The British newspapers are well into the swing of assigning the blame on leading political and banking figures for the recession unfolding in that country.
There is real anger in the community being directed at the banks. Prime Minister Gordon Brown has now admitted that the financial regulation under his watch as Chancellor of the Exchequer was too light and led to the mess Britain is now in. British workers are complaining about how foreign workers based there are stealing their jobs because they are cheaper to hire. As part of the deal to recapitalise British banks with public money they have been asked by Whitehall to only lend to British-based companies and individuals.
In the United States, part of President Barack Obama's fiscal stimulus is to ''buy American''. Globalisation is on the nose but whether it will lead to trade protectionism and ''beggar thy neighbour'' solutions is yet to be seen. Eventually those sentiments are going to crop up here.
John Howard used to successfully play the blame game against the Australian Labor Party in election campaigns by pointing out Labor's record of economic management was inferior to that of the Coalition. It backfired in the last election, though, as Labor began examining his record as federal treasurer under Malcolm Fraser. His seven-year period was marred by high interest rates, budget deficits, stagflation and capped off by a recession in 1982-83. But it goes even deeper than that.
Howard's greatest legacy was to commission the Campbell report into financial deregulation exactly 30 years ago. Its brief was to examine Australia's then archaic banking and financial sector. The idea had been first put to Malcolm Fraser in 1977, but Howard procrastinated on designing a terms-of-reference for it, as he did on also implementing the recommendations. He was right to see the recommendations as far-reaching.
Most of the report was actually implemented by the Hawke government as part of its commitment towards economic reform and internationalising the Australian economy. Interest rate controls were lifted as were quantitative lending controls on banks. Foreign banks were invited to open here, and the floating of the Australian dollar was recommended. For the most part the reforms have been a great benefit though in 1991 we did not think so after having an asset price boom and then bust eventually brought about by double-digit interest rates.
Our banks had a bleak time of it, having extended billions to high fliers; a case of sub-prime corporate borrowing. Today our banks appear as models of prudence compared to the reckless ambition of their overseas counterparts. Apparently it is all to do with our system of financial supervision and accountability.
We are one of the last industrialised economies to be sucked into this global recession. While we can say the seeds of this gathering recession are mostly overseas-borne it might not save us from harsh scrutiny in the near future. We still have a gaping current account deficit.
The resources boom gave only a short-lived trade surplus last year, despite promises it would give us trade surpluses into the future. We still have to borrow from the rest of the world. Imports still keep rolling in, and only a fraction of them are capital goods or inputs. In April, when our commodity contract prices have to be renegotiated it will formally mark the end of our terms-of-trade bonanza; a feast that went on for five years. That, in itself, will be a deflationary blow to economic activity.
As national income falls it should cut import growth but we have become such an import-dependent economy it will widen the trade deficit. Nor will a cheaper dollar do much to raise exports in a depressed global economy. Even our manufacturing sector has locked itself into global supply chains so much that a lower dollar will not be the import replacement boon it once was. In fact it will raise costs for producers.
More disconcerting, though, is how will international capital markets will see us. The fact that our current account deficit will creep to be about 7 per cent of gross domestic product and foreign debt continue to rise might trigger something nasty. The Rudd Government might face a currency crisis in a few short months.
The fact that the Treasurer has admitted to a collapse in revenue growth and an imminent budget deficit will swing the markets' attention to our place in the world. Market apologists say the market has already taken the end of the resource boom into account by depreciating the Australian dollar by 30 per cent since last July. The economists at the ANZ Bank are predicting the Australian dollar to slip to about US54c by the middle of the year. There will, they say, be a smooth market and economic adjustment to these changed and adverse circumstances for Australia. The response to this glibness is to just recall how the markets have behaved over the past six months. What might happen, too, if the May federal budget is spectacularly in the red? We may yet have a Banana Republic crisis to match May 1986.
Alex Millmow is a senior lecturer in economics at the University of Ballarat.