Australian wisdom?

Recent comments indicate why we should be wary of policy makers, business leaders, and even journalists regarding the extent that they are willing to diagnose or expose new problems.

Take recent comments by the current chairman of the Future Fund and former head of the Commonwealth Bank (1992 to 2005), David Murray, on the ABC’s 7.30 Report when responding to the recent financial crisis (September 29, 2008). While Murray suggested that higher pay should be given in order to attract better public servants to advise the Parliament and to serve in important government departments such as the Reserve Bank, he said little about the immense importance of debt to Australian bank profits.

Although the promotion of sub-prime loans and inadequate regulation represents a low point within the recent history of liberal democracies, one cannot merely blame American banks for the current financial crisis.

Australian banks are also institutions anxious to maximise profits for shareholders with little regard to any long-term social consequences. Though interest rates have fallen in recent months to help many people with home loans, the banks have been reluctant to pass on any cut to Australians with credit cards. For those who do not pay off their purchase within 55 days, the rate has increased from 17.75 per cent in October 2007 to 20.74 per cent a year later.

The end result? Australia’s credit card debt alone reached $44 billion by October 2008 after being $21.5 billion during October 2002.

So, as the adverse effects of these difficult times play out, it will be lower-income earners that suffer most. As a recent Dun & Bradstreet Consumer Credit Expectations Survey revealed, one third of low income households (earning less than $30,000 a year) already anticipate higher debt levels by Christmas 2008, while the same number of high income households (earning more than $70,000 a year) expect to lower their debt levels in the coming three months.

While some will point to Australians living beyond their means, the gap between higher and lower income earners will widen as the latter is less able to purchase our modern era’s abundance of goods.

At the same time, our politicians will continue their promotion of spin. While Labor’s consumer affairs spokesman, Alan Griffin, warned in October 2002 that growing credit card debts were making consumers highly vulnerable because of high card interest rates (then averaging 16 per cent) after debt doubled from $9.8 billion to $21.5 billion in just four years, political leaders have done little since.

While Labor’s recent $10.4 billion assistance package was necessary to promote spending, including handouts for pensioners, and low-income and middle-income families and first home buyers, it is a bit misleading for Prime Minister Kevin Rudd (October 15) to attack the world’s big banks and the role they have played in the global financial crisis. He hit out at lending standards, risk management and corporate governance in major institutions around the world.

Rather than beating his chest as if he alone has the answers that can solve all the world’s problems, Rudd should recognise that Australia’s fortunate fiscal position and recent high value for shares, housing and currency owe much to the role played by debt in stimulating the production of cheaper consumer goods in China, and a growing demand for Australia’s raw materials.

If Australia had not enjoyed such a profitable trading relationship with China alone, who knows what government policies would have been adopted to boost the national interest; although the importance of Australia’s sound financial regulation cannot be overstated.

The likelihood of economic ramifications for Australia was known long ago. After all, even the then governor of the Reserve Bank, Ian Macfarlane, stated at the 2006 Boyer lectures that “any boom built on rising asset prices financed by increased borrowing, has to end” and that “the effect on the economy would be greater than in earlier years” if any financial shock was to occur.