May 302013

Yes, it’s been a little while.I’ve changed jobs, I now work from home and harder than I’ve ever worked in my life to date, but you know what?? It’s a hell of a lot more enjoyable than the daily commute. But enough about me, let’s address the vacuum which is cogent understanding of basic economic theory. Rather, the unwillingness of some on the so-called ‘right’ to accept that when needed, and when applied prudently, Keynesian economic theory works to protect a nation’s economy from market retraction, by simply providing a bulwark against that loss of continuum which a smoothly functioning capital market provides.

I draw the reader’s attention to this thread in Google Plus. It starts out as a commentary by your’s truly on the lies told by conservative politicians which they pass off as ‘debate’ in our Parliament. It turns into a weak-kneed attack by a conservative shill on fiscal measures put into place by the Rudd Labor Government in 2008-09, after having sought the advice of Treasury. That advice was, as I’ve written here before, “Go Early, Go Hard, Go Household”. In other words, the government of the day stepped into the yawning gap left by a retreating global market economy as credit providers lit out for parts unknowable, and spent money. In the US it’s called by the fancy name of Quantitative Easing. We lay people outside of the hallowed halls of a nation’s Treasury call it ‘printing money’. The Rudd Labor Government spent what budgetary surpluses it had inherited, then borrowed against a AAA international credit rating – which this country retains today – in order that cash be put into people pockets to spend and stimulate the domestic economy.

Why? Because business and industry, which relies almost entirely upon the credit largesse of domestic banks and financiers, couldn’t get credit. Those same banks & financiers had to buy their money to lend from what international sources remained liquid in the aftermath of Lehman Brothers going bust. Lehman’s was the world’s largest exchange house. A place where money in the form of balance sheets and complex financial instruments called derivatives were traded. When the Global Financial Crisis as it is now termed hit, the world’s finance houses literally closed up overnight. No one financier was willing to trust any other financier of any stripe in any country, because they’d all had a drink from the Lehman’s well. They’d all, almost without exception, indulged in the shell game where Collateralised Debt Obligations and synthetic CDO’s were created and bet upon in the international debt swap market. No-one knew who else might have the Lehman’s disease and so everyone quarantined themselves.

Money could still be bought, from the right providers, if one was willing to pay a premium. That premium was far too expensive for many lenders, so they simply stopped lending. And thus it begins. Recession I refer to. In stepped the Rudd Labor Government to support those banks and financiers which, of necessity, sourced their funds from overseas, offering an Australian Government Guarantee backing the purchase of debt instruments by foreign banks & lending houses. That guarantee remains in place today as the debt instruments backed by that guarantee, in many instances, still exist. Not only do they exist, but many, many others which have matured are retained in the register as contingent liabilities. Any banker worth his salt knows that a Guarantee has a life beyond its expiry because that life may be impinged upon by factors unrevealed by the Beneficiary or unknowable to the Guarantor. I encourage any who don’t understand this register to view it. For example, this instrument, taken out in 2010, maturity date of  2015 in the sum of $550,000,000 backing the purchase of those monies by the Bank of Queensland. Note the cost of those funds. 90 day BBSW + 35BPS. That’s the 90 day Bank Bill SWap rate plus 35 basis points, or 0.35%. Those funds came out of Europe, Probably a German Bank. BBSW is defined rather well in this article. Now have a look at this instrument, taken out by the Commonwealth Bank of Australia in 2009, the height of the GFC, also funded through Europe. LIBOR plus 22 basis points. LIBOR and BBSW are similar but different forms of benchmark rate setting. The import is the same. 35 basis points for BOQ and 22 for CBA. Why? Because the CBA as a credit risk is rated higher on the credibility scale than BOQ. So flows the cost of funds in the finance world.

So, money became, and remains, tight. It still, today, costs anywhere between 20 and 30 basis points over the benchmark to buy money. This is why the Big Four in this country retained margin over what the RBA was prepared to pay for Registered Mortgage Backed Securities, or RMBS. The Australian domestic swap market is too small to sustain the majors in this country. They had to borrow overseas because that’s where the volume transactions are. It’s like a game of poker. Once you sit down at the table, you’re there until the hand is played out.

So, what has all this to do with Government stimulus programs in 2008-09? Jobs! Plainly put, the expenditure on what is now derisively labelled by conservative shills as “pink batts and school halls” saved hundreds if not thousands of jobs. Stimulus created an environment where people had work, they continued to earn incomes, they continued to spend, the great wheels of the economy continued to turn. In late 2009 early 2010 it was declared by Treasury that Australia had narrowly avoided a ‘technical recession’. For the uninitiated, a recession is defined as two consecutive quarters of negative economic growth as measured by a country’s gross domestic product. Australia’s economy displayed one negative quarter of domestic growth. This was the period during which mining companies sacked thousands of workers and mothballed – albeit briefly – many of their construction projects. These same mining companies re-hired their workforce 6 months later on entirely different contracts, where once the workers had been protected by awards. Opportunistic….much?

Bottom line being, and here I come to the thrust of this post, Keynesian economic theory is seen to work. It worked in the 1930’s for the Scandinavian countries which employed it. It worked in the seventies for Australia, the nineties when the mere mention of probable government intervention sparked optimism in domestic markets, and it has definitely been seen to function over the past 6 years. Evidence that Keynesianism holds true can be seen today in the recent decisions by European money houses to start thinking about re-capitalising Spanish banks. Europe, it must be said, has been steadfast against employing Keynesianism from a purely philosophical and cultural perspective on the part of Germany, the economic powerhouse of the EU. There comes a time though when bullets must be bitten if recession is not to lead into longer-term depression. Where does the money come from? The governments of the EU as a collective. The European Commission. Government intervention.

The GFC goes on today in this country, even though many refuse to recognise it because they’ve not been hurt by it. Australia is not called a lucky country for no reason. Economically, we are extremely lucky. Isolated to a great degree by distance and by regulation. We have probably the best run fiscal regulatory system on the planet. Why? Because socially-democratic governments interspersed in the inevitable flight to inherent conservatism provide a sense of fiscal responsibility combined with recognition of the need for a country to advance itself without reliance on external so-called free markets. Such advancement can only come from within, from taking the hard decisions when needed while looking out for those who are the drivers of prosperity. The common man & woman working for the betterment of themselves and their fellows. Thus endeth this lesson.