Wednesday, 18 February 2009

Economic Crisis, Stimulus Packages and Politics

I have struggled to come to grips with the concept of Government economic stimulus packages.

In November 08, the Australian Government announced a package worth around $10 billion dollars encouraging people to spend, spend and spend.

During the previous 24 months, the Reserve Bank of Australia progressively increased interest rates to try and lower our spending and reduce inflationary pressure. The interest rate issue was a major election issue and the new Government continued to talk down the economy and criticize the inflationary practices of the previous Government.

A subsequent package of $42 billion was announced a few weeks ago. At the Senate enquiry, the head of Treasury admitted there is no way of knowing if it will work and in fact no way of measuring if it works.

So who has got it all wrong? Are such packages the answer?

In the USA, banks have been bailed out and in doing so, have effectively become nationalized. Same in the UK.

Our economy is holding up comparatively well and the reasons given are the strength of our banking system and the central system of regulatory control our banks are subjected too including the Australian Prudential Regulatory Authority (APRA)

However, the same Regulator is responsible for the regulation of the Financial Planning Industry and we have seen thousands of people collectively lose millions of dollars including their houses as a result of the seemingly questionable practices of a well known, high profile Financial Planning Firm – it is a veritable destructive financial Storm.

If APRA is given credit for the strength of the banks, does it also receive credit for the millions lost by investors in the collapse of the Financial Planning firm in question? Perhaps, our Bank Boards and Executives are actually very capable banking professionals running relatively good lending books backed by sound and disciplined risk management protocols? Are we giving credit, where credit is due?

A good friend of mine (and fellow cyclist) is an expat holding a Vice Presidential role with a successful boutique investment house in Singapore.

The extent of the impact of the economic downturn on the Singapore economy has not been widely reported. Business is very slow in Singapore.

We often talk. He is genuinely surprised at the relatively low impact the crisis has had (so far) in Australia. He has been concerned that things are not worse in this country in that he feels that when we are hit with our dose of reality, we will be hit hard.

However, during a recent visit to Australia, he was almost overwhelmed by the continuing high level of overall business confidence and community confidence. Sure, we are pulling in our purse strings and jobs are being lost but the confidence in relative terms is much, much higher than in Singapore and in the other parts of the world his business takes him.

The key to us coming out of the economic crisis with bruises rather than amputations may well be the ability to maintain a basic level of confidence and optimism. It may not be Government handout and deficit funding.

It is in these areas that our political leaders have a role to play.

Governments all over the world love a good crisis. There is nothing like a crisis to provide a Government with a forum to show leadership – no matter how shallow the leadership depth may be. Remember Howard post Port Arthur, Thatcher during the miners strike, even Bush in the period post 9/11

The challenge for Prime Minister Rudd and Treasurer Swann may well be resisting the temptation to talk up the crisis therefore sacrificing the corresponding political benefits, in favour of maintaining as much public confidence as possible.

It would be interesting to place a politician on a lie detector machine and ask,

“You can ensure the impacts of much of the financial crises will be avoided however for doing so, you will lose the next election. Would you swap the opportunity to form a Government at the next election for economic stability?”

The idealist in me would like to think the answer would be positive.

Sadly, the cynic in me is not so sure.

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