These days there's not too much talk about a soft landing for the global economy. The descriptions of the landing we can now hope for from the credit crunch are hard, very hard, and like jumping onto a concrete slab from a second-storey balcony.
The US government bail-out of the banks might make a difference. But then again it might not. At the moment there are few certainties in the world. As yet we simply don't know how the crisis will change the international and domestic financial system.
The calls for more regulation have already started but no one knows what regulations we should have more of. If there's anything good to come out of what's happened in the past six months it is the realisation in the United States that the crisis is as much a product of too much regulation as of too little regulation. The efforts of various administrations to force financial institutions to offer home loans to people who on most measures could not afford them completely distorted bank lending processes.
In the middle of a crisis, people's attention is usually either on the micro or the macro. Questions about what the Dow will do tomorrow are interspersed with metaphysical speculation about whether we're facing the end of capitalism. But in between the immediate and the generational there's the medium term of the next few years. And in Australia the medium term nicely captures the period in which we'll have two federal elections.
One thing we can be sure of is that the political debate will change as a result of what's happening. Even if Australia and the world avoid a recession, the fear of the R word will be enough to affect political behaviour.
For the past decade the electorate has thought the role of government is to distribute the benefits of the boom. And politicians have themselves come to think of that as their task. Voters and politicians have become accustomed to the good times of secure employment, growing equities value, and increasing house prices. Five million Australian families own houses, and it's safe to assume that the majority of those families were expecting their house to be worth more next year than it is this year.
In recent years the toughest decision many Australian families have had to make is whether their new flat-screen television should be LCD or plasma.
It's been a long time since a federal or state government has had to make a difficult economic decision. Treasury departments around the country have probably forgotten how to make a hard decision. Until now their most difficult task has been to decide whether to award public servants a 4 or 5 per cent annual pay rise. A reason state governments have shirked structural reform and taken the easy option of spending more money on a problem is because there's been more money to spend. If the spend-more-money option is no longer available, the chances for real reform might actually improve.
Federal and state ministers haven't had much practice at saying, "I'm sorry, we can't afford it". They didn't use this line because no one would have believed them. They wouldn't have believed the line themselves. There's been so much money in federal and state budgets that governments haven't known what to do with it. The federal governments have had to invent various "future" funds as a way of spending the surplus revenue.
The assumption in Canberra has been that the government or the private sector could easily afford to pay for any new project, program, or policy. The best example of this sort of thinking is of course climate change, but there are plenty of others. The debate about increasing the aged pension is based on the belief that the government has got the extra $3 billion to pay for it. The same applies to government-funded maternity leave. Twelve months ago it sounded like a good idea. Now the situation is different. Even if taxpayers are funding the direct cost of the scheme, ministers have simply assumed that small business can afford all the additional costs that will be imposed.
Home owners and everyone with share portfolios are not the only ones in for a hard time in the months ahead. Politicians will have to learn to stop making new promises. And they might even have to learn how to unwind some of the promises they've made but which we can no longer afford.