If the battle cry of our government’s response to the Global Financial Crisis was “go early, go hard, go households,” this government’s approach to the current crisis seems to be “go late, go half-measures, and go… well…go to Hillsong”.
For a decade we have been accused of having gone too far in our efforts to avoid the GFC. When we look back on the decisions taken over the last month, they will be seen (as with the bushfires) as the mark of a complacent and negligent government.
No two crises are the same. The crisis of 2008-09 began within the American financial system. A financial collapse became an economic collapse and then mass unemployment.
Then followed a political crisis as governments around the world went into deficit and debt to save their economies, exposing themselves to attack for “wasting money” as they sought to deal with a problem not of their making. The current crisis obviously has radically different origins.
It began as a public health crisis in China where an appalling failure to contain the coronavirus in December allowed its spread across the country, grinding its national economy to a halt before extending the contagion and its economic impact to the rest of the world.
Policy makers around the world now have to deal with a crisis at three levels: first, containing COVID-19 so it spreads along the flattest curve possible to enable our health system to cope until we have a vaccine; second, preventing recession, cashflow induced business collapse and large-scale unemployment; third to ensure that national actions are coordinated with global actions to ensure that one doesn’t undermine the other.
Earlier this year I wrote that China’s January and February would become the rest of the world’s March and April based on the simple mathematical probability of the virus’ spread elsewhere.
Indeed, the danger is, in the absence of hard measures in the rest of the world, the public health and economic impact will extend much longer. I also specifically warned back then of Australian complacency.
On public health, the government’s public information campaign on personal hygiene, social separation and community events (the biggest determinants of the “contagion curve” and the coping ability of the health system) has been several weeks too slow.
It’s messaging has also been contradictory on basic things like handshaking and public events. So much so that the public could be forgiven for concluding, based on the official commentary alone, that the virus would not be a big deal for Australia.
Then it all changed late last week. Lax border controls were suddenly tightened over the weekend once New Zealand acted. A public advertising campaign suddenly appeared. Yet the Chief Medical Officer has told us we are running out of testing kits. On none of these measures have we been leading the world.
We’ve been lagging the world. The effectiveness of public heath measures is fundamental to any rational discussion on the economic policies needed to avoid recession. Fear of the virus is undermining business and consumer confidence. And the uncomfortable truth is fear will only be removed once there is public confidence in our ability to manage, contain and eventually eliminate it.
In the meantime, the central economic task is to ensure that firms with normally sound business operations are protected.
This is not a gift to business. It’s essential to employment. Large corporations in the travel, tourism, hospitality and education sectors have seen a near collapse in trading conditions. Most SME’s have limited financial reserves.
If cashflow dries up, unless the banks extend credit perfectly good businesses will collapse and unemployment will skyrocket. This in turn will compound the demand side pressures already emerging from imploding consumer confidence.
Quite apart from other specific supply-side problems arising for various retailers from interrupted global supply chains. But of all these, the credit crisis for firms looms largest of all.
Against this analysis, what to make of the government’s stimulus package? Like their response to the public health challenge: too little, too late.
The total package is less than 1% of GDP. That’s unlikely to be sufficient to avoid recession given that China will have negative growth for the first quarter and will not return to normal growth by the second. Japan is already in recession. Korea is heading that way. The same for both Europe and the US. Put all that together it starts to look like the quantum of contraction we faced in 2008-09.
We avoided recession by the skin of our teeth with a total stimulus strategy worth 5% of GDP spread over two years. Apart from the quantum, the key policy question remains how to keep firms solvent during this crisis and this may provide a creative alternative to pure stimulus.
Both Germany and China have been seized on this. China has directed its banks to provide “credit forbearance” for six months to businesses directly impacted by the crisis – underpinned by central bank loans to the rest of the banking system.
Whether this will apply universally to all distressed firms is unclear. Germany has deployed what it describes as its “big bazooka” by directing its state-owned KfW bank to provide credit to distressed firms “with no upper limit on the amount of loans that KfW can issue.”
In Australia’s case, while the government’s announced grant of up to $25,000 for SME’s is helpful, it won’t be sufficient to keep businesses afloat. Australian banks will be on the front line of these decisions. Treasurer Josh Frydenberg is right to jawbone the bank CEO’s.
But they alone will not be able to bear all on their balance sheets. This leads to the third essential element of the government’s response: the future stability of the financial system itself.
Recent decisions by the Australian Office of Financial Management to open its “repo window” to Australian institutions following the dumping of Australian bonds by hedge funds are necessary.
A ban on short-selling should be instituted as we did in 2008. It will be critical to respond rapidly to any signs of emerging illiquidity in US financial markets and/or their retreat from foreign exposure. Given the Australian system’s exposure to international inter-bank lending, keeping the arteries of finance open through various forms of sovereign guarantees may once again become necessary.
Finally, Australia has been utterly inert in pressing for full G20 engagement on the coronavirus crisis. That’s why many of us spent time and effort a decade ago getting it established in the first place and securing Australia a place at the table.
It is also the only mechanism available that can bring America and China together at a time when the disastrous state of their bilateral relationship runs the risk of standing in the way of a globally sustainable public health and economic recovery.
Scott Morrison, like Donald Trump, prides himself on being a master of retail politics. Morrison, like Trump, is also showing himself to be an abject failure in the engine room of public policy. And despite the giant Morrison/Trump protection racket otherwise called the Murdoch media, the bottom line is that when you finally come up against a real crisis, it’s impossible to spin your way through it.
That’s because for the people, the stakes have become very real indeed.
First published on 16 March 2020 in the Guardian Australia.