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The Global Financial Crisis: Why Did it Happen? What Lessons for Labor?

Luke Foley

This is an edited version of a talk given by Luke Foley, NSW ALP Assistant Secretary, to the Sydney Branch of the Australian Society for the Study of Labour History, 16 September 2009.

Thank you for the opportunity to speak on the subject of the Global Financial Crisis and Labor’s response. I want to talk not only about the current crisis but also about some lessons from history. This is the second major global financial crisis that the Australian Labor Party has confronted whilst in government. The Great Depression saw the Scullin Labor Government flounder before annihilation at the ballot box in December 1931. Of course the parallels between the two crises have been drawn by commentators, but the key point for our discussion is the qualitatively different response from Labor in government.

I should also say initially that we are nowhere near out of the woods yet in dealing with this crisis. Nothing that I say should be taken as inferring that we are. There will still be pain in the form of unemployment for many, possibly some negative growth in the future, and dislocation as government inevitably makes tough decisions about spending. But what is now clearly emerging is that the Rudd Labor Government’s actions have been vindicated – by the economic data, and by international organi­sations like the World Bank and OECD which have applauded the Australian Government’s actions. So while it may be too early to talk about lessons from this crisis, it is an appropriate time to look at the actions of the government and consider what lessons the past offers the labour movement.

We should however, quickly recap the speed with which this crisis hit Australia, and the world. It’s been called an economic tsunami, which is an apt description. The crisis began with an unending stream of bad news corning out of the world economy in early 2008. US house prices were falling month after month, a significant number of American households were defaulting on their mortgages, and this in turn was causing banks to get into difficulty. Foreign banks were drawn into the US crisis as risky mortgages had been parcelled up into securities and sold on to buyers across the globe. This included banks in the UK, Ireland and Iceland, and pension funds in places like Norway.

The default losses stemming from the GFC are now estimated to range between $2 and $3 trillion: a figure three times larger than our national GDP Big name banks like Lehmann Brothers then started collapsing. This threatened to freeze the global borrowing sector, and the contagion spread to Australia and other countries in our region. In Asia exports to the US fell through the floor. Even China started to suffer from a slowdown in its growth as its near neighbours fell into recession. Australia instantly saw a massive decline in demand for export products, particularly for mineral exports.

In the face of this crisis the Rudd Labor Government faced a stark choice – to sit and wait, or to act. The Australian Government took the decision to respond swiftly and decisively to the crisis, playing a leading role in international discussions on stimulus and rearguard act.ion to stabilise the banking sector. While countries like Germany, France and Canada were arguing the merits of stimulus spending from an ideological viewpoint, the Rudd Labor Government acted to Go early, Go hard, Go households. The Rudd Government’s stimulus was aimed at household expenditure ­thereby assisting with employment in the most exposed industries of the economy: hospitality, retail and other service industries. The Government didn’t hedge its bets on stimulus and did go in hard, aware of the lessons from Mexico and Japan where governments intervened in a half-hearted way or held back from a full stimulus.

The government acted with stimulus in two ways: through the immediate injection of cash into the economy in the Economic Security Strategy, and with long-term infrastructure investment through the Nation Building Stimulus Plan. The first of these is of course synonymous with the $900 payments. The second is yet to be fully appreciated as school halls and science labs continue to be put up across the nation and local government and state governments roll out federal funding for key road, rail and other projects.

It’s worthwhile to just briefly mention some key policy decisions as the crisis unfolded to understand the Significance of the Government’s response.

Stabilising the banking sector with the Bank Deposit Guarantee, so that economy didn’t freeze-up.

Providing Special Purpose Vehicles for car financing, a strangely exposed part of the economy to this crisis, with potentially huge flow-on costs to manufacturing jobs in the car industry.

  • Providing a 30 cent in every dollar investment tax break for small and general businesses buying eligible assets, so that business kept buying.
  • Boosting the Home Buyers Grant to keep the housing market going.
  • Installing ceiling insulation in 2.7 million Australian homes to promote new, green jobs,
  • Building 20 000 new social housing dwellings and 800 .new houses for the Australian Defence Force.

Importantly the Government’s response also went to the international heart of the crisis – with the national response working in tandem with diplomatic efforts to reform the architecture of the global economy, as well as reforms required to strengthen the global financial system.A key point I want to make to you is how much of a ‘Labor’ response the Rudd Government has made to this global recession. This wasn’t a neo­monetarist or neo-Iiberal response as others advocated; it was a thoroughly social democratic response, and one which has learnt the lessons from history well. Kevin Rudd, in his 2009 essay in The Monthly magazine, highlighted what he believed to be the causes of the crisis:

It is a crisis which is at once institutional, intellectual and ideological. It has called into question the prevailing neo-liberal economic orthodox)’ of the past 30 years – the orthodoxy that has underpinned the national and global regulatory frameworks that have so spectacularly failed to prevent the economic mayhem which has now been visited upon us.

In his essay, the Prime Minister squarely laid the blame for the crisis at the feet of neo-Iiberalisrn – the economic orthodoxy that arose from the stagflation crisis of the 1970s, and which has dominated economic policy through the 1980s and 1990s. It’s an ideology that rejected regulation of the market system and rejected the human values that underpin much government action. There is no doubt that the lax regulatory environment in the United States around finance provision and the trading of stock derivatives were the critical triggers for the crisis. The second black mark against the neo-liberals was the absence of warning bells built into the system, The liberal Party is yet to appreciate the dynamics of this crisis and why social democrats have responded the way they have. The conservatives are yet to learn the lessons many of us have from looking at the Depression crisis of the 1930s.

Our Prime Minister is, as he never tires of telling us, a proud Queenslander. Perhaps he has learnt lessons from studying the career of another Queensland Labor figure, ‘Red’ Ted Theodore .Thcodore held a NSW Federal seat after resigning the Queensland premiership and failing to win a federal seat in that state. Theodore was the brilliant Treasurer and the strongest man, in the Scullin Labor Government.Tragically, a politically motivated Royal Commission distracted him from dealing with the Depression in those desperate months in the second half of 1930. The traditionally monetarist and deflationary policies advocated by the Commonwealth Bank’s Sir Robert Gibson and the Treasury officials, backed by Sir Otto Niemeyer from the Bank of England, and swallowed byTheodore’s replacement as Treasurer, Joe Lyons, were adopted in the Melbourne Agreement of August 1930.

At their essence these policies mandated balanced budgets from Australian governments, federal and state, and wage cuts for workers. Theodore’s work pointed to another possible response to the crisis, one which was never followed. Theodore’s method was to use credit to increase expenditure and therefore employment. Theodore outlined a plan for £18 million in expenditure, with 6 million for wheat growers and 12 million for employment on public works. Expansion of domestic purchasing power was seen to be vital; as Theodore said ‘It is this stimulus in trade; it is this active buying and selling of goods and commodities that is so much needed in Australia today’.

Theodore quoted the then unknown economist John Maynard Keynes in the House, and received strong endorsement from economists like Professor Robert Irvine at Sydney University who was a follower of the economic theories of }.A. Hobson, a proto-Keynesian On 7 February 1931 Theodore presented his proposal to the Premier’s Conference. Of course before it could be implemented the political crisis overtook the economic crisis. Two clays later Jack Lang launched the ‘Lang Plan’ – a populist distraction if there ever was one. We can only guess as to what the Theodore Plan may have done for the Australian economy.

Joe Lyons, a tragic figure in the Labor Party, along with a number of colleagues joined the conservatives in opposing Theodore’s actions as Treasurer. In a further act of betrayal, the Langite members of the House Jed by Jack ‘Stabber’ Beasley, crossed the floor and defeated the government. The Langites purpose was to hurt Lang’s enemies, especially Theodore.At the subsequent general election, Labor was decimated in its worst ever defeat, but the monetarist policy advocated by the Nationalists and the bankers was never vindicated.Australia’s national income was soon to decline by 30 per cent, her real national product by 18 per cent, and unemployment of trade unionists was to reach 30 per cent in the second quarter of 1932.

Labor lost its way in the Great Depression. It hasn’t this time.The domestic political ramifications of international crises have been acutely felt by the Australian Labor Party throughout our history. The role of decisive leadership and clear values are perhaps the most important lessons from this crisis for the Labor Party in the long-term.