Malcolm Turnbull (Wentworth, Liberal Party, Shadow Treasurer) Share this | Hansard source

I welcome the statement by the Treasurer on the crisis in international credit markets. The Treasurer has summarised the history of the development of the crisis, and I will not go over the same ground again other than to make some observations about the different nature of this credit crisis relative to previous episodes consequent upon periods of imprudent lending. Over the last 20 years, we have seen the development of enormous markets for securitising debt of all kinds. Residential mortgages are very much the focus of attention at the moment, but the securitisation markets cover all debt classes. This has enabled a substantial increase in competition in all debt markets, and Australian home buyers have especially benefited from this. Since the early 1990s, the range of lenders has continued to expand as balance sheets could be effectively outsourced to the public markets via securitisation.

What we have seen, as the Treasurer observed, is a global shutdown of those securitisation markets. Since the beginning of this year, for example, and according to Assistant Governor of the Reserve Bank Guy Debelle, speaking on 5 March, there has only been one successful securitisation of Australian residential mortgage backed securities. This credit crunch has seen some second-tier mortgage lenders pulling out of the business, including Macquarie Bank, and others dramatically curtailing their lending. The consequence is that, whereas six months ago the top five banks had around two-thirds of the Australian mortgage market, perhaps a little less, now they are believed to have over 90 per cent of that market. The major banks have continued lending but in doing so have been obliged, as the Treasurer noted, to access the wholesale debt markets directly. The availability of credit does not yet appear to be unduly constrained in Australia but, as the assistant governor observed recently, the major banks have been picking up the slack from the closed public markets. Corporates that financed themselves directly from the public markets are now borrowing from the banks directly—a process of reintermediation—and that is coming with an increased cost of credit. A number of banks’ CEOs have talked about credit rationing. What that means, of course, is that credit terms will be tighter and the cost of credit will be higher. This is one of the factors that feeds into the considerations by the Reserve Bank on interest rate adjustments in particular and inflation in general.

The closure of these securitisation markets has been particularly unfair to the Australian market. Our residential mortgage market is of a considerably higher credit quality than that in the United States. In that sense, in Australia we are all being tarred with the same brush. Residential mortgage backed securities are out of fashion, to say the least, and there does not seem to be a lot of discrimination in the markets at the moment; there has been such a collapse in confidence. It is worth noting that the Reserve Bank’s Financial Stability Review of March 2007 said:

The closest equivalent to sub-prime loans in Australia are non-conforming housing loans, which are provided by a few specialist non-deposit taking lenders and account for an estimated 1 per cent of all outstanding mortgages, well below the 15 per cent sub-prime share in the United States.

The reality is that the American residential mortgage market is very different from ours. It has a very large, relative to Australia, share of subprime loans. If they can be described as imprudent lending—and I think few people would disagree with that characterisation with the benefit of hindsight—then we can say that Australia’s credit culture has been a more responsible and conservative one. I was speaking only today with Paul Fegan, who is the Chief Executive of the St George Bank, our fifth biggest bank, and he noted that out of 500,000 Australian mortgages St George has issued it has got foreclosure proceedings in respect of 74. Each one of those would be a matter of great disappointment—tragedy, perhaps—to the particular borrowers, but it gives you an idea of the strength of our overall residential mortgage book. Nonetheless, the securitisation markets are as shut for Australian mortgages as they are in the United States. It is important also to remember that residential mortgages in the United States are, for all practical purposes, nonrecourse to the borrower. A homebuyer can literally give the keys back to the bank without further recourse to him for the balance of the loan.

The former Federal Reserve Chairman Alan Greenspan said yesterday in an article in the Financial Times that the credit crisis ‘is likely to be judged as the most wrenching since the end of the Second World War’. If that is so—and let us hope it is not—it will be because of the way in which the contagion from this imprudent lending on residential mortgages, subprime mortgages, infected the whole system. This can be compared with an earlier credit crisis in the United States, in the late 1980s, when a large number of what we would call building societies, I suppose—Savings and Loans—collapsed again because of poor lending practices. In that episode, the impaired assets—the dud loans—of the S&Ls remained on their balance sheets for the most part. The United States government was able to take over the S&Ls via an entity called the Resolution Trust Corporation, so a conventional process of workout was undertaken—assets were sold, losses were realised and the market was able to function.

In this case, the economic interest—the ownership, if you like—in the subprime mortgages had been so widely sliced and diced in different forms of securitisation that the impacts of the dramatic fall in value of those assets are widespread and very difficult to predict and identify. The difficulty in identifying where the losses lie, on a mark to market basis, has dramatically undermined confidence in financial institutions. Once confidence dries up, so does credit. Confidence is critical. So we have seen central banks around the world pumping unprecedented levels of liquidity into the financial system. As the Treasurer said, we cannot be complacent here in Australia, notwithstanding our stronger financial system and our stronger credit culture. It is vital that our regulators are more attentive than ever to the health of our financial system. That is why I welcomed the statement by the Treasurer yesterday in a response to a question of mine that the Labor Party’s proposal to cut $130 million of funding from ASIC will be rescinded, at least for the next two years.

The Treasurer has taken the opportunity to recapitulate his economic policy. I will seek briefly in response to that to identify where I differ from him. Firstly, I recognise—as do we all—the importance of ensuring that inflation remains within moderate levels, by which I mean between two and three per cent on average over the cycle. That is the inflation target objective. It is in the latest objectives of monetary policy that have been agreed to by the current Treasurer and the Reserve Bank, and the target has been set out in that form since 1996, when it was put in place by Mr Costello. Despite the very considerable positive shock to our economy from the improvement in our terms of trade we have, over recent years—and in particular over the 47 quarters of the Howard government—been able to contain inflation within the target band. That is so whether you are measuring inflation as the headline CPI or as the RBA’s preferred measure of underlying inflation, the trimmed mean. It is salutary to recall why we have been able to do this and it is important to be proud of that achievement and not to deny it. It was only last week that the Reserve Bank Governor, Glenn Stevens, answered the question: how have we been able to do this? He said:

Having said all that, it is important to keep some perspective about the situation in which we find ourselves. We have been living through one of the largest transformations in the structure of the global economy, as far as Australia is concerned, for a century. The rise in the terms of trade over the past five years is the biggest such event since the Korean War boom in the early 1950s ... In essence, we are seeing a very large change in relative prices in the world economy, and a relative price change that is more important to Australia, in particular, than to almost any other country. These sorts of events will always produce stresses and strains, including significant divergences in performance across industries and regions (though these are often exaggerated in popular discussion). Because the event is, overall, very expansionary, it was always likely to be associated with some risk of higher inflation.

In other words, the Reserve Bank Governor is speaking with the moderation, the objectivity and the perspective that has been so lacking in the rhetoric of the Treasurer. Therein lies my disagreement with the Treasurer. He has spoken about our economy not only in a way that is misleading in terms of our economic history but in a manner that is calculated to undermine confidence. Treasurers and central bank governors have one big thing in common: they should speak about the economy in a way that creates confidence and ensures that people have faith in our markets and in investing. Let me go on with Governor Glenn Stevens. He continued:

But given the magnitude of the shock, when all is said and done, the economy has coped pretty well so far. Yes, inflation has risen. This is a problem, and requires a suitable response from monetary policy. But compare the outcomes on this occasion with those in the commodity price booms of the early 1950s or the mid 1970s. In the early 1950s, CPI inflation reached 25 per cent, then fell back to zero within a few years, associated with quite a pronounced recession. In the mid 1970s, inflation reached about 18 per cent, and took a very long time to come down to acceptable levels. This time, we are grappling with a peak CPI inflation rate that looks like it will be around 4 per cent in CPI terms, and trying to assess how soon it can reasonably return to 2 -3 per cent. This is a far cry from the problems of yesteryear.

How different is that language? Scrupulously accurate, endorsed as comprehensively correct yesterday by the Treasurer—and yet it is night and day; that language is at complete odds with the exaggerated rhetoric of the Treasurer. The governor is seeking to inspire confidence by being accurate and measured in what he says; the Treasurer, to make a political point, is undermining confidence. The governor goes on:

The reason we are doing better this time around is not hard to fathom, either.

Well, it is pretty hard for the Treasurer to fathom—but, anyway, it is not hard for the governor or for anyone on this side to fathom.

As work in the Treasury has argued persuasively, a flexible exchange rate, a reformed and flexible industrial environment, better private-sector management and much stronger fiscal and monetary policy frameworks have made a lot of difference. The fruits of those decades of effort of reform are an economy that, for all its strains, is doing well under the circumstances.

I could not describe the economy better myself. The Governor of the Reserve Bank has spoken accurately and comprehensively about inflation and in moderate language which inspires confidence.

Why is confidence so important? As Alan Greenspan said on 12 February 1998 in his congressional testimony:

The state of confidence so necessary to the functioning of any economy has been torn asunder.

He was speaking about the circumstances of the time.

Vicious cycles of ever rising ... fears have become contagious.

              …              …              …

Once the web of confidence, which supports the financial system, is breached, it is difficult to restore quickly.

Indeed, as Martin Feldstein, the President of the National Bureau of Economic Research in the United States said only last month: ‘Confidence is everything.’ And that is why, historically, prime ministers, treasurers and central bank governors have consistently used moderate language when speaking about the economy—for confidence can turn quickly; it can ‘turn on a dime’, as the Americans say, and as recent consumer and business confidence surveys show. We have now seen three surveys of confidence, with business confidence falling dramatically in the National Australia Bank’s survey for January 2008 and record falls in consumer sentiment in the Westpac-Melbourne Institute survey showing confidence at its lowest level since 1993. So, in 106 days under the Rudd government, business and consumer confidence have tumbled. That is a fact.

The Treasurer no doubt would say: ‘It’s not my fault. Look at all the turmoil around the world.’ Well, there is plenty of turmoil around the world. But there is something that was not there before November last year—and there was plenty of turmoil at the end of last year, and not just in electoral politics in Australia; this crisis really got underway in August of last year. The big difference is that we now have a Treasurer who speaks about the economy in a way that is calculated to undermine confidence.

He is not prepared to acknowledge that our economy is one that has been described by the Economist as the ‘wonder down under’. Our economy is one that has unemployment at a 35-year low and a participation rate at a record high. Our economy enjoyed average growth over the 11½ years of the previous government—so reviled by the Treasurer—of 3.6 per cent a year, higher than most other developed economies, including the United States and Europe. Our economy was 50 per cent larger in real terms when the coalition left government compared to when it came into government. Real wages grew 21½ per cent over those 11½ years, where they had fallen 1.8 per cent under the Hawke and Keating governments. This is a government that has no net debt and has run consistent strong surpluses. The government was praised in September last year by the IMF for its ‘exemplary macroeconomic management’. That is the track record.

I do not expect the Treasurer to become a spokesman for the previous government. I do not expect him to sing our praises. But what he does not seem to understand—and it is not that he does not know enough about the economy; I think it is that he does not have a feeling for it—is that confidence underpins everything. And when you trash your own economic history, when you say, ‘The inflation genie is out of the bottle,’ that is inevitably interpreted as, ‘Inflation is out of control.’ That is interpreted as meaning that the Reserve Bank is not doing its job and that the government was not doing its job—that the system is not working. And yet, manifestly, the system is working. We want our financial system to work. We want the securitisation markets to reopen. We want Australian homebuyers to have access to more lenders to get the benefits of competition. And central to all of that is confidence, and confidence is evaporating. (Time expired)

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