Tuesday, October 21, 2008

As world finances unravel, PM loses the plot

The Federal Government's economic narrative has been mugged by reality and is completely shredded.

In less than a year, the argument has gone from highlighting John Howard's "irresponsible spending" and the inflation genie being out of the bottle, to desperately pumping more than $10 billion into the economy to stave off recession.

Prime Minister Kevin Rudd has blamed the crisis on "free-market ideologues" and greed.  His commentary throughout is troubling and ill-informed.  His experience, interests and expertise are in foreign affairs and diplomacy.  He is the first Australian prime minister in a generation with little economic or business experience.

Perhaps that explains why the Government has moved from Howard-light to Howard-heavy on spending.  Money has been thrown at families with children, and retirees -- all to arrive in a lump sum just before Christmas.  First-home buyers of new homes will enjoy an even greater grant from government.

Of course, there is nothing wrong with government giving something back to the community -- yet tax cuts would be a far more effective way to do so, and also to stimulate the economy.

Rudd has the same bad economic habit as his predecessor -- willing to spend;  reluctant to cut taxes.  Unfortunately, it gets worse.  The Government intends to bring forward several, as yet unspecified, "nation-building" infrastructure projects.

Of course, the Government was always going to build some white elephants -- only the justification has changed.

Rudd is using the crisis as an excuse to take bank bashing to new heights.  He has leapt on to so-called excessive executive compensation.  US politicians are on to this, too, so the "me too" era continues in office.

Yet there is no evidence that excessive salaries are the cause of the crisis.  In fact there is evidence that meddlesome bureaucrats are to blame.

Many commentators are pointing to so-called fair lending laws in the US and the actions of the Boston Federal Reserve in encouraging banks to make loans to low-income borrowers.  Unusually low US interest rates after 2003 have also been identified as contributing to the crisis.  The actions of the US Government and its agencies are at the root of the crisis.

If any bankers are to have their salary scrutinised it should be those at the Reserve Bank.  Not only has the RBA been caught raising rates in a slowing economy and having to reverse its recent monetary policies with indecent haste, but those actions have probably just cost taxpayers $10 billion out of the surplus.

Bankers in the private sector would never get away with a loss of that size.  Rudd needs a coherent and consistent economic message.

When justifying why banks did not pass on the full rate cuts, he argued that the banks were well run and well regulated.

This hasn't changed in the past month.  So there is no reason to argue that executive compensation at Australian banks is endangering our economy or Australian deposits.


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