I acknowledge the First Australians on whose land we meet, and whose cultures we celebrate as the oldest continuing cultures in human history.
Here in Australia we wait, watch and listen with our heads turned towards Washington and those legislators who will determine the America’s national response to this most dire financial crisis. When events the magnitude of which we have witnessed in the last week take place, we sometimes struggle to find a sense of proportion.
But if we lose that sense of proportion and perspective, we may misjudge and overreact. That’s why it is important to focus on how stability can be restored to the global financial system. And why it is also important to outline, in clear, calm and objective terms, the great strength of the Australian financial system. The strength of the Australian economy. The strength of the Australian budget position. And how the Government intends to steer Australia through this global economic storm.
Australia is not immune from the problems in the United States. However we are better placed than most countries to weather the storm.
- We have first class regulators.
- Australia has four of the world’s 20 AA rated banks.
- We have about 1% of sub prime loans versus about 15% in the United States.
- Our arrears rates are more than five times lower than the United States.
- We have budgeted for a strong budget surplus as a buffer for the future that is the envy of the developed world. By contrast, six of the seven largest economies are currently running Budget deficits.
The Australian economy is resilient, flexible and strong, and the Government is confident it will steer Australia through the global economic storm that lies ahead. And whereas five of the world’s largest economies already have recorded zero or negative growth this year, Australia continues to generate positive economic growth.
We should not forget that the Australian stock market suffered a 25 percent drop in one day in 1987. The market recovered from that fall. Our market will in time recover from the current volatility.
It’s worth remembering that 1987 was also the year the movie “Wall Street” premiered in New York and Gordon Gekko entered our lexicon when he sought to sum up the philosophy, for lack of a better word, of a generation of financiers with that chilling declaration: “Greed is good”.
The “greed-is-good” era brought the stock market crash of 1987, the savings and loans debacle in the United States and the global recession which gripped many countries in the early 1990s.
It is perhaps time now to admit that we did not learn the full lessons of the greed-is-good ideology. And today we are still cleaning up the mess of the twenty-first century children of Gordon Gecko. At a technical level, the current financial crisis is the unwinding of the extraordinary global credit boom of recent years. It is a rapid shift and dislocation in the credit market cycle.
The top of the cycle was characterised by a period of strong economic growth, low cost of capital and rapid increases in asset prices, most notably in housing markets and share markets. These conditions created a financial boom in which credit became widely available and relatively cheap. In particular there was a rush to purchase real estate.
For a short time, the real estate boom was a self-fulfilling proposition. Low capital costs and high demand for housing caused house prices to keep rising – a classic ‘asset bubble’ began to develop. At the same time, advances in information technology and financial engineering saw the emergence of sophisticated new financial instruments and structured assets.
These assets were purchased by investment banks, hedge funds and other financial institutions. But regulatory frameworks did not always keep up with the rapid pace of change. The risks inherent in these financial innovations were not always well understood.
As the housing bubble burst, it triggered a wave of home foreclosures and asset write downs that, as Americans have been saying, have rocked both Wall Street and Main Street. That’s the technical debate. But it also points to a broader debate about corporate values and, for that matter, a debate about the general values of our current age. Beneath the financial jargon and dramatic stock market events, the sub-prime crisis has also reflected a fundamental failure of values.
We’ve seen the triumph of greed over integrity. The triumph of speculation over value creation. The triumph of the short term over long term, sustainable growth. The fact is that Gordon Gekko wasn’t tamed in 1987 – he was simply ignored.
The fact is that much of the root cause of the sub prime crisis came down to our financial markets rewarding people for taking extravagant risks. Executives earned massive bonuses. Their rewards were skewed to short term “success” rather than long term creation of asset value. Corporate governance structures encouraged short term paper results over long term measurable achievement.
Angelo Mozilo, the CEO of Countrywide Financial, the largest sub-prime lender made more than $270 million between 2004 and 2007 before its collapse. Stanley O'Neal, the former chief executive of Merrill Lynch, was paid $US100 million in the last two years as a result of the massive profits the bank made during the subprime housing bubble. When the bubble burst, Merrill Lynch suffered massive losses which obliterated the earlier gains, yet their executives had no obligation to pay any money back.
They literally laughed all the way to the bank. Perverse financial values were also on display in the American retail mortgage market. The ‘originate and distribute’ model of mortgage lending encouraged mortgage providers to unscrupulously provide finance to borrowers who often did not have the capacity to repay the loans.
Mortgage salespeople preyed on the aspirations of vulnerable families, soliciting them to take out home loans. Lenders confused working class people, non-English speaking families and first time borrowers with hidden fees, ratchet interest rates, and confusing repayment terms. Predatory financers inflated borrower's income and overstated their ability to pay back a loan.
These were the most obvious manifestations of the culture of greed and short-termism which pervaded large parts of the American financial sector. This culture was never challenged by a political and economic ideology of extreme capitalism. And this crisis bears the fingerprints of the extreme free market ideologues who influence much of the neo-liberal economic elite.
Free market ideologues who have a naïve belief that unrestrained markets are always self-correcting and that markets left to themselves will always achieve optimum outcomes. Ideologues who believe that any regulation of private business is fundamentally wrong. Ideologues who have resisted the regulation of financial markets and the supervision of a wide range of financial institutions. Ideologues who lectured the developing countries caught up in the Asian Financial Crisis a decade ago about the need for transparency and disclosure, but did little to reform their own financial systems. Ideologues who believe that government is always the problem, never the solution.
Except of course when there is a crash – then, the self-same ideologues argue, having privatised their profits, we should socialise their losses. And by the way, having demanded lower and lower taxes all the way through. When we are through the current crisis it will be time therefore to take stock.
Not to overreact - but rather, for the world to calmly take stock of what went wrong, as we pursue the reforms necessary to restore long-term confidence and stability to global financial markets. Global financial markets require global financial regulation based on the fundamental principles of transparency, conservative prudential standards and, above all, universality.
That is why the Australian Government has put forward at the United Nations and prospectively at the International Monetary Fund, a five part regulatory reform program for consideration and implementation by all governments.
There is an alternative political and policy narrative to the one that has tended to prevail in recent times. A narrative that recognises the importance of markets, but one that also recognises the limitations of markets and recognises also where markets fail. A narrative that recognises the role of public goods. A narrative that recognises that one of those public goods is market regulation. A narrative that values transparency, competition and innovation – but one that does not encourage speculation nor reward for merely short-term success. A political and corporate culture that values profitability and productivity achieved through hard work – but one that does not endorse the Gordon Gekko ethic of the quick buck, based on little more than a single financial transaction.
We believe that market participants need strong incentives and rewards for success. But we believe that their success should be measured over a sustainable horizon. We believe in strong incentives for individuals, but we also believe that trust and traditional ethical standards are essential elements of the financial system. We believe strongly in the profit motive.
But we also believe in responsibility to the community where those profits are made - a belief increasingly evident in Australian corporate philanthropic behaviour. I say again, when we are through this crisis, it will be time to take stock. And through informed debate in political and corporate Australia as well as the media of the virus, the disease, some would say the epidemic, of short-termism that also threatens Australia’s long term future.
Because across the length and breadth of the nation, the cry of the people is clear – and that is for a long term, sustainable vision for the nation’s future. One that goes beyond the electoral cycle. That goes beyond a quarterly corporate reporting cycle. And one that certainly goes beyond the 24 hour news cycle. A long term vision that embraces:
- long term planning on the nation’s productivity agenda;
- long term planning on the nation’s workforce participation agenda;
- long term planning on the nation’s infrastructure - our ports, our rail, our high speed broadband;
- long term planning for the ageing of the population;
- long term planning for the economic and environmental impact of climate change;
- long term planning for water and for agriculture in this, the world’s driest continent, and
- long term planning for our engagement with the Asia Pacific century.
The Government I lead is not just committed to responsible economic management for the immediate term. The Government I lead is determined to be a nation-building government for the long term.
And beyond this overriding emphasis on the long term, after a decade so much squandered on the short term, we must also encourage a much wider community debate on the corporate and political values we hold dear – a debate between short-term gratification and long term vision.
A debate that brings to a head how we shape the reward structures of corporate Australia. A debate about how we assess the long term values of companies, their executives and their assets against their long term performance - as opposed to short-term asset bubbles.
And this is very much a values debate – Gordon Gekko, greed and immediate gratification as against a culture that values a fair go, that values hard work and that values thinking about and preparing for tomorrow.
The Australian Government has been proactive throughout the global financial crisis that has been with us since our first day in office. We have responded to events as they unfold, often anticipating them, and putting in place policies, programs and measures to better prepare Australia for the period ahead. We have acted to promote stability, transparency and confidence in national financial markets.
The Australian Government has also been actively involved in designing the global regulatory recommendations coming out of the Financial Stability Forum created by the G7. Australian financial authorities (APRA, ASIC, RBA and the Treasury), are also taking action to address each of the five areas identified by the Forum including:
- strengthened prudential oversight of capital, liquidity and risk management;
- enhancing transparency and valuation;
- changes in the role and uses of credit ratings;
- strengthening the authorities' responsiveness to risks, and
- robust arrangements for dealing with stress in the financial system.
And here at home, the Government has been working to strengthen our domestic financial system.
Earlier this year the Australian Government began working on legislation to improve disclosure requirements around short selling. The exposure draft of this legislation has now been released. And, more recently, ASIC has acted in concert with regulators around the world to put temporary restrictions on short selling.
In May this year, the Government announced that it would increase its issuance of Commonwealth Government Securities as part of the Government's commitment to the effective operation of Australia's financial markets. We provided legislative authority for an increase in future Commonwealth Government Securities issuance of up to $25 billion to strengthen the robustness of Australia’s financial system and reduce its vulnerability to adverse shocks.
In September the Government announced that the Australian Office of Financial Management would be authorised to purchase Australian residential mortgage-backed securities – a measure made possible by legislation introduced and passed back in June. This will strengthen effective competition in Australia's mortgage markets.
The Government has also been active in advancing consumer protection in Australia’s credit markets. In April, the Financial Stability Forum recommended that authorities review and, where necessary, strengthen deposit insurance arrangements.
Following this, the Government announced in June the adoption of a Financial Claims Scheme. The financial claims scheme will ensure depositors and insurance policyholders with Authorised Deposit Taking Institutions (ADIs) have quick access to their money up to a defined threshold. Also in June, the Government proposed the Commonwealth take responsibility for regulating all consumer credit.
Three months later, COAG agreed to create uniform national credit regulation with a view to closing loopholes and cracking down on unscrupulous lending. These are concrete measures in many areas to promote competitiveness, transparency and proper consumer protection in our financial markets – and above all to maintain confidence and stability.
That is why we have also called on banks to act responsibly and competitively in response to any RBA rate cut next week. The easiest thing the government could do would be to take the populist approach. But the global financial crisis is real and it is affecting global financial stability, and financial instability has very serious consequences for Australian families.
Of course we want to see the Liberals’ high interest rates come down. Ten interest rate rises in a row under the Liberals. And last month (aided by this Government’s fiscal policy settings) we saw the first interest rate cut in seven years. Of course we will welcome a cut in interest rates. And we will press for those to be passed on to the absolute maximum extent – a maximum that is consistent with maintaining the stability of the financial system.
But if the choice is between the sober advice of the financial regulator and any rank act of political populism, the Government will choose the advice of regulators - even if taking that advice proves to be politically popular. The first responsibility of any government is maintaining the stability of Australia’s financial system at a time of almost unprecedented global financial crisis.
Our major Australian commercial banks are in a strong position. And that must continue to be the case. And this is equally important for all the mums and dads, all the working families, all the pensioners and carers – who together have a fundamental interest in the stability of the Australian banking system. Particularly at a time when the world has recently seen more than 25 banks fail or needing to be bailed out.
These policy responses and reforms to domestic and international financial markets are part of the Government’s broader economic reform agenda. Australia, like other nations, faces tough economic times ahead because of the state of the global economy.
That is why the Government is committed to strong, responsible economic management anchored in a strong budget surplus. That is also why the Government has a plan to boost long-term productivity growth through a comprehensive economic reform program based on an education revolution to make our workforce the best trained in the world, our nation-building infrastructure plan, investing in the technologies of the future and our tax and regulation reform plan.
That means maximising Australia’s economic competitiveness in an increasingly competitive - and now, increasingly unpredictable - world. My vision for Australia is a modern economy with the best educated, best trained, best skilled workforce in the world.
My vision for Australia is also the country with the best 21st century infrastructure in the world. And my vision for Australia at the dawn of the Asia-Pacific century is for Australia to be the most Asia-literate (and China-literate) country in the western world. Our economic program for the future is built on three building blocks.
Responsible Economic Management
The first step to ensuring stability is through macroeconomic management. This is achieved through a prudent fiscal policy and a central bank with independent carriage of monetary policy. It is why we delivered a strong budget surplus as a buffer for the future. And that is why we have increased the independence of the Reserve Bank of Australia.
Boosting Productivity: Education, Infrastructure and Deregulation
Second, beyond stability, the Government’s role is to ensure the provision of critical inputs for a modern economy to boost long-term productivity growth. Productivity growth has been faltering in recent years. We must turn this around because productivity growth is the only effective guarantee of non-inflationary growth in living standards in the future.
The Government must ensure the provision of high quality education, training, and infrastructure. This plan starts with an education revolution – a substantial and sustained increase in the quantity of our investment in, and in the quality of our education system.
Alongside education, the Government’s other key priority for expanding Australia’s productive capacity is infrastructure. Inadequate infrastructure is a handbrake on growth. That is why the new Government has embarked upon a program of nation building. We have appointed a Minister for Infrastructure and created an advisory body, Infrastructure Australia, led by Sir Rod Eddington.
Infrastructure Australia is auditing Australia’s current infrastructure bottlenecks, auditing our infrastructure needs for the future and developing the nation’s first infrastructure priority list. We will work together with Australian State governments to build on their world’s best practice instruments, including public-private partnerships - to enable private companies to finance, design, construct, operate and maintain innovative infrastructure to deliver public goods.
Yesterday, COAG agreed to bring forward our timetable for determining future infrastructure priorities – a core part of the Government’s nation-building agenda. And COAG has agreed on a goal of embracing nationally consistent PPP guidelines by year’s end.
In partnership with State governments, we have also identified 27 areas for deregulation and red tape reduction to improve efficiency and reduce the regulatory burden on the economy – in practical areas such as establishing a one-stop shop for registering a business name for all of Australia, as well as establishing a national consumer policy framework.
The overall mission is clear: building long term productivity growth so that Australia’s long term economic future is secure, without being totally captive to the ups and downs of the mining boom.
Economic engagement with Asia
A third building block for our economic future is our policy of comprehensive economic engagement with Asia – as Asia will drive global economic growth for much of the 21st century. In August we concluded negotiations for a region-wide ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA).
In terms of coverage this is the largest FTA Australia has ever negotiated. It covers 16 per cent of Australia’s trade in goods and services, worth $71 billion and targets a big market of 570 million people with a combined GDP of US$1 trillion. In addition to good market access, it will provide much greater certainty for Australian investors. During my visit to China in April I agreed with Chinese Premier Wen Jiabao that we would unfreeze our FTA negotiations which had stalled. Since then we have had two rounds of constructive negotiations with a third scheduled in December.
China is Australia’s largest trading partner with two-way trade in goods and services of $58 billion in 2007. Our exports are already growing at around 20 per cent annually. The FTA should accelerate this through better market access. We are particularly focussing on achieving results on services, especially financial services. We are also stepping up the pace of our FTA negotiations with Japan after my visit in June. The seventh round will be held this month.
I agreed with the new Japanese Prime Minister Taro Aso in our meeting in New York last Thursday that we would accelerate these negotiations as Japan remains our largest export market. Following agreement with President Lee during my visit in August, the first round of preparatory talks for an FTA with the Republic of Korea will take place in two weeks in Seoul.
The Republic of Korea is our fourth largest export market but out trade has been limited to a few major commodities. Its potential has been neglected. We now want to expand and diversify the economic relationship. We have also accelerated our FTA feasibility study with India, which will now report this year. India is already our sixth largest merchandise export market and eighth largest services market but the potential is far greater.
The Government takes economic engagement and integration with Asia seriously. China’s extraordinary economic growth has been a driving force behind the period of very strong global economic growth experienced between 2003 and 2007. Indeed, China was also a stabilising force during the Asian financial crisis in 1997. China provided a stable export market for many of the countries that suffered from the economic turmoil. China also contributed financial resources to the IMF rescue packages for Thailand and other Asian economies.
Despite domestic economic pressures, China also resisted devaluing the Renminbi. This helped to maintain the export competitiveness of their Asian neighbours during the crisis and the overall stability of the region. China also has a strong interest in contributing to the resolution of the current global financial crisis and the restoration of strong global economic growth.
China has in recently days made some important statements on the global financial crisis. President Hu Jintao has welcomed the US Administration’s Troubled Asset Relief Program (TARP) to buy up distressed financial assets, noting that China hoped these measures can achieve quick results to improve economic and financial conditions in the US.
Addressing the United Nations last week, Premier Wen Jiabao also made a commitment that China would play its part in addressing the global financial crisis, including through enhanced financial coordination. And at the World Economic Forum meeting in Tianjin last weekend, the Chairman of the China Banking Reform Commission, Liu Mingkang, called for the establishment of a global regulatory system that is in keeping with the global financial system.
In view of China’s important role in restoring stability and ensuring future global expansion, these are important statements. As I mentioned in my own remarks to the UN General Assembly last week, the G-20 should play a major role in supporting reform of the global financial system.
China, as a member of the G-20, can significantly assist these efforts, including through supporting financial stability being at the centre of the G-20’s work program. We look forward to working closely with China in strengthening the global financial system.
China can also support the broader implementation of the Financial Stability Forum’s recommendations through Asia. In recent years China has also been playing an increasingly role in global financial markets. It is estimated that at the middle of this year, Chinese institutions were holding around $500 billion US dollars worth of US treasury bonds and $200 billion in US asset-backed securities.
The current instabilities that are concentrated in the US should not be taken as a signal to China to retreat from integration and globalisation. We need to address the problems that have given rise to the current crisis, and not withdraw or huddle down into ourselves. China’s friends, including Australia, must continue to encourage China to continue to play the positive role in the global economy and financial system it has in the past.
It is important we make it clear that China’s ongoing economic and financial integration is important, and this integration is firmly in the interests of China, the interests of Australia, and the interests of the global economy. It is important now for western nations to demonstrate our positive support for China as a responsible stakeholder in the global economy and in major financial institutions.
Indeed with many financial institutions in the US and Europe now requiring recapitalisation, this is a time when China – alongside other economies such as Japan and Korea - can play an important role in strengthening global financial stability.
Chinese institutions have the liquidity to take stakes in those US and European institutions. Such investments should not cause alarm in western nations. They are a natural reflection of the structural changes in the global economy. The 21st century economic reality is that China is now a major economic and financial powerhouse.
By whatever measure you wish to use, China’s economy is on course to becoming the world’s largest during the first half of this century. Strong growth in the Chinese economy is now crucial to the global economy – just as strong export-driven growth in China has been dependent on the health of the global economy.
It is in every nation’s interest for China to strengthen its links to the global economy and to become an increasingly positive stakeholder in the global economy. That is why we welcome the recent decision by the People’s Bank of China to reduce its lending rate by 0.27 basis points, demonstrating the Government’s willingness to stimulate the economy if growth continues to slow.
That is why we also welcome recent statements by the Chinese leadership that China’s best contribution to the global financial system is for China to strongly grow its economy. And it is why we should also welcome further Chinese investment in global financial institutions. Such investments would have a stabilising influence on global financial markets, diversifying and strengthening the investment base of those financial institutions.
It is also important that China participates in building the future architecture of global trade by helping revive the Doha Round, where China – and Australia - have a strong interest in achieving an outcome that can underpin strong future economic growth.
China has played a constructive role in negotiations to date. China can now be an even more positive force in these negotiations in the future – helping to shape a final agreement among the key parties. A positive outcome on Doha would not just lift global economic growth in the longer term – it would also provide a shot in the arm for international confidence in the short term.
On the key challenges facing the international community – the global financial crisis, the future of global trade and climate change – for China to be engaged and participating as a responsible stakeholder is strongly in the interests of China, Australia and the global community.
Developments in global financial markets in recent times have been of truly seismic proportions. Both the scope of institutional failure and the scale of government intervention in financial markets have been unprecedented. As the IMF noted yesterday in its latest World Economic Outlook, “the financial turmoil that began in the summer of 2007 has mutated into a full-blown crisis".
There is a lot of jargon in financial markets. Terms like short-selling, systemic risk, collatoralised debt obligations might seem to be a world away from the lives of ordinary Australians. But the fact is that financial stability is a public good which has a very direct effect on all Australians. If we fail to protect this public good – that is the stability of Australian financial markets - then those who suffer are the working people whose jobs, whose savings, whose homes, and whose standard of living depend on it.
That is why the Government is acting responsibly to support the stability of the Australian financial sector. That is why we are acting with our partners around the world to assist in restoring stability to global financial markets. And these are responsibilities that this Australian Government is determined to discharge.