Shitstorm: The Rudd Government’s response to the Global Financial Crisis

January 27, 2013 at 12:26 pm 1 comment

The Germans, in their infinite wisdom, chose the word “shitstorm”  as their Anglicism of the Year in 2012. Their jury defined shitstorm as a public outcry in which arguments mix with threats and insults to reach a critical mass, forcing a reaction. Shitstorm, they said, filled a gap in German vocabulary “through changes in the culture of public debate.”  As ever, the hugely influential urban dictionary has a more pithy explanation calling it a “gigantic cluster fuck”.  The 2010 book Shitstorm: Inside Labor’s Darkest Days by Lenore Taylor and David Uren is about the gigantic cluster fuck that was (and remains) the Global Financial Crisis.  Taylor is one of the country’s most respected political journalists while Uren has written on economic issues for 35 years so they team up well to discuss how the shitstorm of the GFC impacted Australian politics and the country’s economy.

The book takes its name from a quote then-Prime Minister Kevin Rudd used in a television interview. On March 8, 2009, Rudd appeared in front of a live studio audience on the Seven Network’s Sunday Night program where he about his government’s response to the GFC. Responding to opposition claims about the debt Labor created to fund its stimulus package, Rudd said it came down to a choice between letting the market fix it up or intervening with temporary borrowings. “People have to understand that,” Rudd told the audience, “because there is going to be the usual political shitstorm – sorry, political storm over that.”  It seems reasonable to believe it was choreographed error from Rudd who left very little to chance during his tenure as Prime Minister.

shitstormError or not, the choice of words was typical Rudd. The cover of the book Shitstorm shows a picture from that era with the four members of kitchen cabinet: Rudd, Linday Tanner, Wayne Swan and Julia Gillard.  In the photo Rudd has his back to the camera. He is not interested in us, he is conducting his orchestra. But his players are not quite in tune. Finance Minister Tanner is looking off to right, Treasurer  Swan is looking off the left and only Rudd’s deputy is looking vaguely in his direction, but with her own agenda. The gang of four formed the Strategic Priorities and Budget Committee (SPBC) that made most of the political decisions in the periodm any of which were remarkable and still-debated. It resulted in Australia avoiding a recession, when the economies of the world fell like ninepins around them.

Rudd was spot on about the shitstorm, but could not see he would be one of the casualties. His sensational sacking as Labor leader happened after the book was released. No one, least Taylor and Uren saw it coming. Then again neither did anyone else outside a small circle. The panic-stricken parliamentary putsch in June 2010 that cost Rudd his job as first-term Prime Minister left the Australian polity reeling, locked the nation into costly backflips, and severely damaged the trust between Labor and many of their own supporters that lasts to this day.

The Gillard government scraped over the line in October 2010 thanks to the negotiating skills of the new leader. But to win that election, she had to promise no carbon tax although both parties had agreed to it in 2007.  The distant drum of the US sub-prime mortgage crisis had little effect on that election. It wouldn’t affect Australia where interest rates  had risen 10 times in a row due to mining growth.

Both leaders knew the crash was coming but Rudd couldn’t risk talking about a crisis as it would highlight their inexperience while it was also inconvenient to Howard’s “don’t risk good times” message.  Labor won but there was little time to celebrate.  The first effect in Australia was the cost of borrowing money. The big banks who manage lots of short term loans were suddenly exposed as money fled the banking system.  No Australian bank had to close its doors but there were times when the queue was down the street (prompting banks to consider how to keep large queues inside).

As the cost of money rose, the Australian banks took the near unprecedented step of rising interest rates without a signal from the Reserve Bank. The first bank tipped off  Treasurer Swan in advance but the next one didn’t.  So Swan advised people to switch banks but he could well see there was a problem brewing.  While n summer holidays at Cotton Tree beach on the Sunshine Coast, he took a call from US Treasury Secretary Hank Paulson that terrified him. Paulson said the US “might be able to see a way” through the crisis if house prices didn’t collapse. Swan could see it was a big if.

It was first items of business when Rudd returned to work after Christmas. Labor (or rather the SPBC) promised a budget surplus of $18 billion (around 1.5% GDP). But although China ate up Aussie minerals elsewhere the news kept getting worse. When Rudd went to Washington in March, he met the IMF’s Dominique Strauss-Kahn who stunned him by saying the sub-prime lending mess would cost a trillion dollars (a figure later upgraded to $3 trillion). Governments would ultimately bear much of that cost.

By May budget in 2008, Swan was under pressure to abandon $47 billion of election promise tax cuts. The Government held firm but had to hold back on cuts they hoped would keep the books in the black. This was a direct result of the growing crisis but Swan couldn’t publicly admit this, for fear of impacting consumer confidence.  Matters spiralled out of Swan’s and consumers’ control in September 2008 when the US’s fourth largest investment bank, Lehmann Brothers went bankrupt with $613 billion owing on uncertain assets.  Trillions in securities across the world guaranteed or counter-signed by Lehmans were now suddenly at risk. The US’s largest insurer AIG’s shared dipped 70% with $550 billion tied up in sub-prime mortgages . Largest US mortgage-lender Washington Mutual’s shares also nosedived and exposed mutual funds who had to dump securities to meet a run on redemptions. The bond market died as no one would lend for anything longer than one day.

Australia  had $800 billion of debt, of which $500 billion was short-term subject to constant finance.  As America’s financial wobble threatened to tsunami across the Pacific, Swan’s message to the press was simple: “We were not immune but better placed than most to weather the coming storm”. But an IMF meeting in Washington in October 2008 would tell him the climate was worsening: it was enough for a clean bank to have links with a toxic bank for it to be in trouble. China’s boom would not save Australia from this tempest.

Swan came from the meeting convinced Australia needed financial stimulus. Rudd quickly warmed to the idea too. Over Christmas Rudd had been reading the economic ideas of EG Theodore and his bitter regret over how Australian lack of government action delayed a recovery in the 1930s Great Depression. Rudd was not about to let it happen again. Panicky people had salted $5.5 billion out of Australian banks in ten weeks since Lehman went bust, and second tier banks like Suncorp and Bankwest were at risk of collapse.  Rudd guaranteed all term wholesale bank funding and retail deposits. Mortgagees like Challenger Howard were not protected. In two years the four big banks  increased their home-lending share from 60 to 85% .

While the SPBC was  arguing over the size of a stimulus, it was startled by the news the Reserve bank had dropped interest rates by 1%. This was twice as much as Treasury recommended. Rudd had learned the lesson from Treasury relief package model which was to ‘go hard, go households’. The SPBC would also double Treasury’s recommendation with a $10 billion package –  $8.7m in  cash handouts and $1.5m was spent on the First Home Owner Grant. There was also $6.2m to build a green car. Rudd’s message was they were ‘deploying the surplus’ to secure the economy. Opposition leader Malcolm Turnbull was so shocked, he gave immediate bi-partisan support.  Labor’s own cabinet was equally in the dark about the proposal and unhappy about it. Rudd blamed the need for speed and ‘extreme market sensitivities’ but his downfall can be charted to this decision.

Meanwhile, the IMF predicted the world economy would stagnate in 2009. The stimulus kept Australian tills ringing through Christmas but business confidence was at a record low. The Government pushed hard to strengthen Howard’s G20 as a forum to make global recommendations. They were supported by the Americans who saw the G8 as too happy to install euro-centric banking controls that were anathema to the Bush Administration. In November 2008, the IMF told the G20 they needed to fund a stimulus in the order of 2% of GDP.  This was huge, yet they were underplaying the situation. The IMF knew any higher recommendation would ‘scare people to death’ as its chief economist Olivier Blanchard said. Countries took notice and even mighty China announced $600b Keynesian spending on infrastructure projects

Yet it put the Rudd Government in difficult political territory. Spending would ease unemployment but it would kill their promise to fund a surplus. Rudd and Swan refused to say the word deficit for months until they finally admitted it was temporary. The linguistic games showed frustrated ministers that Rudd’s office had centralised decision making to an unacceptable level.

Rudd went on with the spending plotting a large-scale construction program to keep up emplyment. Schools were chosen because they didn’t need much lead time or lengthy council planning approvals. The $16.2b Building the Education Revolution program was soon supplemented by a $6.6b social housing program and $2.7b on a solar installation package. Labor lalso needed a quick ‘sugar hit’ and gave another cash handout of $8b  designed to keep  money circulating. The total package was 2.4% of GDP in the first year, beyond the IMF measure but reduced to 1.8% in 2010-2011. By the second package in February 2009, Treasury was predicting Australia would avoid a recession. It was a magnificent achievement but there were serious flaws. The solar rebate was so high, it led to huge demand and shonky work practices that had fatal results.

As well as the surplus, there was another  major casualty of the downturn – Rudd’s emission trading scheme, in Ruddspeak, the Carbon Pollution Reduction Scheme. It was due for 2010 but Government agreed to delay by a year to include extra compensation Labor called a ‘global recession buffer’. Rudd decided to get his new “browner” plan through the Senate with the help of the Liberals rather than with the Greens who wanted tougher action. Opposition leader Malcolm Turnbull was supportive but undone by deep divisions in his own party. The eventual compromise with Labor was torpedoed by Liberal hardliners led by Nick Minchin and a spill led to the surprise election of Tony Abbott as leader in December 2009.

Abbott immediately turned his back on the CPRS, leaving Labor stranded. Rudd was so sure the Liberals would support it, he had spent no time selling it to the public. It would be impossible to run a double dissolution election on a complicated scheme that to Abbott was a “great new tax on everything” . The failure of the Copenhagen climate change talks in December was the nail in the coffin and Rudd delayed the ‘great moral imperative of our time’ to 2013.

As Taylor and Uren’s book approached deadline,  Labor’s three-year-long polling honeymoon was over and they were running neck-and-neck with the Liberals. The media were hammering them over their stimulus plan failures. Rudd axed the installation scheme and Minister Peter Garrett  became the scapegoat. Meanwhile the audit office found a colossal amount of waste in BER  including substandard work and inflexible design. The budget surplus was a mirage and the Government had troubling selling its economic message for different reasons than before. During the height of the crisis, minister could not be frank for fear of damaging confidence, now they couldn’t sell the recovery because it would draw attention to the spending issues.

To Rudd and Swan’s immense credit, they saw the GFC coming earlier than most. They acted quicker than most and deeper and with the help of the Reserve Bank and China, Australia emerged almost unscathed. Abbott ridiculed 25 months of Whitlamesque spending’  but  Rudd saved the country from years of austerity with his infrastructure stimulus. What neither he nor anyone saw was that Australia would recover so quickly. His  successor Julia Gillard suffered in the 2010 poll but held on with a debt burden that would cripple Australia’s ability to implement real change in the difficult decades to come. As Taylor and Uren concluded, the political shitstorm would be ‘wilder and more damaging that Kevin Rudd ever imagined’.

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1 Comment Add your own

  • 1. Geofferoo  |  January 29, 2013 at 3:06 pm

    “…it left a debt burden that would cripple Australia’s ability to implement real change in the difficult decades to come.”

    So…does that mean the rest of the developed world, with vastly greater debt levels, is completely beyond hope? And did the debt levels of the post-war years, massively, almost unimaginably greater than those today, cripple “Australia’s ability to implement real change”?

    C’mon. The whole idea that Australia’s modest government debt is a massive burden is utterly absurd (unless you buy into the bunkum peddled by Abbott, Hockey and co.).

    Reply

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