The Germans, in their infinite wisdom, chose the word “shitstorm” as their Anglicism of the Year in 2012. The 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.” The influential urban dictionary has a more pithy definition, 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 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. They team up well to discuss how the GFC shitstorm impacted Australian politics and the economy.
The book takes its name from a quote from then-Prime Minister Kevin Rudd in a television interview. On March 8, 2009, Rudd spoke to a live studio audience on the Seven Network’s Sunday Night program about the government’s response to the GFC. Responding to opposition claims about the debt Labor created to fund its stimulus, Rudd said it was a choice between letting the market fix it up or intervening with temporary borrowings. “People have to understand that,” Rudd said, “because there is going to be the usual political shitstorm – sorry, political storm over that.” The swearword was likely a choreographed error from Rudd who left little to chance.
Deliberate or not, the choice of words was typical Rudd. The cover of the book Shitstorm shows the four members of the kitchen cabinet: Rudd, Linday Tanner, Wayne Swan and Julia Gillard. Rudd has his back to the camera. He is not interested in us, he is conducting his orchestra. But his players are not in tune. Finance Minister Tanner is looking off right, Treasurer Swan is looking left and only Rudd’s deputy Gillard is looking vaguely in his direction, but with her own agenda. The gang of four of the Strategic Priorities and Budget Committee (SPBC) made most political decisions many of which are still debated. But Australia avoided a recession, when the economies of the world crashed like ninepins around them.
Rudd was right about the shitstorm, but could not see he would be a casualty. His sensational sacking happened after the book was released. Taylor and Uren never saw it coming either. No one did outside a small circle of Labor apparatchiks. 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 their own supporters not yet repaired today.
The Julia Gillard government scraped over the line in the October 2010 election thanks to her negotiating skills. But she had to promise no carbon tax reversing a 2007 election promise. The distant drum of the US sub-prime mortgage crisis had little effect in 2007. In Australia the worry was interest rates which had risen 10 times due to mining growth.
Rudd and Howard knew the crash was coming but kept it out of the election campaign. Rudd couldn’t risk talking about a crisis as it would highlight Labor “inexperience” while it was inconvenient to Howard’s “don’t risk good times” message. When Labor won there was little time to celebrate. The first effect in Australia was the cost of borrowing. The big banks’ short term loans were suddenly exposed as money fled the system. No Australian bank closed 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 Reserve Bank signal. The first bank tipped off Swan in advance but the next one didn’t. The treasurer advised people to switch banks but he could see there was a problem brewing. While on summer holidays 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 knew it was a big if.
It was the first item of business when Rudd returned to work after Christmas. Labor promised a budget surplus of $18 billion (around 1.5% GDP). China continued to eat up Aussie minerals, but elsewhere the news kept getting worse. When Rudd went to Washington in March, he met the IMF’s Dominique Strauss-Kahn who told him the sub-prime lending mess would cost the world a trillion dollars (a figure later upgraded to $3 trillion). Governments ultimately bore much of that cost.
By the May 2008 budget, Swan was under pressure to abandon $47 billion of promised tax cuts. The Government held firm but held back on cuts they hoped would keep the books in the black. Swan couldn’t yet admit the growing crisis for fear of impacting consumer confidence. Matters spiralled out of control in September 2008 when the fourth largest US investment bank, Lehman Brothers went bankrupt with $613 billion owing on uncertain assets. Trillions in securities across the world guaranteed or counter-signed by Lehmans were now at risk. The US’s largest insurer AIG’s shares dipped 70% with $550 billion tied up in sub-prime mortgages. Largest US mortgage-lender Washington Mutual shares nosedived and mutual funds dumped 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, $500 billion short-term subject to constant finance. As America’s financial wobble threatened to tsunami across the Pacific, Swan’s message was simple: “We are not immune but better placed than most to weather the coming storm”. An IMF meeting in Washington in October 2008 told him the storm was worsening: it was enough for a clean bank to have links with a toxic bank to be in trouble. China’s boom would not save Australia.
Swan knew financial stimulus was needed. Rudd quickly warmed to the idea. Over Christmas Rudd had been reading the economic ideas of EG Theodore whose bitter regret was a lack of Australian government action which prolonged the 1930s Great Depression. Rudd was not about to let it happen again. Panicky people salted $5.5 billion out of Australian banks in ten weeks since Lehman went bust, and second tier banks Suncorp and Bankwest were at risk of collapse. Rudd guaranteed all term wholesale bank funding and retail deposits. Smaller mortgagees like Challenger Howard were not protected and in two years the four big banks increased 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 models which was to “go early, 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 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. Shocked Opposition leader Malcolm Turnbull gave immediate bi-partisan support. Labor’s own cabinet was 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.
The IMF predicted the world economy would stagnate in 2009. The stimulus kept Australian tills ringing through Christmas but business confidence was low. The Government pushed hard to strengthen Howard’s G20 as a forum to make global recommendations. They were supported by the US which saw the G8 as too happy to install euro-centric banking controls, anathema to the Bush administration. In November 2008, the IMF told the G20 they needed a stimulus worth 2% of GDP. This was huge, yet they were underplaying the situation. IMF chief economist Olivier Blanchard knew any higher recommendation would “scare people to death”. Countries took notice. Even mighty China announced a $600b Keynesian spending package on infrastructure projects.
The Rudd Government was in difficult political territory. Spending would ease unemployment but would kill their surplus. Rudd and Swan refused to say the word deficit for months until finally admitting it was temporary. The linguistic games showed frustrated ministers Rudd’s office had centralised decision-making to an unacceptable level.
Rudd plotted a large-scale construction program to keep up employment. 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 supplemented by a $6.6b social housing program and $2.7b on a solar installation package. As a quick sugar hit they gave another $8b cash handout to taxpayers 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 with fatal results.
There was another casualty of the downturn – the ETS, known in Ruddspeak as the Carbon Pollution Reduction Scheme. The CPRS was due in 2010 but the Government delayed it a year to include extra compensation 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 environmental action. Opposition leader Malcolm Turnbull was supportive but undone by deep divisions in his own party. The eventual compromise was torpedoed by Liberal hardliners led by Nick Minchin and a spill led to the surprise election of Tony Abbott as opposition leader in December 2009.
Abbott reneged on the CPRS, leaving Labor stranded. Rudd was so sure the Liberals would support it, he spent no time selling it to the public. It would be impossible to run a double dissolution election on a complicated scheme Abbott was calling 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 the Liberals were neck-and-neck. The media hammered Labor over stimulus plan failures. Rudd axed the installation scheme and made Peter Garrett the scapegoat ministerial scalp. The audit office found colossal 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 spending issues.
To Rudd and Swan’s 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 no-one saw was 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 than Kevin Rudd ever imagined”.