With inflation falling, a full percentage point
cut in interest rates at the end of the month now looks like a done deal. But
while a relaxation of monetary policy is both welcome and overdue, it does not remotely measure up to what is now required
if we are to ward off what could be the most serious recession in most people’s lifetimes.
That isn’t to say that home owners should
not see some small reduction in their mortgage interest payments. Businesses
– at least those still willing to borrow – should get marginally better deals from those lenders still willing
and able to lend. And lower rates should mean that overseas speculators are less
likely to push up the value of our dollar by chasing the interest rate premium we have insisted on offering them over recent
Even so, the impact of the Reserve Bank governor’s
expected decision will be pretty marginal. Any slight easing in the cost and
availability of credit at home will be offset by the higher cost and greater difficulty our banks will encounter in borrowing
overseas. And even if credit is a little cheaper and easier, that may not
be of much use if fears of a recession mean that people are no longer willing to borrow and spend. Relying on monetary policy in these circumstances is a bit like pushing on a piece of string.
When Treasury advised the government a week or two
ago that the economic situation had worsened over the three weeks of the Christmas break, they revealed themselves as the
only observers who failed to see – from some months back – that a further and rapid deterioration was inevitable. The suspicion must be that they are still fighting the last war, still fondly hoping
that the measures that were too late to deal with last year’s home-grown recession – already well entrenched long
before the global meltdown - will now serve to deal with the world crisis. Following
along in the wake of events, relying on tax cuts planned last year and a belated cut in interest rates, will simply not cut
the mustard now that the world economy is in free fall.
It is of course true that we have not so far had
to grapple with the financial crisis that has engulfed much of the world’s banking system. Our (largely Australian) banks have so far avoided those problems, though they may find the going gets
tougher over coming months. But what we haven’t seemed to have grasped
is that the shattering loss of confidence in the world’s banks is now spilling over in to the real world economy –
the one where people actually live and work and spend and try to make a living.
recession gathers pace overseas, we have yet to feel the full impact of export markets that are going backwards, of commodity
prices that are falling, of import prices that are rising, of credit from overseas sources (on which – as proportionately
the world’s second most indebted nation – we are dangerously dependent) becoming more difficult and expensive
Nor have we understood the impact on our domestic
economy of falling house prices, rising unemployment, tighter government spending levels and more bankruptcies, closures and
bad debts. As people feel less wealthy – as the perceived value of their
assets falls, and doubts grow over their future income levels and job security – they become less likely to spend and
invest, compounding the recessionary impact of the meltdown overseas.
This is not to say that there is an easy consensus
about what does need to be done. But what is clear is that most overseas governments,
with varying degrees of reluctance, have accepted that simply cutting the cost of credit when people may not wish or be able
to borrow is not the answer. What is now needed, as Keynes recognised 75 years
ago, is a fiscal stimulus that will raise the actual level of spending in the economy.
That means government investment in infrastructure and services that will benefit the economy, and possibly putting
money into the pockets of people – like the poor and the retired – who will spend it, even if this means temporarily
rising government deficits.
While others have accepted that difficult times
require special measures, we seem locked into an ideological straitjacket which is obsessed with monetary policy and seems
more frightened of a burgeoning government deficit than of national bankruptcy. Yet
there is no reason why we should be less courageous than others in making our response to recession. The one bright spot in
our economic situation, after all, is that the government’s finances are, by comparison with other countries, reasonably
healthy. We must hope that our new government will have the courage to recognise
this, to understand what they must now do, and to do it before it is too late.
21 January 2009
This article was published in the Sunday Star-Times
on 25 January.