Wayne Swan (Lilley, Australian Labor Party, Treasurer) Share this | Link to this | Hansard source

by leave—As honourable members know, the last two weeks have been a turbulent period on global financial markets, to say the very least. There is no question this is a difficult time for the world economy. And it would be wrong of us, as a nation, to pretend we are completely immune. It is true that there is much here that is beyond the control of the Australian government. This is something we have been upfront about, throughout this global economic turbulence. But despite all the substantial difficulties in the US and elsewhere, we do have cause for confidence, and there are things which we can do. We are acting decisively in those areas where our actions can really count. I remind the House that if you had to pick a country that you would live in, in these uncertain times, you would choose Australia. That is an important piece of perspective that we should never lose sight of. In response to the international developments of recent weeks and months, there has been decisive and significant policy action taken, here and abroad. So it is appropriate that I again outline to the House and to the people of Australia the nature of the decisions, the environment in which they have been made, and the reasons behind them.

A little over a year ago, global financial markets began a fundamental repricing of risk. Few commentators or market actors foresaw the turmoil this would inflict on global financial markets in the period since then. Developments have been dramatic: we have seen three of the top five US investment banks cease to exist as stand-alone entities. Global stock markets have wiped off more than 25 per cent of their value. And some markets that had become the mainstay of the financial system have simply ceased to operate. Rather than see a steady recovery in global markets, this last week has been the most turbulent in almost anyone’s living memory. Turmoil in financial markets intensified with disruptions in the US financial system reverberating in markets around the world. In the last week alone, Lehman Brothers filed for bankruptcy. Bank of America agreed to take over Merrill Lynch. The US government bailed out the insurer AIG with an $US85 billion loan in return for an almost 80 per cent equity interest in that company. And in the UK, Lloyds TSB agreed to the merger with HBOS.

Towards the end of last week we did see a recovery in global markets—that is true. This came as a result of news that the US government is developing a comprehensive package to buy up bad debt from financial institutions, to unfreeze credit markets that have ceased to function because financial institutions no longer trust each other to pay back loans. I am pleased to inform the House that this recovery has continued in the Australian market this morning, reflecting positive international developments and moves to restrict short selling in the Australian market.

Moves taken by US officials over the weekend were just some of the dramatic but welcome policy interventions that have been enacted. To date, the US government has taken a number of very difficult decisions to restore confidence in US financial markets and limit the impacts that are flowing through to the rest of the world. For example, the US authorities have taken steps to support Fannie Mae and Freddie Mac. They provided a line of credit to AIG—the world’s largest insurer. And on Friday they announced the establishment of a temporary guarantee program for the US money market mutual fund industry. These have all been welcome steps. But, as the US Treasury Secretary, Hank Paulson, has said, a more fundamental and comprehensive approach is needed to address the root causes of the problems facing the US financial system.

The US government’s announcement—that it is developing a comprehensive package to address the underlying problems in the US financial system—is one that the Rudd government strongly welcomes. The tarnished assets in the US financial system continue to inhibit a recovery in both US financial markets and around the world. And until they are fully disclosed and dealt with they will continue to contribute to volatility in global financial markets.

The US government’s proposed comprehensive package envisages the US Treasury buying up to US$700 billion in infected mortgage-related assets from US financial institutions. This is an enormous package. Consider this: it amounts to over US$2,000 for every man, woman and child in the United States—a very substantial package. And the size of the proposed package brings into sharp focus the size of the problems facing the financial system in the United States. However, while we welcome the US intervention, it is very important to draw a clear distinction between the US banking system and the Australian banking system, which is not infected with this type of bad debt that has necessitated the US bailout.

While the US government’s announcement is welcome, as is the rebound in global markets towards the end of last week, we should not imagine that all will now be calm in the international financial system. Financial crises are unpredictable, and there will undoubtedly be further unpleasant surprises and further volatility over the period ahead as the remaining losses are worked through the system. We will also continue to see the fallout of these developments on confidence and economic growth right around the world.

Consumer confidence across the OECD economies is around its lowest level in almost 30 years. The world’s major developed economies are struggling to grow—five of the world’s seven largest developed economies recorded zero or negative growth in the three months to June this year. Growth is also slowing in Australia—not surprising, with global financial turbulence, together with 10 consecutive rate rises under our predecessors. That is hitting our economy.

Inevitably, also, these global developments have hit the investments and superannuation savings of many Australians. We understand that this is creating considerable anxiety in our community, particularly for retirees reliant on super as their primary source of income. But it is important again that we counterbalance these difficulties against what remains a good economic performance by Australia. The June quarter national accounts show our economy still recording solid growth. Our superannuation system is strong and its investments well diversified. And our banks are well capitalised and well regulated and do not face the myriad of problems being faced in the US—a point I will return to later on.

We have always been upfront about the global challenges we face and their impacts here in Australia. Because so many of these global difficulties are beyond Australia’s control, we have consistently focused on those things we can actually influence. We are acting decisively in those areas where our actions can really count.

In the lead-up to the budget both the Prime Minister and I had been taking careful soundings on the international economic climate. We were acutely aware of the difficult global environment we faced, and the importance of getting the balance right in the budget:

• The importance of delivering a strong surplus to help fight inflation and buffer us against these global factors outside of our control.
• The importance of laying the foundation for a new era of investment in Australia’s critical infrastructure needs for the future.
• And the importance of delivering tax cuts to working families who are being hit by higher interest rates and higher global oil and food prices.

Many people told us not to deliver those tax cuts in the budget, but there are not too many people saying that today. It shows our budget settings were well judged in the light of unfolding global and domestic circumstances. Our understanding of these challenges from day one is also why the Prime Minister and I continued to be in close and constant contact with our regulators. Those regulators are closely monitoring events in the United States and elsewhere and remain in close contact with their international counterparts. The Prime Minister and I have also kept in regular contact with our counterparts around the world, including, and most particularly, those in the United States.

This has been critical in understanding these global developments and preparing for their impacts here. It has also been critical to our playing our part in the global solution to this crisis, as policy makers agree to the most appropriate response around the globe. We will continue to work with our international counterparts bilaterally and through institutions such as the International Monetary Fund and the Financial Stability Forum. This is also why it is so important that the Prime Minister meets with other world leaders and the US government. Over 100 world leaders will be at the United Nations this week and the global economic crisis will be foremost on their minds. At this time of global economic uncertainty, Australia’s Prime Minister must be there as well.

To be absent at such a time would be leaving Australia out in the cold, while other world leaders are working their way through this turmoil. It is also important that we engage with the international financial community to reinforce the strength of the Australian economy and the strength of our financial system. That is why the Prime Minister will be meeting with global financial market representatives and US policy makers in New York. It is also why I will be attending the IMF annual meetings in a little over two weeks—to work with my international counterparts on solutions to the underlying causes and to highlight the significant strengths of the Australian economy and financial system.

It is worth taking some time to understand the roots of the current subprime crisis. It is now clear that, for most of this decade, the US has experienced a toxic cocktail of seriously eroded lending standards in their financial institutions and an extended period of ultralow interest rates. This serious erosion of lending standards meant that loans were extended to many subprime borrowers who unfortunately had little realistic chance of repaying them. This, in combination with ultralow interest rates, led to serious overinvestment in the US housing market, as many people borrowed at the prevailing ultralow interest rates to build houses. It is this overinvestment, along with the default of many subprime mortgages, that is driving the current downturn in the US housing market, contributing to falling US house prices and contributing also to the credit crisis that has its epicentre in the US financial system. At the core of this problem, as US Treasury Secretary, Hank Paulson, has said, has been irresponsible lending and irresponsible borrowing.

Many executives in financial institutions have made a lot of money out of all these activities and have walked away with big packages, while the taxpayer has been left to foot the bill. It is important to describe the situation in the US, because it brings into sharp focus just how different the situation is facing Australia. As I said earlier, our banks are well capitalised and well regulated and they do not face the nature and depth of the problems of their US counterparts. Australia’s four largest banks are among only 12 of the world’s top 100 banks with a credit rating of AA or above.

In Australia, subprime mortgages account for only one per cent of the mortgage market compared with around 15 per cent in the United States. Our default rates are nowhere near those being experienced in the United States. Australia did not have a dotcom stock market bust in 2000; we did not have ultralow interest rates earlier this decade; and we did not have a serious erosion of lending standards in our financial institutions. Whilst we are not immune from the current global difficulties, as I have said many times before, we are better placed than most countries to weather the storm.

We find ourselves in a very good position. The government has built a strong surplus to buffer against global turmoil and provide a foundation for responsible investment in the future. Prices of our key commodity exports remain around generational highs, and businesses are investing in the future with confidence, with over $100 billion of planned investment in 2008-09.

These are all reasons for optimism, but we are not overconfident and we are certainly not complacent. The Prime Minister and I have engaged all year in a series of moves to bolster our defences—already strong—in the face of international turbulence:

• We are implementing the Financial Stability Forum recommendations in full and encouraging their implementation internationally.
• We have taken steps to support liquidity in the government bond market to ensure our broader financial markets operate more effectively.
• We are strengthening protections for deposit holders through the introduction of the Financial Claims Scheme.
• We are creating a single national regulation of consumer credit, including mortgages, to ensure that the kind of problems being faced in US with poor lending practices do not occur here.
• The government also announced in March that it would be legislating to improve disclosure of covered short selling.

Let me now outline the further developments on short selling on Friday and over the weekend to further protect Australia from international turbulence. For the benefit of Australians who are not fluent in the language of the financial markets, short selling can be simply described as selling shares the seller does not themselves own, normally borrowed or loaned from someone else, on the likelihood that the share price will fall. When the seller has to return the borrowed shares, they go off and buy more at the new, hopefully lower, price, return these to the original lender and, of course, pocket the difference. While appropriately regulated and disclosed short selling has a role to play in the effective operation of the market as it can assist with true share price discovery for example, it is appropriate to curtail its use at a time of heightened market volatility. Some of these practices are, frankly, big investors manipulating the current circumstances to make money out of other people’s misfortune.

So, in light of developments in global markets in recent weeks and over the weekend, ASIC and the ASX have taken coordinated action on short selling. These are important steps to ensure the integrity of the operation of our financial markets at this time and the government welcomes them. On Friday, ASIC and the ASX announced measures to ban all ‘naked’ short sales effective this morning, limit the number of allowable ‘covered’ short sales, and increase disclosure requirements for these allowable covered short sales. Following further consultation with its counterparts overseas and participants in the financial markets, ASIC has also announced an interim ban on all short selling. The government endorses this coordinated response which accords with similar action taken by the US, the UK and other major jurisdictions. This action shows that our regulatory system is working well in responding to challenging global circumstances.

There have been reports of short selling being used to try to manipulate the market, in particular with regard to financial stocks. Market manipulation of this sort simply cannot be tolerated. Australia has a world-class regulatory system and this action will help ensure ongoing confidence in the operation of Australia’s financial markets. The government and the regulators continue to monitor this situation closely and will not hesitate to take further action should it be warranted.

I finish by reminding Australians again that we have much to be optimistic about. Our situation is fundamentally different to that being experienced by most other developed countries. This does not mean that we have not felt the impact of these global forces—we most certainly have—but Australia is well placed to weather the impacts of this global financial crisis. As our regulators have said:

Australian deposit-taking and insurance companies supervised by APRA are well-capitalised, profitable and well-regulated and are weathering the turmoil well. Australian depositors can be confident in the soundness of Australian financial institutions.

We do take heart from this assessment, and the government will continue to do whatever it can to help shield the Australian community from the impact of these global forces.

I ask leave of the House to move a motion to enable the Deputy Leader of the Opposition to speak for a period not exceeding 18 minutes.

Leave granted.

I move:

That so much of the standing and sessional orders be suspended as would prevent Ms J. Bishop speaking for a period not exceeding eighteen minutes.

Question agreed to.

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

The Prime Minister said today that the most important thing for political leaders is to not add to uncertainty. The opposition agrees wholeheartedly with the Prime Minister but we urge him and his government to practise what he is now preaching. There is great uncertainty about the ramifications of the global financial crisis and the extent of impacts on the Australian economy. There is uncertainty about job security, interest rates and other factors of critical concern to Australians. It is important at times like this for the government to do all it can to maintain confidence in the state of the economy and to remain committed to sound economic policies.

The Rudd Labor government inherited an economy that was strong, resilient and flexible. Extensive economic, employment, tax and welfare reforms undertaken by the coalition government played a key role in those strong fundamentals. In addition to strong fiscal management, the coalition adopted independent monetary policy and a sound financial system with the creation of the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission. These reforms and strong management of the economy mean Australia is quite different from other OECD countries. Our financial sector is well capitalised and profitable and is well placed to withstand the pressure of the crisis. The Labor government inherited fiscal surpluses of $110 billion over five years. It inherited net assets of $45 billion. It inherited a 30-year low in unemployment. This is a far cry from the economy handed over by the Keating government in 1996. Then, the budget was $10 billion in deficit. There was net government debt of $96 billion. The previous Labor government had presided over high unemployment, record high interest rates and high inflation. The coalition repaid Labor’s $96 billion debt, brought the budget back into surplus and, after 11½ years of reform, we left the lowest rate of unemployment in 35 years. Inflation and interest rates remained at historically low levels, and the highest interest rate under the coalition was always lower than the lowest interest rate at any time under the previous Labor government.

So the coalition’s legacy has been sustained growth, increased employment, decreased unemployment including long-term unemployment, and rising living standards. This was achieved despite significant turmoil from the Asian financial meltdown, the crash of the technology shares, the September 11 terrorist attacks and the war on terror. But confidence was maintained in Australia throughout these times of great uncertainty and crisis because Treasurer Costello and Prime Minister Howard reassured the Australian people that our economy was sound and that we were well placed to withstand these external shocks. The Labor Prime Minister and the Treasurer were clearly intimidated by the outstanding record of economic management they inherited, and they immediately embarked upon a regrettable course of action. In their mad rush to trash the coalition’s economic record, the Treasurer and the Prime Minister declared that inflation was out of control. The Treasurer’s now infamous declaration that the inflation genie was out of the bottle, on the day before a meeting of the Reserve Bank, was reckless, and it was followed by the Prime Minister’s hysterical claim that the inflation monster was ravaging the economy. This had a major impact on business and consumer confidence at precisely the wrong time of the economic cycle.

Since the Rudd Labor government came to office, business and consumer confidence has plummeted to lows not seen since the previous Labor government in the early 1990s. There has been such a succession of worsening indicators since early this year that it would in fact be impossible in the time available for me to summarise them. The government must accept responsibility for this collapse of confidence and the deteriorating state of the economy. Both its rhetoric and its policies have contributed to the problem. A key idea in economics is that people in households and businesses make decisions based on their expectations about the future. Their expectations influence their decisions, their decisions influence economic activity, prices and other economic variables, and economic conditions and the particular circumstances of business and households influence expectations. Labor’s panicky and negative rhetoric undoubtedly undermined confidence in business and households. The Treasurer and the Prime Minister must accept that their actions have directly contributed to the economic slowdown in Australia.

The events of the last week have been extraordinary. Lehman Brothers has collapsed and filed for bankruptcy, Merrill Lynch has merged with the Bank of America, the United States government has nationalised the giant insurer AIG, Morgan Stanley has considered combining with a commercial bank and, in the middle of what has been called the largest shock to the financial system since the Great Depression, funding pressures have become enormous and even money market funds, which are usually considered safe, have incurred losses. Risk aversion has surged, and investors have sought the safety of short-term Treasury debt, driving yields to their lowest level since the early stages of World War II. The severity of funding pressures has been most apparent in money markets, where already higher spreads between interbank lending rates and expected official interest rates have surged. In the United States the pressure has been most pronounced. Three-month interbank rates are now about 130 basis points above the expected federal funds rate, exceeding the earlier record peaks seen during the credit crunch late last year.

Instead of lowering official rates, central banks have tried to separate their monetary and liquidity policies, preferring to provide into the global banking system a massive amount of cash. This has been accomplished primarily by the Federal Reserve increasing its US dollar swap lines with the European Central Bank and the Swiss National Bank as well as establishing new lines with the Bank of Canada, the Bank of England and the Bank of Japan. In total these new and expanded swap lines now mean that central banks—mainly in Europe, where demand is greatest—can provide roughly US$290 million in short-term funding to banks.

Last Saturday, 20 September, US Treasury Secretary Hank Paulson released details of a plan to ask congress for $700 billion to buy distressed assets from US financial institutions. The proposal would give the Treasury Secretary significant leeway and flexibility in buying, selling and holding residential or commercial mortgages as well as any securities, obligations or other instruments that are based on or related to such mortgages. Among the things the US government is asking for is the authority to hire asset managers to oversee the buying of assets. With an election looming, it is unclear how much time it will take to secure congressional approval. It could also take some time to set up the fund and start buying assets. This suggests that in the short term the brunt of the government’s support to the banking system will continue to be borne by the US Federal Reserve’s liquidity policy and, depending on the fallout for the real economy, its monetary policy decisions.

For Australia, the global credit crunch saw the non-bank sector run into difficulties last year and early this year when they were no longer able to buy money cheaply in the United States to on-lend for mortgages that they would then securitise to sell to investors. Our banks have taken up the slack, although they could not keep growing their loan books at the frantic pace of last year, given higher funding costs and an inability to free up their balance sheet by securitising and onselling existing loans.

The increase in funding costs has been significant, with banks finding it more expensive to raise finance both at home and abroad. Deposit rates have increased over the past year, while money market rates remain well above the expected cash rate. Internationally, our banks have been able to issue a substantial amount of debt during the crunch, albeit at a more expensive rate. These higher funding costs have been passed on to borrowers, resulting in wider margins between lending rates and the cash rate over the past 12 months, thereby contributing to the reduction in lending seen so far this year. Funding costs have come down slightly, and the Reserve Bank’s recent decision to lower rates has provided some relief, even though the Reserve Bank now expects inflation to reach five per cent by December.

Last week’s events have worked to reverse the improvement in overall funding costs by making it expensive to issue debt abroad and by lifting money market rates. The shift in money market rates in Australia has been large, although not as extreme as in the United States. The Reserve Bank has said it will take any increases in funding costs and the extent to which they are passed on into account when formulating monetary policy. Superannuation returns have fallen in the last six months, as has household wealth. The evidence suggests that, while our economy is strong and resilient, it is not completely immune from events overseas. Our banking sector is profitable, well regulated and well capitalised, but its stock prices have fallen nonetheless. We need to make sure our regulations are appropriate and that regulators are doing their job properly in monitoring developments closely.

The coalition left the economy in good shape. Thanks to successful reforms, including the financial sector reforms and the Wallis reforms—which created APRA, ASIC and the nine iterations of the Corporate Law Economic Reform Program, CLERP—as well as our very strong fiscal position, Australia is in a very strong economic position compared with most other OECD economies. We are also benefiting from the growth in Asia, particularly China. The diversification of our exports has reduced the volatility of the terms of trade. Australia’s flexible workplace relations laws have also helped by providing job opportunities. Reform of the tax system has also been crucial to provide dividends to Australians and to improve the competitiveness of our tax system.

But I repeat: Australia is not immune to the financial crisis. We are well prepared and our economy is strong and resilient, but the Rudd government have been caught like rabbits in the headlights. The panicky attacks on the new Leader of the Opposition have built on perceptions of a government that lacks the ability to manage the economy through this global crisis. The government are so focused on symbolism, websites, reviews and inquiries that they forget about the decisions and the actions that must be taken. The Prime Minister seems to be more focused on 2020 than on today, 2008. There are serious economic issues facing our country right now. The Prime Minister has to start governing and start governing for the present.

The major concern about the Treasurer’s response to short selling is the inconsistency and the mixed messages emanating from the government. Only a few weeks ago, on 8 August, Minister Sherry said that the government would not ban short selling. He said:

Let me say again for the record—we will not be banning short selling.

Then the government changed tack, with the announcement on Friday of an interim ban on what is called naked short selling, with Minister Sherry welcoming the change. On Sunday, the interim ban was extended to cover short selling in total. Essentially what this means is that as of last Friday the government and ASIC knew that the United Kingdom Financial Services Authority had banned not just naked short selling but all short selling in financials. Secondly, the United States Securities and Exchange Commission was proposing to temporarily ban short selling on the same basis. Yet, on the Friday, the Australian government chose to ban only naked short selling. Why did they not ban all short selling last Friday? If the excuse is that overseas regulators made subsequent changes, why is the minister not in close contact with these regulators, as he claimed?

The effect of all this uncertainty—which has been three or perhaps four positions over three days if you include the status quo and Minister Sherry’s comments—is that the Australian stock exchange had to delay opening on Monday morning to seek clarification from the corporate regulator about the decision to ban the short selling of shares in the local market. The Australian stock exchange had to close for an hour because of the confusion, the incompetence of the Australian government on the issue of short selling.

This sends a message of confusion and incompetence on the part of the Treasurer—or was it just sheer panic? It is symptomatic of a government that is unsure of where to go or how far to go. This is a government that says it wants to promote Australia as a financial services hub and then reduces withholding tax for foreigners. This is a government that says it wants to promote certainty and stability in the financial markets but manages to close the stock exchange, amidst great confusion. What must the international investment community think of such incompetence?

The coalition, as our leader has offered, is committed to a bipartisan response to the international financial crisis. The coalition remains committed to assisting the government. I extend an offer to the Treasurer, in the absence of the Prime Minister, to meet with me so that we can discuss any further measures that might be needed. I urge the Prime Minister and the Treasurer to cease their reckless attacks on the economic legacy of the coalition government and to cease their attacks on the Leader of the Opposition when all he seeks to do is discuss the impact of the financial crisis with the government of the day—a financial crisis that will affect jobs, superannuation and mortgages in this country. I ask the government to commit to doing everything in their power to rebuild the shattered confidence of this nation.