Nick Champion (Wakefield, Australian Labor Party) Share this | Hansard source

Last night in the House I was speaking about some of the theories about the international financial crisis, and in particular Mr George Soros’s speculation that there may have been a ‘superbubble’ building over the last 20 years in credit markets which has now imploded. It is interesting that over the last 20 years we have seen the slow deregulation of international credit markets and the removal of protections and provisions that were put in place during the Great Depression. Often these measures seemingly had good results in the short term and were apparently able to resolve crises like that which existed in 2001, but they may have fed into a prevailing bias that markets could grow indefinitely and self-regulate without any difficulty. We have now found that to be misguided. So, too, there was a notion that banks were too big to fail. There was an idea that, if you allowed commercial banks and investment banks to amalgamate, the resulting financial entity would be too big to fail. That has been proven to be absolutely wrong.

So I think we need to look critically at market fundamentalism and realise that in large part it was an ideology, not some economic certainty, and we need to be pragmatic and sceptical about any economic model that says it is absolute. We had the famous book about the end of history, but I think absolute models, whether communism or market fundamentalism, are prone to both spectacular flaws and catastrophic failures. That is why we need international regulation of the financial markets.

This is particularly apparent when you look at the source of this implosion, the subprime mortgage sector in the United States and collateralised debt obligations. We had a situation where the originators of mortgages, the brokers, were separated from the sources of capital. The banks trusted those brokers to do their job properly. We know that in many instances they did not, inflating the assets of properties, inflating people’s incomes and in some instances engaging in fraud. There were banks that moved loans into special lending vehicles off their balance sheets and then onsold those loans in packages to investors, who were other banks and institutions—hedge funds and the like—that then onsold them to other banks and institutions. All the participants, including the ratings agencies, trusted all the other participants because of the financial rewards that were present at every stage of the process. Because those rewards were so large, there was encouragement for banks, brokers and rating agencies to participate. There was a problem where banks felt that, if they sat it out, they missed out on profits.

In effect, the world created the financial equivalent of a chain letter: one that promises huge rewards but turns out to be too good to be true. We know people fall for those sorts of scams, sometimes in defiance of reality, because they believe they can gain. That belief is a bit of a fantasy, but that fantasy is very hard to remove up until the point when reality collides with it. We know that this sector has caused both great losses and great confusion in the markets. Last Thursday I was out on a farm in my electorate, down at Singing Creek Road, with a farmer named Mac. We were out on his property and he was telling me about a particular section of his property and the title on it. That title, he recounted to me, held the history of who had bought and sold it, including him. He had both bought and sold it and had bought it back. It showed when he had borrowed money against it and who he borrowed money from. That piece of paper, that title, held a financial history of the value of the property and what had gone on and there was some certainty to that title. This is one of the things that I think has been missed in the analysis of the financial crisis: we are not sure exactly what many of these financial instruments are now worth.

It is a matter that is taken up by Hernando De Soto, who is the author of The Mystery of Capital. In an article called ‘Toxic Paper’ in Newsweek last week, he said that one of the difficulties is:

… policymakers in the White House seem to be coming to grips with the real enemy: the debasement of legal financial documents that represent value, allow it to be transferred and signal risk.

He continues:

It is through paper that we connect and know the global economy. It is impossible to do business on a national level—never mind in a globalized marketplace—without reliable legal documentation. Yet this worldwide web of trust is now crashing down. In recent years, governments have debased paper by carelessly allowing into the market a biblical flood of financial instruments derived from bad mortgages nominally valued at some $600 trillion or more—twice as much as all the rest of the world’s legal paper, whether it represents cash, traditional financial assets, or property, tangible or intangible.

The astonishing quantity of these documents, and the fact that they’re so tangled up and poorly recorded, is making it difficult to determine how much there is, what it’s worth or who holds it. Given that the volume of these derivatives dwarfs all other paper, the mess is also undermining one of the greatest achievements of property law: the power to identify and isolate with precision every asset and every particular interest on that asset.

I think that is a really good quote. It goes to the heart of one of our problems in this financial crisis—that is, just the sheer confusion around these derivatives and the fact that it has become very difficult to find out exactly what the losses are and exactly what the assets are worth, and that is undermining trust and confidence in international banking. It seems to me that the only way you can overcome that is through international cooperation, because finance is now largely international.

We know that the current economic crisis and banking’s central role in it is, in essence, nothing new. In 1935 Ben Chifley, a former Prime Minister of this country, was appointed to a royal commission on banking that was set up by the Lyons government, a conservative government, in the wake of the Great Depression. That helped to set the scene for a whole lot of debates on banking; it also set the scene for the Menzies government to regulate banking after the war. A great deal of good sense came out of that royal commission. I would like to quote Chifley’s remarks on the banks. He said:

Private banking systems make the community the victim of every wave of optimism or pessimism that surges through the minds of financial speculators.

I think that is certainly true of the present international situation. What action is the government taking in its approach to this unprecedented challenge? Firstly, we are making sure that our domestic financial market is stable and that private credit continues to flow. That is essential to jobs; it is essential to small business. Secondly, we are injecting an economic stimulus into the economy as part of the Nation Building and Jobs Plan. In the short term this will stabilise the economy but in the longer term it will help to set the ground for productivity growth. Thirdly, we are providing additional support for those who unfortunately do lose their jobs through no fault of their own. This is to ensure that they can maintain their skills or retrain for new jobs that will emerge as the economy recovers. Fourthly, we are implementing a medium-term economic and fiscal policy strategy which will maintain some borrowings, but there will also be a spending discipline along with that. Fifthly, we are engaging with other governments around the world—and this is a critical point—to help shape global decisions that have been caused by this economic recession. This is principally to restore global private credit markets and to make sure that the international banking system does not impair the real economy. There are a number of international proposals but it might well be that we need the international equivalent of the 1935 banking royal commission to look at a new international framework.

On the domestic front, one of the most important things that the government have done is act to guarantee the banks. Before the guarantee, Australian banks were having some difficulty raising funds offshore. Prior to September last year, raisings had fallen to $1.7 billion from $13 billion a month earlier. In October there were no international raisings at all. The guarantee had an immediate effect on interbank lending between Australian banks and international lenders. Australian banks have now raised more than $75 billion under the guarantee that the government provided. This guarantee did two really important things: it gave some certainty to international investors in Australia, and it gave some certainty to deposit holders. That is an absolutely critical thing for a government to do. Likewise, with the Australian Business Investment Partnership with Australian banks, we are providing certainty to the commercial property sector for projects which, due to the financial crisis, might not have gone ahead. This is another particularly important partnership in order to keep credit flowing. In a very similar partnership we have acted to protect car dealerships, which is important to my electorate and, in particular, to General Motors Holden.

Obviously, there was a need for an immediate economic stimulus to the national economy. The majority of that stimulus will take place in the next two years. We have increased the home buyers grant. We have provided one-off payments to families, pensioners, students and farmers, and that is all beginning to flow. I think it is particularly important that those payments flow because they will underwrite economic growth in my electorate. I have talked to many small business owners, and one prominent furniture manufacturer in the town of Gawler tells me that his business has not dropped off at all. Part of the reason for that is that he runs a very good business but another part of it is that the government has acted to provide stimulus.

Likewise, we have a 30 per cent small business tax deduction, something that I know farmers in my electorate are very excited about. We have the largest school modernisation plan in Australia’s history. We are bringing forward investment in rail and road infrastructure. We are constructing 20,000 new public housing homes. We have provided an assistance package, which I have spoken to the Committee about before, to support jobs in the automotive industry. Most importantly, the Reserve Bank has lowered interest rates by four per cent in the last six months. That is providing families and small business with mortgage relief. We have seen a lot of speculation about the savings rates going up. I think the savings rates have gone up because people have banked those interest rate cuts. I do not think it is pensioners not spending their bonuses from December.

I just want to touch on the fact that most of the capital flows over the last 20 years have been from creditor nations in Asia and the Middle East to debtor countries in the West. I think that, in the mid term, future national savings will become increasingly important. I think that superannuation may well play a big role in our mid- to long-term strategy for dealing with this crisis because having superannuation and national savings establishes the confidence of international creditors. It provides a long-term growing pool of capital and assets. It will let us buy up undervalued assets in the current crisis. Some crises bring opportunity. With that, I conclude my remarks and commend the bills to the House.

See this speech in context