Wednesday, July 13, 2016

Election result need not be a setback for good government

Maybe those who complain about a boring election campaign are condemned to an exciting election finish. Many in the establishment – particularly the business establishment – have convinced themselves the country is off to hell in a handcart, but it doesn't have to be like that.

The nation won't be ungovernable provided Malcolm Turnbull is willing to negotiate with the minor parties when necessary – hardly a new experience for governments, which rarely have a majority in the Senate.

Nor does it follow that the government will be unable to hasten the budget's return to surplus.

As a study by the Australia Institute has demonstrated, much of this year's budget can be legislated, particularly with a little compromise.

In any case, the budget is not the economy. And, contrary to any casual impression you may have absorbed, the prospects for the economy remain reasonable.

Brexit is bad news for the Brits, and adds to Europe's many problems, but it's not big enough to greatly affect the rest of us. The US economy is gathering speed.

The messy election result won't have much effect on the economy. Business loves whingeing about "uncertainty" – when it's got nothing else to do or say, that's what it does – but the period of transition from the mining investment boom is getting towards its end and, as it does, the rest of business will be getting on with it.

The economy has been growing at a rate that's about average, and the best guess is it will continue doing so. It has been creating additional jobs and this should continue.

For all that, however, there are messages for politicians on both sides from this election. How well they listen will determine how well we are governed over the next three years.

(Don't fall for the one about how we'll be back to the polls in no time. The more-excitable always say that at times like this.)

The first message comes from the continuing decline in people voting for the major parties. The proportion of voters giving their first preference to a minor party reached almost one in four.

This is not surprising when you remember how standards of conduct have fallen: the broken promises, the scare campaigns, the negativity and automatic opposition to whatever the other side says, the statements that are true in some sense but have been crafted to mislead.

The plain fact is that the mainstream politicians have forfeited our trust and lost our respect.

Many of us have concluded they're all liars, and we tune out whenever they start slagging each other off, or arguing about who has the bigger hole in their costings. They could save themselves much energy if they learnt not to bother doing this.

The message for the government is that it must broaden its appeal if it wants to attract a comfortable majority of two-party-preferred vote.

Any lapse into infighting between Abbott and Turnbull supporters will be the final proof the Coalition is no different from Labor.

The Coalition campaigned on its plan for jobs and growth (which boiled down to a cut in the rate of company tax), while Labor campaigned on the public's worries about cuts to government spending on education and health.

Labor's success in this argument explains why it did so much better than expected.

The Coalition suffered from the lingering resentment and suspicion provoked by Tony Abbott's first budget, which attempted to fix the deficit almost solely through cuts to the spending on health, education and welfare depended on by low and middle income-earners, while protecting the earnings of businesses supplying services to government and the tax breaks enjoyed particularly by high income-earners.

Many of those measures were abandoned, though some remain "zombie measures", rejected by the Senate but still on the government's books.

The memory of that deal-breaker budget was kept alive by Scott Morrison's insistence that the budget had a spending problem, not a revenue problem. (Surely Turnbull will use this opportunity to find Morrison "a job to which you're better suited".)

The message for the Coalition is obvious: it must switch to budgeting for all Australians. That means tax increases as well as spending changes that seek genuine efficiencies in contracting with business suppliers (drug companies, for instance), not just cost-shifting to the public.

The message for Labor is that its strategy of not being as obstructionist towards the government as Abbott in opposition was towards it, and of making itself a big target in the election by proposing "positive policies" (such as limiting negative gearing), worked well.

So now is not the time to revert to Abbott-like spoiler behaviour – if I wreck the joint they'll have to give up and hand over to me.

When they combine, the two sides can get anything through the Senate. Labor can win itself voter respect for being sane and sensible without bowing to the government's every wish.

It can help with the compromises. And when the government's fighting the good fight against powerful interests (such as the two big pathology companies, and the Coalition greedies​ making spurious claims about retrospective super changes) it can resist the unworthy temptation to take advantage of it.

With Labor now hopeful of winning next time, any budget nasty it helps the government fix now will be a problem it won't have to fix then.
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Monday, July 11, 2016

Oh no, not a credit rating downgrade

Sorry, but I've put Standard and Poor's and the two other big American credit rating agencies on a negative watch.

For me, the rating agencies' involvement in the global financial crisis has destroyed their credibility forever. I can no longer take their solemn pronouncements seriously, nor hear them with the reverence or contrition they imagine themselves entitled to.

The rating agencies were one of the private sector institutions charged with upholding standards of behaviour in America's financial markets, putting investors' interests ahead of their clients' and their own.

They were supposed to be a bastion against crisis and collapse, but they betrayed their trust.

The way their system works is that institutions wishing to borrow money by issuing bonds or other securities have to pay rating agencies to give those securities a rating of their credit worthiness.

The agencies' job pre-crisis was to be the hard-headed wise men who could see through the smoke and mirrors created by "innovators" on the make. They failed.

While everyone else in Wall Street was making money hand over fist, they didn't resist the temptation to get in for their cut.

They obliged their paying customers by awarding AAA credit ratings to securities subsequently exposed as "toxic debt".

In the process, they exposed the obvious conflict of interest involved in the common practice of governments attempting to protect the interests of investors and others by requiring businesses to buy "independent" certification from other businesses.

To an extent, governments around the world give the rating agencies a captive market by requiring certain organisations to hold only those securities certified as AAA.

This was how some Australian local councils got sucked into America's toxic debt crisis.

Trouble is, with this monumental blot on their record, we can no longer be sure what game the ratings agencies are playing and in whose interests they act.

In the case of government ("sovereign") borrowers, the agencies take it upon themselves to issue ratings. They then have the temerity to present the government with a bill for their services, though no self-respecting treasury pays up.

They seem to be pretty tough on government borrowers, though the lines they draw between safe and unsafe levels of debt seem pretty arbitrary.

What I wonder is if they have higher and holier standards for government than they have for their private sector fellows.

Why not? Everyone in business (and a lot of people in treasuries) know that governments, because their actions are not the product of market forces, are therefore non-rational and prone to being either mad or bad.

The agencies want us to believe their deliberations are highly scientific and sophisticated, applied consistently across the world.

But it's open to doubt how true that is.

After all, many of us believed the line that the whole towering edifice of ever-multiplying derivatives and synthetics built up before the financial crisis was the product of amazing advances in statistics and the science of finance, which had rendered us far smarter than we used to be at "managing risk".

When it comes to signalling changes in the riskiness of particular borrowers, the agencies purport to be the leaders: their vigilance causes them to be the first to see the problems looming, with the market following their lead.

But it's common for the market to turn against some borrower, leaving the agencies scrambling to adjust their ratings to fit. Are they just purveyors of conventional wisdom?

Whenever a downgrading of one of our governments is threatened, the media unfailingly assure us this would be a bad thing because the government would have to pay higher interest on its debt.

If this is still true, it's much less so than it used to be. And if there is still a premium to be paid, it's smaller than it's made to sound.

The rating agencies' loss of authority since the financial crisis is evident.

When, in 2011, in a rush of blood to the head – or maybe a touch of the megs​ – Standard and Poor's announced it had cut the US Government's credit rating to AA+, the other two did not follow suit and the market took not a blind bit of notice.

The yield (interest rate) on US Treasury bonds continued falling. Moral: don't try to get smart with the world's reserve currency.

But something similar happened when the three agencies downgraded Britain to AA- in the wake of the Brexit vote. Yields on British bonds have since fallen, along with those of other "sovereigns", including us.

Sometimes there are forces more powerful than a bunch of for-profit rating agencies.
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