It makes perfect sense to perform emergency repairs to a rickety house.
By all means re-pin dubious foundations, plug leaky roofs, patch the plumbing and replace failing fuses.
Of course the smarter strategy is to re-establish the long-term integrity of the entire structure.
The economic turbulence caused by the asset price bust and the collapse of the global banking system calls for a similar response.
There is currently little confidence about the true value of the collateral that underpins the credit system.
As a result, the world’s financial system is in crisis.
Compounding this problem, the real economy – the marketplace of labour and commodities – is in strife.
So far, we’ve seen three government-led responses to this turbulence.
Governments have applied a fiscal triage to the banking system. While allowing some institutions to fail, they’ve guaranteed deposits. They’ve also attempted to staunch poisonous debt by allowing banks to swap their risky assets for government securities and partially nationalising bigger banks.
The aim is to defibrillate the credit system by getting banks to trust each other enough to start lending again. These actions should increase the quantum of money in the economy.
Second, central banks have lowered interest rates. This should decrease the cost of money in the economy.
Third, governments are pump priming their economies.
In Australia, the Rudd Government has administered an adrenaline shot with its $10.4 billion ‘economic security’ package.
The package front-loads the economy with cash while we wait for interest rate cuts to kick in.
The package also deals with the community’s rational reaction to uncertainty, which is to stop spending. It’s what John Maynard Keynes called the “paradox of thrift”, which is where individuals and companies rebuild their balance sheets just when the broader economy needs their money.
For many, these measures are designed to ‘normalise’ the economy.
In fact, ‘normalisation’ is the last thing we need.
It’s now time to move our thinking beyond short-term emergency repairs to the economy.
Two big strategies are required.
First, world governments need to develop new global governance mechanisms that address the structure of international capital markets.
Thomas Friedman, author of The World is Flat, says the current crisis highlights the central truth of globalisation, “we’re all connected and nobody is in charge”.
World leaders talk about the need for a new “global financial architecture”. Many leaders seem attracted to the idea of a revamped Bretton Woods agreement – the 1944 deal that established the world’s first international financial system.
The serious danger is that governments will lurch from a system of enterprise to one of control, which is unlikely to cope with the massive complexities and interdependence of the global marketplace.
Nevertheless, a new governance model is needed given the recent re-nationalising of financial institutions.
The second strategic thrust is to embark on a massive program to supercharge Australia’s competitiveness.
This country has experienced five major shocks in the post - WWII period – the 1961 credit crunch, the recessions of 1974, 1982 and 1990 and the tech wreck engendered slow down of 2001.
Successive federal governments forged policy tools that gave them greater influence over economic cycles.
Their goal was stable growth using four turnkey policy tools:
- Monetary levers – the active management of interest rates through an independent central bank charged with curbing inflation
- Productivity and competitiveness booster programs – cutting tariff/quota protection, financial deregulation, increased labour market flexibility through workplace reform, competition policy and privatisation
- Demand management – restructuring the tax system and recalibrating immigration levels
- Higher national savings levels secured through compulsory superannuation.
While these tools were innovative and highly successful in their time, a new era of domestic reform is urgently needed to lock in potential globalisation dividends.
In brief, the Australian Government needs to:
- Speed up tax reform – slash 54 taxes to, say, three
- Speed up Australia’s transformation into a common market with a single common set of efficient rules
- Speed up competition policy mark II and focus on urban renewal as a platform for achieving competitiveness
- Speed up hard and soft infrastructure investment
As stewards of the built environment and a large chunk of the community achieving retirement savings, the property industry will play a huge role in this policy renaissance.
We can vigorously push the policy reform agenda.
We can also voluntarily fashion a more transparent industry that is a model of accountability. In doing, so we will restore trust in our sector.
I’ll discuss these specific policy reform programs, along with the Property Council’s response to the economic crisis, in Property Australia’s December/January editorial.
Peter Verwer |
Thursday, 30 October 2008 10:23 AM |
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