Ms Julie Bishop (Curtin, Liberal Party, Deputy Leader of the Opposition) Share this | Hansard source

The government’s response to the global financial crisis has been characterised by its failure to heed warnings from 2007 and specific warnings from late 2007 and throughout 2008 as the failings of the US subprime market infected the global financial sector. Had the government read the signs and heeded the warnings, it could have responded in a far more considered and reasoned way, both with a coordinated overall strategy, not the ad hoc, hasty decisions that we have seen, and in a more calm and measured and steady manner that would have boosted confidence in Australia, not destroyed confidence as it has lurched from one bungled response to another under the guise of ‘decisive’ action. The Prime Minister and his ministers’ pavlovian response that the government acted ‘decisively’ in response to the global financial crisis might mean it acted quickly but it does not mean it acted in a considered, well-advised, thought through or measured way.

The government’s lack of preparedness to respond to the global financial crisis was highlighted by the Deputy Prime Minister in a radio interview on 24 November this year, when she said:

No-one 12 months ago was talking about a global financial crisis, now everybody is talking about a global financial crisis.

How wrong she was. In fact, on 12 November 2007, the then Treasurer, Peter Costello, warned of:

The collapse of the sub-prime US lending market which is now having reverberations around the world. And all of these things will buffet global inflation, they will buffet our economy, they will buffet exchange rates, they will affect growth and job opportunities. They will require careful management on the Budget, on tax, on structural policy, on industrial relations, on competitiveness, on investment.

That is what former Treasurer Costello said on 12 November 2007. But if the Deputy Prime Minister did not want to heed the words of the then Treasurer, by the time the Rudd government came to office it should have at least read the Reserve Bank warnings, and they had begun not in 2008 but in early 2007. The Reserve Bank’s Financial stability review in March 2007 referred to the increase in delinquencies on subprime loans causing significant difficulties for many subprime lenders. Reflecting this, it said:

… more than 20 sub-prime lenders have shut down and, on average, the share prices of the largest sub-prime lenders in the United States have fallen by nearly 40 per cent since the start of the year … The problems in the sub-prime market have also weighed on other financial stocks …

They went on with another warning. The Reserve Bank’s Statement on monetary policy in May 2007, talking about the three main risks being identified and their impact in the US economy, spoke of ‘a generalised tightening in credit standards leading to a “credit crunch”’. The Reserve Bank of Australia was referring to the US credit crunch of May 2007. It went on to refer to:

… an overly aggressive regulatory response by state and federal agencies which could also cause a decrease in credit provision; and a deepening of the ongoing contraction in residential construction and stagnation in house prices.

In its September 2007 Financial stability review, the Reserve Bank referred to the marked increase in the delinquency rate on subprime mortgages, and spoke about a large number of mortgage originators in the United States closing and potential losses on the subprime mortgages of some US$100 billion. In February 2008, the Reserve Bank statement warned again of the ongoing turbulence in international financial markets since the last statement, including a large correction in global equity prices, and it spoke about the growing pessimism among investors about the outlook for the US economy and, by extension, for global growth. The United States congress, in early 2008, was already implementing significant measures to deal with the slowdown in the US economy—a slowdown which would, as we know, impact worldwide. Economic indicators had suggested an increased risk of recession in the United States. I point out that, in January 2008, the US congress enacted the Economic Stimulus Act 2008, signed into law on 13 February 2008. Its provisions included tax rebates to individuals, and business tax incentives. In fact, the total cost of the bill was US$152 billion.

The Reserve Bank of Australia sent out another warning in its Financial stability review of March 2008 and another warning of the impact of the US subprime crisis globally in its Statement on monetary policy in May 2008. So for the Deputy Prime Minister to say in November 2008 that no-one was talking about the global financial crisis 12 months ago shows that the Deputy Prime Minister was not following international financial trends, nor was she following Reserve Bank warnings. In fact, the government was so ill prepared for the impact of the global financial crisis that in early 2008 it declared that its No. 1 priority was fighting inflation. The Treasurer had his entire focus on fighting inflation, egging the Reserve Bank on to put up interest rates when the rest of the world was loosening monetary policy to deal with the impact of the pending global financial crisis. We all recall the Treasurer’s now infamous statement on the eve of the Reserve Bank meeting that the inflation genie was out of the bottle. He was egging on the Reserve Bank to put up interest rates. The Prime Minister was in on this as well. Inflation was ‘public enemy No. 1’ for the Prime Minister. On 21 January 2008, he declared a ‘war’ on inflation and he set out a five-point plan to fight inflation. He went on in June of 2008 to talk about the inflation ‘monster’ wreaking havoc on interest rates. Even as late as 27 August 2008, in the House of Representatives, he spoke about inheriting inflation running at 16-year highs and putting downward pressure on inflation.

As we know, that was precisely the wrong message to be sending. While the rest of the world was loosening monetary policy, the Prime Minister, the Treasurer and the government were egging on the Reserve Bank to tighten monetary policy. The government’s first budget gave another sign of the fact that the government was completely misreading the economic circumstances that were unfolding around the world. It was so blinded by its desire to harm the record of the former coalition government on economic management, so blinded by its political efforts to damage the coalition on one indicator, inflation, that it took its eye off the ball. The budget included tax increases—$20 billion in increased taxes and revenues. That was precisely the wrong fiscal response for that time, and yet the government refused to acknowledge that it should be easing fiscal policy. By 15 September, once Lehman Brothers had collapsed and the catastrophe in the United States was becoming evident even to the government, it started to talk about the global financial crisis. Of course, on 12 October the Prime Minister made the first announcement comprising part of the government’s response to the global financial crisis. But, as we know, that response was not in relation to what was happening around the world; it was a response to the fact that the Leader of the Opposition and I had called a press conference on 10 October and set out a number of suggestions for the government on bank guarantees, on the residential mortgage backed securities market and on delaying the emissions trading scheme in the face of the unprecedented global crisis unfolding around us.

The government’s announcement of an unlimited government guarantee for bank deposits has been canvassed on numerous occasions in the House of Representatives. Suffice to say that the opposition believed the government when it said that it took explicit advice from the Reserve Bank governor, the man charged with the responsibility in this country for the stability of the financial markets. We believed the Prime Minister when he said that he had explicit advice from the Reserve Bank governor. We now know that this unlimited bank guarantee has caused enormous dislocation in the financial markets. That was an inevitable consequence when the government announced that it would guarantee some deposits in some institutions and the Prime Minister says that they are therefore protected and safe. In the minds of the public, that means that deposits that are not in those institutions are not guaranteed, not protected and not safe. It is no surprise that billions of dollars of funds were moved out of one sector of the financial markets into another.

We also know that many of these funds and institutions had to freeze their accounts to ensure that there was not a run on them. It has been estimated that some 270,000 Australians have had their funds frozen in mortgage funds and the like as a result of the government’s bungled unlimited bank guarantee. And who will forget the Treasurer’s response to those who were suffering hardship as a result of their funds being frozen? His response was, ‘They can go to Centrelink.’ That was an insult to thousands and thousands of self-funded retirees around this country.

But the government’s bungling continued. The government informed those institutions that did not receive the guarantee that they could just convert into banks and it gave APRA more money to fund the conversion. Anybody would know that it does not take days to convert into a bank. It could take months, if not years—and that is if they wanted to do it. The government also said, ‘Well, those suffering hardship because their funds have been frozen can get ASIC to somehow assess their hardship and then try and unfreeze the funds.’ We have not heard too much about that. Eventually the government caved in, after weeks of uncertainty in the financial markets, after weeks of hardship for Australians, and imposed a cap of $1 million, with a fee for deposits above that amount. As we know, the Reserve Bank governor has been begging the government to impose a cap—‘the lower the better’.

The government has also bungled its introduction of the wholesale term funding guarantee for Australian banks. For weeks the opposition suggested that the government should introduce legislation with a standing appropriation to ensure that the guarantee was unconditional, irrevocable and timely, but of course the government would not do that. It has now conceded that that should have been done at the time of the announcement.

The government has also announced a stimulus package of some $10.4 billion following Treasury advice that it needed to act in a manner that was temporary, targeted and timely. As that package has yet to be delivered, time will tell whether it will have the desired effect. But there is another view of fiscal packages, and that is that they be permanent, pervasive and predictable. This alternative stimulus mantra has been offered by John Taylor, a professor of economics at Stanford University, in testimony before the Committee on the Budget in the US Senate on 19 November this year, as the United States Senate considers the options for a second stimulus package in addition to the US$152 billion boost in the Economic Stimulus Act passed earlier this year, which I have just referred to.

Another concern is the government’s failure to provide the Australian public with confidence. It has been talking down the economy. In order for banks to lend and people to spend, they have to feel confident about the government’s handling of the economy, growth in Australia and our prospects for the future. So what does the government do? It announces that it will go into deficit. Unlike virtually every other comparable country in the world, Australia has no government debt. It had a surplus of $21 billion, it has growth at two per cent and it has plenty of room to move in monetary policy. The government is yet to provide any modelling, research or evidence to back up its responses to this global financial crisis. It has yet to update its forecast. It does not keep people informed of what it is doing. Jobs are at stake and people deserve to be kept informed.

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