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Monday, 22 September 2008
Page: 8087


Ms JULIE BISHOP (Deputy Leader of the Opposition) (3:45 PM) —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.