The Money Men by Chris Bowen (i wanna iguana read aloud .TXT) 📗

have emerged was delayed while the government and the RBA waited to see if a loosening of policy would be needed to deal with a downturn. The increase in interest rates was thus postponed for seven months, and the boom got out of control. In a policy domino effect, the delay meant that interest rates had to go higher because the increase was later than it should have been. It was a case of too much, too late. Because interest rates were increased to such high levels, the crash, when it eventually happened, was deeper and more prolonged than it might otherwise have been.

The RBA began to increase interest rates in April 1988, making Australia only the second country after the United States to engage in monetary contraction after the crash. In that sense, the criticism that Australia waited too long to increase interest rates is hard to sustain. The April increase, however, certainly came later than Keating would have liked. As early as January 1988, Keating, who had observed rampant building activity on his family holiday to Noosa on the Queensland coast, rung RBA governor Bob Johnston in an unsuccessful bid to get him to begin lifting the rates. Two months later, Keating met with the bank and again urged a 2 per cent rise in rates. Again he was rebuffed. Part of the problem for Keating in this period was that the responsibility for the setting of interest rates lay in an unsatisfactory no-man’s-land between the government and the independent reserve bank. The float of the dollar had increased the stature and independence of the bank, and Keating was no longer inclined to issue instructions to it as to interest rate decisions. But nor had bank independence yet been formalised or institutionalised. The reverse situation would emerge in 1989 and 1990 when Keating thought that the RBA and the Treasury were underestimating the extent of the economic slowdown and he decided he wanted bigger, earlier cuts. In hindsight, we can only conclude that Keating was right on both counts.

While monetary policy was a responsibility shared by the government and the RBA, fiscal policy was entirely in Keating’s hands, and he used it to bring about even further contraction in policy settings. After the tight 1987 Budget, Keating decided to bring down a mini-Budget economic statement in May 1988, in which he signalled that he would push the fiscal levers to new levels in an effort to use budgetary policy to slow the economy. This statement is described by commentator Laura Tingle as ‘the tour de force of the Keating treasurership’.28 Keating used this statement to engineer $980 million of spending cuts and a budget surplus of $3 billion.

Keating kept the focus on spending restraint when he came to deliver the 1988 Budget in August of that year, projecting a surplus of $5.5 billion with real outlays falling 1.8 per cent. Despite this tight fiscal policy, the economy continued to boom, and more and more of the pressure fell on interest rates. From an already high starting point of a case rate of 10 per cent in March 1988, the RBA progressively increased rates to a peak of 18 per cent in November 1989. These extraordinarily high rates, judged necessary to arrest the boom, presented an enormous political challenge for the government, with mortgage holders and small businesses straining under the pressure. Political hardheads like Cabinet minister Graham Richardson urged Hawke and Keating to smooth out the rough edges of the policy by introducing a mortgage relief fund. Hawke was tempted to do just that, but Keating correctly concluded that such a move would undermine the effectiveness of their tight policy and prolong the boom even further.

Interest rates had not come down by much when Hawke and Keating had to face the people in the March 1990 election. As well as confronting Andrew Peacock, who had replaced Howard as opposition leader in 1988, Hawke and Keating also had to deal with the political and economic impact of a series of financial collapses in Victoria—including the State Bank and the Pyramid Building Society—some of which could fairly be sheeted home to that state’s Labor government. However, the Hawke–Keating government was able to counter the loss of nine Victorian seats by winning seats in Queensland and Western Australia, and it became the first Labor government to win four consecutive federal elections.

By 1989, Keating knew the economy was slowing, so he urged bigger and faster interest rate reductions. But he also still believed that avoiding a recession was possible. In delivering the 1989 Budget, for example, Keating told the House of Representatives that ‘Australia will emerge from the recent, high level of spending without a recession and with its economic and social structure improving.’

Keating was not alone in thinking that a ‘soft landing’ was possible. He was basing his predictions on advice from the Treasury and the RBA, which both thought the slowdown was likely to be nowhere near as pronounced as that of 1981/82. When it came, however, the landing would be far from soft. The official forecasters had failed to foresee that when the high interest rates finally had their impact, it would be severe and quick. In addition, the effect of the financial collapses in Victoria, as well as in South Australia, which had also seen its State Bank fall, meant that the slowdown was particularly savage. It is possible to conclude that four out of the six states did experience a soft landing, but the economic collapses in Victoria and South Australia amounted to a localised depression and were enough to drag down the entire national economy.

On 29 November 1990, the Australian Bureau of Statistics confirmed what many people already knew to be true: the Australian economy had contracted for two consecutive quarters and was therefore in recession. Having to account for this failure of policy, Keating exhibited a bravado that was compelling even for him. Drawing on his penchant for memorable phrases, he undertook a massive political