You have to
love the editorial from today’s edition of the online newsletter Crikey.
Crikey says: Tony's tax lesson
from world leaders
"No
country has ever taxed or subsidised its way to prosperity."
Of the
rambling, campaign-style
speech delivered
by Australian Prime Minister Tony Abbott to the World Economic Forum in Davos,
Switzerland, last night, that line was an interesting one.
It was
certainly an interesting crowd to tell it to. Australia's GDP per capita sits
at around seventh in the world by most measures. Above it is Norway, which
taxes at 50% and up, and equal or just below us -- and lacking ours and
Norway's resources windfalls -- are Denmark, Sweden and Finland, also 50%-plus
taxers.
And those
statistics are made more revealing when you look at estimated GDP per capita figures from 1900, where Australia sits at No. 2
(behind New Zealand), riding high on the sheep's back. Sweden is 13th, Norway
is 17th and Finland 20th. So we have gone down five or six places, while they
have gone up, across a century in which they have applied consistently higher
taxation.
When our
resource boom splutters and dies and all we have are Gina Rinehart's poems
bolted to rocks to show for it, Scandinavian countries will have the schools,
universities, compact cities, affordable renewable energy, etc, that they paid
for with taxes.
So thanks
for the history lesson, Tone. Will this be on the curriculum?
There seems to me to be a non-sequitur in Treasury’s advice regarding infrastructure in its incoming government brief as reported by John Kehoe in the 28 September 2010 edition of the Australian Financial Review (see Treasury laments infrastructure mess on page 3).
I am fully in tune with the first couple of propositions:
- Treasury criticises the lack of a rigorous, coordinated and long-term infrastructure plan by governments, especially the states
- Infrastructure Australia has found it difficult to identify ready-to-deliver nationally significant projects for the government’s fiscal stimulus packages.
Indeed, I think the Opposition got off far too lightly in relation to the Howard Government’s abject failure to do anything about the nation’s infrastructure – yet another example of the Rudd-Gillard Government’s inability to communicate a simple story when it had a good story to tell. It allowed the Opposition to berate it from one end of the country to the other with tales of waste and mismanagement relating to school buildings and pink batts, but where were all the infrastructure projects that the immensely capable Howard Government had ready and raring to go, just waiting for funds to be available?
Where I part company from the Treasury is when it goes on to say:
- The government’s capacity to finance infrastructure will be limited given its budget circumstances
- ...investing in the right kind of infrastructure and using infrastructure more efficiently...requires appropriate regulation and pricing, private investment, and contestable and competitive infrastructure markets.
- [A] proposed overhaul of Infrastructure Australia includes ensuring rigorous cost-benefit analysis of all proposed projects...
- [The Government should] enhance the national infrastructure pipeline, to provide a portfolio of potential investments for the private sector including superannuation funds.
My problems with this part of the brief are:
- I have no sympathy whatever with the notion that the government’s “budget circumstances” place significant constraints on its capacity to finance infrastructure. This is a function of the current bipartisan political obsession with budget surpluses, which makes no sense when we speak of national infrastructure, which ought to be financed by borrowings and repaid by the successive generations that use it (generational equity, anyone?). The Australian Government has an immense capacity to borrow.
- Many infrastructure markets are not, and cannot be, competitive in any meaningful sense. If I am dissatisfied with the train service from my suburb to the CBD (I am), what do I do? Catch a different train to somewhere else?
- Cost-benefit analyses are all good clean fun, but in order to qualify for the term “rigorous” they would have to take account of external, as well as internal, costs and benefits. In other words, we are interested in social costs and benefits, not just whether the revenue stream that can be captured by the operator provides a hurdle rate of return on the operator’s investment.
- This is where the non-sequitur comes in. If we want infrastructure to be financed by superannuation funds, the cost-benefit analysis they will do can only take account of internal costs and benefits, even though many of the benefits (and costs) will be external, often manifesting themselves via impacts on the value of land.
There are other problems. Cost-benefit analysis of any major infrastructure involves non-linear mathematics and is acutely sensitive to the initial assumptions. To take a simple example, Westgate Bridge reached its design traffic flows years ahead of projections because its existence changed the pattern of settlement and land use to an extent that it induced a lot more traffic.
Transformational infrastructure like fast rail or the National Broadband Network will have so many unanticipated impacts on behaviour that anyone who talks about “rigorous cost-benefit analysis” is simply talking nonsense.
Then there are the bureaucratic tricks. The Speedrail project (fast rail between Canberra and Sydney) of the late 1990s was set up to fail. In undertaking its cost-benefit analysis, the private consortium was required by the forces of darkness to take account of all external costs, but not to claim the value of any external benefits. This meant that, like the consortium before it that looked at fast rail between Sydney and Melbourne, it could not take account of the enhanced value of land in proximity to the track, and it could not bring to account the benefit of deferring or eliminating the need for a second Sydney airport.
I always thought that that one had more to do with the Howard Government getting a good price for Sydney Airport than anything to do with a rational approach to national infrastructure.
The bottom line is that if the Government wants private investment in infrastructure then “rigorous” cost-benefit analysis has nothing to do with it, unless we try to take account of social benefits through messy community service obligation payments and confusing allocation of responsibilities between the public and private sectors of the kind that has made Melbourne public transport the nightmare that it is today.
Yesterday the Opposition unveiled its alternative approach to Labor’s $43 billion fibre-to-the-premises National Broadband Network.
The Opposition is offering a $6 billion program based upon the existing copper wires, hybrid-fibre coaxial cable and wireless technology.
The Opposition is very proud of its handiwork. It considers that it has the superior offering because the outcome will be better connectivity than we have now, and the program is much cheaper.
The trouble is the Opposition is not asking the right questions. Apart from all the problems that its policy leaves unanswered concerning competition (they will leave Telstra owning the connection between the exchange and the premises), scarcity of spectrum and the need to repeal the laws of physics (they may not know it but they cannot do that even with the cooperation of the Senate), the aim of the game is not simply to make an improvement on what we have now. The aim of the game is to establish national connectivity as comprehensively as possible and to the highest feasible quality, which means wiring the country up with optical fibre except in the most remote regions.
The trouble with the Opposition’s thinking is that, not understanding the potentialities of the technology and apparently being uninclined to ask, they see the National Broadband Network primarily in terms of games and entertainment – they see us as spending $43 billion to enable country people to watch Big Brother in high definition.
The real point about transformative technologies like this is that once everyone has them they change the way we live. When only a handful of people owned a car they just had a faster horse that didn’t eat hay. Once almost everyone had one, our whole way of life changed. Similarly with fixed line phones, mobile phones, passenger aviation, the household computer and a host of other things.
The thing to be considered once the NBN has been rolled out is all of the potential applications that might arise from the availability of that bandwidth to connect any two premises in the nation at very high speed.
And bandwidth is important, because it does not simply speed things up; the faster transfer transforms what is possible. You can move a pile of sand from one place to another with either a ten-ton truck or a wheelbarrow – the function is the same. The wheelbarrow is cheaper; the truck is more efficient.
But you cannot move frozen foodstuffs far in a wheelbarrow – it is too slow. And if you want to move a shipping container, the truck is better. No matter how many wheelbarrows you have, you cannot move a shipping container.
And so it is with fast broadband. The high resolution video that will be possible at 100Mb/s will transform medical practice, distance education, the gathering and exchange of scientific information and the way commodity and service markets operate, to name just a few. We can be sure that, once it is known that this level of connectivity will be in place, some very clever people will be turning their minds to smart ways of using it.
Perhaps the most important reason for committing to the rollout is the opportunities it will create for additional investment, because this is a technology that has increasing returns to scale.
Economics 101 teaches us about a world of diminishing returns to scale, a world in which there is effectively a fixed number of investment opportunities. In this world, every time someone makes an investment in a factory or a power station or a hotel they use that investment opportunity up, and there are only less profitable investments left.
Sophisticated theories of economic growth teach us what the United States Congress understood in the nineteenth century – that many forms of investment create additional, not reduced, opportunities for investment. It was with that knowledge that they were able to incentivise the construction of the Union Pacific Railroad by making land grants to the proprietors as they rolled out the line. The railway line made the land valuable, and huge investment took place in its wake. The prime purpose of the Union Pacific Railroad was not to make money by selling tickets to passengers; it was about what the railroad would do for the United States at large.
In the world of Economics 101 few would want to invest in the United States – all the good opportunities would have been taken up already. People would instead be flocking to countries like Somalia, where all the good opportunities remain untapped.
In the real world, of course, everyone wants to invest in the United States and almost no-one would want to invest in Somalia, even if it were peaceful – the lack of infrastructure makes it a very unattractive investment proposition.
Finally, in a world in which technology is moving as fast as it is with information and communications technology, a whole-hearted commitment to the best that money can buy is the only approach to take. And the Opposition is talking nonsense when it says that its proposed reliance on a suite of old technologies avoids the risk of putting all our eggs in the one basket by committing to optical fibre. The last time anyone thought like that was the American record company that sent away the man that came to them with the technology to make long-playing records; they said that LPs would never catch on and opted to stay with the 78rpm format. When a new technology makes an old one obsolete, it is time to move on.
On Thursday 5 August Professor Ross Garnaut delivered the David Hamer Oration at the University of Melbourne. The address was entitled Climate Change, China Booms and Australia’s Governance Struggle in a Changing World.
Professor Garnaut’s address is recommended reading for anyone with a serious interest in the process of public policy formation in Australia, and while it is foundering. The theme is set by the following paragraph:
For the outcome of the political process to be conducive to broadly based prosperity and to the preservation of democratic institutions, there must be knowledge of the effects of various policies; education of the democratic polity in that knowledge; restraint in the use of political power to achieve sectional economic objectives; and restraint in the use of economic power in the political process. A successful democratic polity is built around analysis, public education, tolerance and restraint. The presence of these qualities in the polity allows leaders who are concerned to follow some conception of the public interest to appeal to the democratic electorate over the heads of vested interests, which otherwise have a privileged influential place in the policymaking process.
One of the key points in his speech is the abandonment of productivity enhancing reform, and with it the practice of basing policy on rational analysis:
There has been no successful major step in productivity-raising reform since the tax changes associated with the introduction of the GST in 2001...
Economic policy since the GST has been characterised by change rather than productivity-raising reform. The use of independent analysis and transparent discussion of policy reform has become rare; when independent studies have been commissioned by Government, they have tended to be sidelined at the decision-making end of policy-making; and the capture of major economic policy decisions by short-term political processes and operatives has become endemic.
Since 2002, there have been some major policy changes with ambiguous or negative effects on Australian productivity and incomes. Australian leadership of an historic Asia Pacific shift from multilateral to preferential trade, led by the US-Australia free trade agreement, is an example. The serious damage to the terms of Australian access to regional agricultural markets is a predictable consequence of the corrosion of multilateral trade. These and other costs of change were obscured from public view by flawed analysis and process at the time when critical decisions were made.
He concludes:
It is time now to lay the foundations for staying afloat as we move forward into new and more turbulent seas.
Meeting the two large challenges ahead of us [climate change and refocusing economic policy] requires the restoration of the political culture of the reform period. It requires the rehabilitation of the independent centre of the Australian polity. It requires restoration of the role of transparent, independent authoritative analysis of policy issues, and public education on the results of sound analysis.
The laws of economics cannot be repealed by ignoring them—any more than the laws of gravity, or of climate science.
Independent analysis may discover truly awful choices; better to face them in knowledge, than to choose blindly under pressure from interests that know their sectoral implications.
Good outcomes in the difficult years ahead above all require firm leadership built around clear articulation of the public interest.
Leadership, transparent independent analysis and public education are the means through which sectional interests will be confined appropriately to legitimate supporting roles, rather than being given central roles in formulation of public policy in the national interest.
Leadership is an essential missing ingredient in contemporary public policy.
Omitted, all the voyage of our lives is bound in shallows and in miseries.
The full text of Professor Garnaut’s oration may be accessed here.
In today’s edition of Crikey Canberra correspondent Bernard Keene has a fair and balanced piece on the just-released interim report of the independent inquiry into the school building componentof the government's stimulus package, which found that the program "is delivering much-needed infrastructure to school communities while achieving the primary goal of economic activity across the nation".
Keene’s concluding paragraphs are worth quoting in full:
But this is the nub of the issue: like the rest of the stimulus package, the schools program was intended to deliver jobs, and fast, in the face of economic meltdown. To that extent, the program delivered in spades. Based on its consultations with industry, the inquiry concluded "the BER provided the construction industry with a significant economic stimulus which prevented many construction organisations from reducing staff and/or the size of their operations to match an otherwise decreasing workload resulting from the GFC. Some indicated that without the work generated by the program they may have had to cease operation."
Rather than being judged from the point of view of construction companies that might have been forced to shut down, the program is being judged with the luxury of success, in which we continue to enjoy strong employment, which was propped up by the government's support for the retail and construction sectors.
But even judged against normal capital works standards, the schools program appears to have been remarkably successful, with less than 2.7% of projects generating complaints.
The schools stimulus program has been under sustained attack from the right-wing media and the ABC, who have continuously claimed the program is wasteful and a "debacle". Like the ANAO report in May, this interim report discredits this campaign comprehensively and in detail. And like the ANAO report, this review will be misrepresented in those outlets.
I can only add a comment along the lines of the one I made in Managing the GFC, citing Joseph Stiglitz: whatever waste might have occurred in the rollout of the stimulus package, how much more wasteful (indeed “reckless”) would it have been to allow mass unemployment to develop?
In its timely and skilful management of the Global Financial Crisis the Rudd-Gillard Government is a victim of a phenomenon identified by the ancient Chinese strategist Sun Tzu 2,500 years ago in his The Art of War: the best victories are not perceived as such by “the common herd”, and so the commander does not get due credit for them.
In his Chapter IV (Tactical Dispositions) Sun Tzu says:
8. To see victory only when it is within the ken of the common herd is not the acme of excellence.
9. Neither is it the acme of excellence if you fight and conquer and the whole Empire says, "Well done!"
10. To lift an autumn hair is no sign of great strength; to see the sun and moon is no sign of sharp sight; to hear the noise of thunder is no sign of a quick ear.
11. What the ancients called a clever fighter is one who not only wins, but excels in winning with ease.
12. Hence his victories bring him neither reputation for wisdom nor credit for courage.
On this analysis it would have been smarter politics for the Government to wait until the dole queues formed, then apply the fiscal stimulus to get the unemployed back to work. There would have been vast amounts of unnecessary misery and wrecked hopes and dreams, but at least the Three Stooges of Australian economic policy (Tony, Andy and Joe) – definitely part of “the common herd” – would have had to admit that there had been a problem and that the Government had tackled it.
The quality of Tony Abbott’s economic thought may be assessed by a very cursory examination of his propositions that “Labor’s reckless spending” is leading us to unsustainable levels of Commonwealth debt, and we must “stop the waste”.
Regarding the notions of “reckless spending” and “waste”, there is little doubt that the way some State Governments chose to manage the stimulus spending in relation to their public schools left a lot to be desired, but there is a bigger picture here. We were facing the gravest financial crisis the world had seen since the Great Depression, and no-one could be sure how it would unfold. The Coalition hadn’t seen it coming, so for them to claim a superior ability to predict how it would unfold, or how it would have unfolded in the absence of timely action, has no credibility. The Government responded quickly, and in accordance with the Treasury’s advice to “go early”.
And as Nobel Prize winning economist Joseph Stiglitz told Kerry O’Brien on ABC TV’s The 7.30 Report last week, the greatest waste in the economy comes from having people unemployed and the nation’s plant and equipment under-utilised. Stiglitz, by the way, was very complimentary about the Government’s response to the GFC.
As for all the alarms and excursions about the level of Commonwealth debt, the 2009 Treasury paper A History of Public Debt in Australia by Budget Policy Division officers Katrina di Marco, Mitchell Pirie and Wilson Au-Yeung projected net Australian Government debt at the end of 2009-10 to be 1 per cent, compared with an average of 48 per cent for the OECD as a whole.
Net Australian Government debt is projected to peak at about 6 per cent of GDP – representing just over three weeks of annual production. At today’s official cash rate, servicing that debt would take about one day of annual production.
Spend two minutes of your life finding out all that you need to know about synthetic CDOs by watching this YouTube clip of Senator Claire McCaskill, Democrat, Missouri explain to a bunch of Goldman Sachs executives what CDOs are all about: gambling, pure and simple.
No doubt Senator McCaskill lacks the sophistication of the Goldman Sachs execs she is addressing, who are undoubtedly the smartest guys in the room. She is new to Washington, having been elected only in 2006, and has lived in Missouri all her life, like three generations of her ancestors.
In its editorial today The Australian Financial Review comments:
The only honourable course for the government now is to release all of its RSPT-related modelling so the public – aided by independent experts – can decide.
While it is about it, the Government might like to explain to us why it chose to use a General Equilibrium model (the KPMG Econtech model) rather than an input-output model like Treasury’s own PRISMOD model on which Treasury normally undertakes its tax and price effect modelling.
I am no econometrician but I do know a little about mathematics. What I know about mathematical models like a GE model is that they are, in mathematicians’ terms, models of complex non-linear systems in which everything is connected to everything else, leading to feedback loops all over the place. Classic examples of such systems are ecological systems, weather systems and economic systems. They are chaotic in a strict mathematical sense, leading to the mathematics of these systems being known in the popular literature as “chaos theory”.
One of the defining characteristics of these complex non-linear systems is acute (and I mean acute) sensitivity to initial conditions, leading to the notion that the beating of a butterfly’s wings in the Amazon can trigger a tornado in Texas. This phenomenon was discovered by meteorologist Edward Lorentz in 1961. He was running weather simulations and decided to check something that was occurring part of the way through a particular simulation. He re-started the calculation by feeding the output from his simulation as data for the new run, and noted to his surprise that the simulation very quickly diverged from the simulation he was checking. On considering what was happening he realised that, whereas his normal input data was to six significant figures, the model’s output data was only to three significant figures. If you restart the model with a number like 0.493 instead of 0.493127, the whole simulation goes off course.
It should be noted that these models are completely deterministic – there are no random elements in them, and you can calculate a unique set of results from the data input. The problem is that a tiny variation in the initial data can produce a quite different unique set of results.
GE models have their uses, which mainly revolve around understanding the processes going on in the system – a small change in A produces a big change in B but only a modest change in C – but they are almost useless as predictive tools because they are so sensitive to the data they are fed. That is why we can never hope to predict the weather more than a week (at best) in advance – we can feed more and more data into bigger and bigger super-computers, but it will never be enough.
To return to the specific subject of the KPMG Econtech modelling of the RSPT, acute sensitivity to “initial conditions” includes of course acute sensitivity to the assumptions which are fed into the model. AFR journalist John Kehoe has some interesting things to say about that on page 6 of today’s Australian Financial Review:
It is believed Treasury directed KPMG Econtech to assume the 40 per cent RSPT would not distort mining investment and the modelling projections were arrived at independent of key design features of the tax, including the rate, uplift factor, depreciation allowances and transition arrangements.
These design features are all assumed to be “perfect” so only pure resource rents are taxed by the RSPT.
Of course what those of us in the real world want to know is whether or not the tax will in fact distort mining investment. We want to see modelling which demonstrates that, not modelling which assumes it.
To turn to the PRISMOD model, this was the model which was developed by the young Ken Henry and his team on the instructions of Treasurer John Kerin at the end of the Hawke era, and which was used to such devastating effect in the Keating era by Treasurer John Dawkins to destroy John Hewson’s Fightback! package.
So I would like to see what that traditional Treasury tool, the PRISMOD model, would show us about this proposed tax, and I would like to know why the KPMG Econtech model was chosen in preference to it.
In this weekend’s edition of The Weekend Australian Financial Review, 20-21 March 2010, there is an opinion piece on the debt crisis by Simon Johnson (a professor at MIT’s Sloan School of Management and former chief economist of the International Monetary Fund) and Peter Boone (Chairman of Effective Intervention at the London School of Economics) which resonates strongly with the piece contributed by Professor Ross Buckley on Friday 12 February (see Negative resilience in the global financial system).
In his piece Professor Buckley identified feedback loops in the international finance system that reward international commercial banks and the elites within nations, at the expense of the common people in those countries. The principal mechanism for this is the pressure which is placed on the governments of highly indebted countries to assume the obligations of local banks to foreign lenders, so that the foreign lenders are repaid in full, and the locals wear most of the cost of the repayment – essentially a massive socialisation of private sector debt.
Writing in a similar vein, Johnson and Boone contrast favourably the recent actions of the Kazakhstan Government with the behaviour within the Euro zone.
In relation to Kazakhstan:
For most of the last decade, Kazakhstan gorged on profligate lending, courtesy of global banks – just like much of southern Europe. The foreign borrowing of Kazakh banks amounted to about 50 per cent of gross domestic product, with many of these funds used for construction projects. As the money rolled in, wages rose, real estate prices reached near-Parisian levels, and people fooled themselves into thinking that Kazakhstan had become Asia’s latest tiger.
The party came to a crashing halt last year, when two sharp-elbowed global investment banks accelerated loan repayments – hoping to get their money back. The Kazakh government, which had been scrambling to support its overextended private banks with capital injections and nationalisations, gave up and decided to pull the plug. The banks defaulted on their loans, and creditors took large “haircuts”(reductions in principal value).
But – and here’s the point – with its debts written off, the banking system is now recapitalised and able to support economic growth.
By contrast, in Ireland, where the banking system’s external borrowing reached roughly 100 per cent of GDP (twice the level of Kazakhstan):
Instead of making the creditors of private banks take haircuts, the Irish government chose to transfer the entire debt burden onto taxpayers. The government is running budget deficits of 10 per cent of GDP, despite having cut public sector wages, and now plans further cuts to service failed banks’ debt.
For Greece, with its government debt approaching 150 per cent of GDP, the outlook is much worse:
If Greece is to start paying just the interest on its debt – rather than rolling it into new loans – by 2011 the government would need to run a primary budget surplus (that is, excluding interest payments) of nearly 10 per cent of GDP. This would require another 14 per cent of GDP in spending cuts and revenue measures, ranking it among the largest fiscal adjustments yet attempted.
Johnson and Boone argue that, in Greece’s poisonous political climate the level of adjustment required is a sure route to dangerous levels of civil strife and violence; Greece simply cannot afford to repay its debt at interest rates that reflect the inherent risk.
The alternative they propose is for Greece to manage an orderly default:
Reckless lending to the Greek state was based on European creditors’ terrible decision making. Default teaches creditors – and their governments – a lesson, just as it does the debtors: mistakes cost money, and the mistakes are your own.
...
A default would be painful, but so would any other solution.
...
A default would ... appropriately place part of the costs of Greece’s borrowing spree on creditors...
Ultimately, by teaching creditors a necessary lesson, a default within the euro zone might actually be a key step towards creating a healthier European – and global – financial system.
Many will disagree no doubt, and there is an argument that there is nothing wrong (in the Greek case) with the taxpayer being asked to foot the bill for the recklessness of the governments they elected – by contrast with the Irish case, and the Indonesian case cited by Ross Buckley, where the punters are picking up the bill for the recklessness of the private banks. The fact is, however, that Greek society simply cannot deal with this matter on its own. If Greece does default, it will be the Germans and the French who take the biggest haircuts. This will be an interesting space to watch.
The Review section of The Australian Financial Review, Friday 12 February contains an excellent essay, Rethinking riches: time to put poor nations first, by Professor Ross Buckley, a professor of law at the University of New South Wales, and an expert on global trade and finance.
Professor Buckley considers the operation of the global financial system from the technical perspective of resilience, a concept that derives from systems science and measures the capacity of a system to regain its function and identity after an external shock. He argues that the global financial system is highly resilient, in the negative sense of being resistant to necessary change. He states:
The global financial system is functional from the perspective of Organisation for Economic Co-operation and Development countries and the international commercial banks, and quite dysfunctional from the perspective of developing countries. But it is highly resilient.
Even the Global Financial Crisis (GFC) has so far led to little substantive change in the system which produced it. ...
In addressing why this should be so, Professor Buckley says:
So why is a system that for so many of its participants is deeply dysfunctional, so resilient? The answer lies in who the current system serves, and the general paucity of knowledge, outside those it serves, about how it works and its consequences.
Resilience science teaches that strongly resilient systems have healthy feedback loops.
The principal feedback loops in global financial governance are that the system rewards international commercial banks and the elites within nations, at the expense of the common people in those countries.
Professor Buckley illustrates this proposition with the example of Indonesia after the Asian economic crisis of 1997:
... the International Monetary Fund (IMF) and the foreign commercial banks insisted Jakarta assume the obligations of the local banks to foreign lenders and then recover the funds from the local banks, if necessary by selling their assets. As was entirely predictable in the case of Indonesia, recovery proved difficult, and only about 28 per cent of the total liabilities assumed were recovered. Almost three quarters of the cost of repaying foreign loans was borne by the Indonesian people. Yet there was no reason for Indonesia to assume responsibility for these loans. The market mechanism, if left to work, would have seen many of these banks placed into bankruptcy by their Western creditors who would have received a proportion (presumably about 28 per cent) of their claims in the bankruptcy proceedings. Instead the insolvent local banks were put into bankruptcy by Indonesia, the creditors were repaid in full, and the Indonesian people wore most of the cost of the repayment. The funds to repay the creditors came from the long-term loans organised by the IMF and invariably described as bailouts of the debtor nations. Yet the terms of these loans required they be used to repay outstanding indebtedness so the bailouts were of the foreign banks. In Indonesia, the IMF co-ordinated a massive socialisation of private sector debt.
Professor Buckley goes on to discuss changes to the global financial system which he says would make it fairer, reduce the extent to which it favours the powerful, and disempower the feedback loops that make the current system so resistant to change.
Professor Buckley’s essay is taken from Resilience and Transformation: Preparing Australia for Uncertain Futures, Steven Cork ed., CSIRO Publishing, 2010.
A conference on Shaping Australia’s Resilience, hosted by Australia 21 (www.australia21.org.au)will be held in Canberra on 18-19 February. Conference program is available here, registration form available here.
Henry Thornton (1760-1815) was a banker, M.P., philanthropist, and a leading figure in the influential group of Evangelicals that was known as the Clapham set. His 'Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802)' is an amazing performance. It has been remarked elsewhere that:
...it anticipates in some points the analytic developments of a century to come.
No other performance of the period will bear comparison with it, though several, among them Ricardo's, met with much greater success at the time as well as later... He was one of those men who see things clearly and who express with unassuming simplicity what they see.
The current generation is fortunate that Henry is also a Ghost Who Walks, at least to the extent of informing us with a lively and informative blog, which can be found at www.henrythornton.com .As well as his own insightful views, Henry presents the views of an interesting circle of friends, which includes Peter Jonson, Michele Levine, Gary Morgan, Louis Hissink, Nick Raffan, Fiona Prior, Peter Byron, John Roskam, Ross Garnaut, Nicholas Gruen, Hugh Morgan and many more – as well as scratchings from your bending author here at Aussie Observer.
You will always be able to access Henry easily from here, because there is a link alongside at “Handy Links”.
