Stimulus, Stimula, Stimulorum

I have so far refrained from entering the fray of the current world financial problems but having watched, listened and read over the course of the unfolding shambles I thought that it was about time that I set everybody straight with a little bit of Atomac self-opinionated self-righteousness.

By now most people are aware that the world’s problems stem from greed by individuals and corporations in a system that was regulation poor. The stinging blow of the “sub-prime” (one of the millennium’s greatest euphemisms) mortgage market followed by the collapse of financial institutions exposed to it and the further collapse of institutions who were making money by betting that the house of cards would not fall down left the world money market running scared. With big banks calling their debts and not lending more money to smaller institutions or each other credit evaporated and the blood began to run in the streets. From what I have read there was plenty of opportunity for governments, particularly the US government to intervene and regulate, but the Bush administrations “hands-off” Republican brand of capitalism had faith that the market would regulate itself. This was like expecting the cat to look after the milk.

With companies unable to get credit their operating costs were not sustainable and they began to make losses. May companies like Toyata have shown a loss for the fist time in years. As companies fail and people lose their jobs there is less demand and therefore less profit and more closures, jobs losses and even less demand. For Australia less demand means lower prices for the minerals our one-trick pony economy relies upon.

One thing that has been thrown into stark reality is the ineptitude of the policy makers and their economic advisers. While things are sailing along on calm waters it seems that any idiot can run the ship. It seems that nobody was looking at the charts and they let the ship sail into the area marked “here be monsters”. Now that the markets are in trouble the same people who were quite happy for the “market to find its own way” are now running around in a panic trying to plug the holes in the sinking ship.

Why did the economists not see this coming? Economics is no more of a science that astrology. Like astrology economics makes predictions. If the arrows are all point up it is pretty easy to predict profits, peace and stability. Could they not see that things were overheating? To continue the ship metaphor why did they not warn the captain that we were running into shoal water? The same economists who were able to chart our course through the calm waters seem completely unable to do anything but state the obvious that we are in trouble, they can’t suggest how we might get back onto the tack we were on before.

In Western Australia as recently as six months ago we were being told that the boom that had started in 2001 would last forever. The obvious fact that a boom, by its very definition must be time-limited, was not part of most people’s realities. Those employed in the mining and construction industries saw their incomes grow exponentially while those, like public servants and, yes, teachers, who were not part of the boom suffered while house prices rose steeply. The state government that was making so much money from the royalties saw fit to raise stamp duty during that time and increase its revenues even further. With all of this money rattling around in the state coffers they spent nothing on any public works worth mentioning. They could have built new theatres, hospitals. museums, public parks, improved all of the state’s infrastructure, increased the pay of their long-suffering employees and many other things. Instead they did nothing and now the boom is over and the money has gone and that is that.

One of the most galling things to watch, now that the boom is over, is the government ready to “bail out” and help those who benefited most from the boom. They federal government, for example, plans to give every school $200,000 for new buildings in order to support the building industry. What about the teachers in those schools who have seen their pay shrink in proportion to the average way and house prices during the boom?

The state government has raced to provide $5m to those who have suffered at the closure of the BHP Nickel mine at Ravensthorpe. Surely the risk that those people took is the same that anyone else takes when they try to make a profit? Why should our money be used to prop them up? Will the government bail me out? Will they bollocks.

The stimulus package that is being offered by the Rudd government, like the previous effort, will have little impact on the financial problem. In short the government wants to give every working Australian who earns less that $80,000 per annum $950. They also intend to give people with school age children $950 per child (a fair exchange I would have thought). In addition they will give every school $200,000 for building.

The cost will be $42 billion. The effect will be a small spike in retail sales and that is it. This is a GLOBAL problem not a local one. If 15 million working Australians spend $950 each it will have no effect whatsoever. Schools don’t need $200,000 for buildings. They have buildings. They would love the $200,000 for resources, but then they ought to have had that before.

If the government wants to do something, instead of wanting to look like they are doing something, they should reduce taxes, especially for middle income earners, spend money on public works and infrastructure, pump money into public service projects and generally use the public spending to make Australia as a better place. In other words try to turn this sow’s ear into a silk purse.

We are in trouble and it is going to take serious changes to financial regulation to create the consumer and market confidence to get us out of it.