart, which it will whether quickly or slowly, Australians are going to wake up from this dream and find themselves left owning nothing in this country bar their formerly overpriced houses.

        I only hope that awareness of how badly we’ve been screwed spreads far enough that in the future, when the center of political power shifts down the pyramid, “the greedy generation” gets the retirement they deserve; dogfood and kerosene baths.

        But yeah, you’re right – they’re going to fight tooth and nail, right to the end to drag everybody else down with them.

        There’s still at least one thing that they can still do – when it’s clear that this is really the end, expect the government of the day to unlock superannuation.
        That combined with another round of first home owners boosts will give one last hurrah.
        It’ll also ensure almost the entirety of national savings are being poured onto the housing bonfire too of course, but I do expect they’ll do it. If not this government then the other mob once they’re voted in.

        • drsmithyMEMBER

          So what do we do to protect ourselves as well as we can ? I’m fortunate enough to have potentially easy options for moving overseas, and can thus escape when the shit really starts to fly, but what do I do with the not insignificant stash accumulating in my super ?

        • “feast on the flesh of their children” – I gotta say when we all became complicit in financialising housing then this expression does have a way of capturing the moment.

          If we don’t want to end up in a zombie economy then the kiddos have to get a bit agro – they can’t just sit around and suck up the debt slavery?

        • Dichromate, nice vent.

          As another gen Y, I hold sympathetic views.

          However, I expect the financial services industry would kick up a stink about that last option – Imagine, for them an entire generation’s worth of Funds Under Management (and associated fees for basically doing nothing) disappearing from under their complacent noses – they won’t give that up easily.

          What annoys me the most is not the debt burden I’d have to take on in order to own my own dwelling, but the opportunity loss for the nation as a whole. Imagine if that money had gone into investing in real production and innovation instead of the national housing Ponzi…

          Smart young Australians just won’t get the chance to innovate in the future – the capital won’t be there, government will be burdened with the cost of keeping the Boomers healthy and well fed, the young will be too busy paying off the mortgage and too risk adverse to try something on their own, and finally the banks don’t finance actual investment anyway.

          As for what we can do about it, rather than enter debt peonage I’m keeping my savings out of super for when I’m ready to start something new and in the mean time getting as good an education as I can.

          • This is going to turn into a generational warfare eventually and will probably get worse as the population ages, and grows in size. I don’t see this getting better with peak oil and such shrinking the pie. The system favors people who already have assets. I cant see how this will be a better future for my children.

            I do blame the boomers for this though. They came out of the end of a war and started when the economic system was reset to a large degree.

            The problem in my head we as a society have given up integrity to selfishly avoid pain like a cry baby . People who made the bad decisions in investment should be punished for them by the market. Investment should reward things that give us a better quality of life, and punish the failures.

      • “IMHO the USA has by accident managed to solve the problem of an over indebted household sector by having a full-on housing crash and massive household defaults.”

        Not sure how you arrive at this conclusion.


        See 3rd set of graphs on total US consumer debt outstanding.

        It does not appear to me from the link above that US households have deleveraged at all.

        I agree with your last para but I think the US will suffer the same fate also regardless of their “crash”.

    • +1 Tarric, in a slow melt scenario, as a member of Gen Y I would sooner move overseas than stay and suffer in order to support the two generations before us.

      I just hope that if there is a crash Gen Y accept the responsibility of being the generation who stops Australia’s addiction to housing as an investment. I myself would start telling anyone who would listen that we need to insist on reforming our current policies that impede supply side responses in the housing market

      • Maybe there should be a political movement? The housing industry is unified and the protests are scattered.

  15. Swan’s greatest failure is that he thought that he could stave off a housing crisis by replacing a crash with inflation – not realizing that the outcome he was hoping for would make what he was trying to avoid inevitable.

  16. “As I have argued before, the stimulus was largely well conceived. Allegations of waste are pretty silly when the point of stimulus is literally to waste money as quickly as possible. That’s its entire purpose, to keep money churning in the economy.”


  17. Wayne’s greatest failure is yet to come. The recession we do not need to have is being prepared while we wait. The political consequences will be dire, but they will be nothing when compared to the economic destruction he is about to provoke.

  18. Your wholly flippant treatment of a policy in which private wealth is expropriated and wilfully wasted for the sake of slightly inflated GDP figures and very slightly fatter bottom lines for foreign plasma TV manufacturers, will always provoke the same response from me: a mixture of irritation and bewilderment. The practice is in and of itself anathema to my outlook. But I’m prepared to concede a moral and ideological bias there.

    Other than that, can’t argue with this post.

    • I have to agree. I worked pretty hard for that cash the government took and then recklessly gave to Gerry Harvey, the bankers, the pokie owning lecherous scumbag parasites (good point G above).

      (and a few school halls did not fix years of underinvestment by politicians from both Coles and Woolworths)

  19. What about some of those cheap suits he used to wear. I know it’s not a big one, but a reflection on the man all the same.
    Reminded me a bit of when Kim Beasley went through his weight loss stage….. on tv.

  20. A bit late, but here’s one for the Macrobusiness team. Peter Martin is calling it “The curious case of the income still rolling in”.http://www.petermartin.com.au/2012/04/budget-2011-12-strange-case-of-income.html

    Appears to show that everything that this site has been blogging about for the past year has had no effect on the government’s tax take.

    Also seems to show that the property market slowdown has had no significant effect on property tax revenue http://www.abs.gov.au/ausstats/[email protected]/Latestproducts/5506.0Main%20Features22010-11?opendocument&tabname=Summary&prodno=5506.0&issue=2010-11&num=&view

    Doesn’t make much sense to me but I’m sure the collective brainpower here at MB can work it out.

    • Actually on second thought, it’s probably not all that crash-hot – still seems to be below the pre-GFC peak.

  21. Swan’s greatest failure was to squander the opportunity of the greatest commodity of all. Time.

    The Importance of Being Earnest, A Trivial Comedy for S

  22. Swan’s greatest failure was to squander the opportunity of the greatest commodity of all. Time.
    The Importance of Being Earnest, A Trivial Comedy for Serious People.It is a farcical comedy in which the protagonists maintain fictitious personae in order to escape burdensome social obligations.

    The importance of being Ernest -Hemingway, that is.
    Ernest Hemingway was once asked how did he go bankrupt. The great man thought for a second and then replied: “I went bankrupt in two ways, gradually and then suddenly.”

    As Mr Hemingway observed, people and entities go bust gradually, at first — this is the phase we are in. Then they go bust overnight. History suggests that after that happens, the economy will recover because we have to start again.

    Either way, the only way to avoid Hemingway’s law of finance is for the gradual to become sudden and the sudden to become gradual. The choice is ours.