What we failed to learn from the GFC


Over the twelve months to March 2009 another 13,600 BMWs and another 700 Porsches appeared on Australia’s roads. By the end of 2009 the Australian stock market had risen 45 percent off its low point, house prices were rising, and the unemployment rate was starting to fall. Australia missed out on much of the GFC fun enjoyed in other, bigger countries. But for the $900 checks from the Tax Office, and the new construction at our local schools, the Global Financial Crisis may have passed by unnoticed.

If a team of financiers have their way, however, we will be able to join fully in the excitement of the next GFC. With an exquisite sense of timing, in September 2008, ten days after Lehman Brothers filed for bankruptcy, our Government commissioned Mark Johnson, retired Deputy Chairman of Macquarie Bank, and six financial sector executives, to report on how Australia might be positioned as a leading financial services centre.

Their report, Australia as a financial centre, was released on January 15 this year.  We might reasonably expect such a report to exhibit a cautionary tone. Perhaps a reference to the consequences of financial exuberance in Dubai and Iceland. Perhaps some basic economics, such as a warning about how countries which play in the global financial markets lose control over their money supply and exchange rates.

The Johnson Report has no room for such negativity. Its only regret is that Australia’s financial sector has been oriented to domestic markets rather than to the growth markets of Asia. Even so, Australia’s financial sector has done well for itself. Supported by tax-funded largesse for superannuation and private health insurance, it has grown from seven percent to eleven percent of GDP over the last twenty years. The Johnson Report recommends a number of initiatives to help it expand further into an export industry, and the Government’s initial reaction has been enthusiastic.

Have we learned nothing from the GFC? Has our easy escape led to delusion – the delusion of a novice gambler who has just enjoyed a winning streak? Do we need a home-grown crisis of Icelandic proportion to make us realize that manipulating money is not real economic activity?

There is a real economy, where people grow food, build houses, teach children and look after the old. Our wealth resides in the real economy, in the form of physical, social, environmental, human and institutional capital. Then there is the paper economy, or the cyber economy, where the financiers live. The symbols which financiers manipulate on their computer screens – dollars, yen, swaps, wraps, CFDs, CDOs – have only a tenuous connection to the reality they denote. We may use monetary units to denote some aspects of our wealth, but money is not wealth.

Yet the Report claims, for example, that in Australia the financial sector has contributed to household “wealth accumulation”. It says it assists investors in the accumulation of “wealth”. Those who live in the cocooned and privileged world of finance confuse money with wealth – showing a disconnection from reality bordering on the psychotic. If financiers were simply geeks playing computer games, they would do no more harm than patients in a mental hospital who believe they are Napoleon or the Prophet Isaiah. Their misguided notion that money is wealth wouldn’t matter. But, as we have seen in countries as diverse as Greece and the United States, what happens in the cyber economy has consequences in the real economy.

There was a time when the finance sector was properly seen as a public utility, whose function was to serve the real economy; when banking, like undertaking and registering patents, was seen as a dull but necessary activity; when terms like “financial dynamism” were rightly understood to mean reckless speculation.

Did the authors envisage what Australia would be like with an even larger finance sector? Do we want a structure of incentives which reward skimming commissions off the contributions of others? Do we want the in-your-face inequalities that we find in places like London and New York? Do we want our best graduates deserting the sciences and humanities for studies in finance? Do we want to make and do things for ourselves, or will we become, like an oil-rich sheikhdom, a nation of poor little rich people whose only skills are to unpack the crates in which the BMWs and Porsches are shipped?