Good Fight: Six Years, Two Prime Ministers and Staring Down the Great Recession

Good Fight: Six Years, Two Prime Ministers and Staring Down the Great Recession

by Wayne Swan

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ISBN-13: 9781743437049
Publisher: Allen & Unwin Pty., Limited
Publication date: 08/01/2014
Sold by: Barnes & Noble
Format: NOOK Book
File size: 4 MB

About the Author

Wayne Swan was named Euromoney Finance Minister of the Year in 2011. He was federal Treasurer from 2007 to 2013, and has been the member for Lilley since 1993. He is the author Postcode: The Splintering of a Nation, and the essay "0.01 Per Cent: The Rising Influence of Vested Interests."

Read an Excerpt

The Good Fight

Six Years, Two Prime Ministers and Staring Down the Great Recession


By Wayne Swan

Allen & Unwin

Copyright © 2014 Wayne Swan
All rights reserved.
ISBN: 978-1-74343-704-9



CHAPTER 1

NO ORDINARY PHONE CALL


10 January 2008

I took the call at 6.30 am in my car on the main street of Cotton Tree at Maroochydore on the Sunshine Coast. This was no ordinary summer break; and it turned out to be no ordinary call.

The coast in January has long been a place of personal refuge for me; the glorious surf there makes me feel a million miles away from the Canberra cauldron. This is where my deepest thinking occurs, where my body and mind are the healthiest. In short, despite not having lived there for forty years, it remains home in the most spiritual sense of the word.

I woke earlier that morning with the news that US Treasury secretary Hank Paulson wanted to talk. After only a few weeks in the job, calls like this were a new experience, although they would become a lot more regular during the next few years; but, in the first fortnight of a new year, it struck me as a touch unorthodox to be receiving such a call at short notice.

Not wanting to wake the family, I drove down to the Cotton Tree News Agency to pick up the papers and take the call in my Ford Territory. The rain was bucketing down; there would be no surf today.

The phone rang. I wedged the handset between my shoulder and ear, so I could stick my finger in the other ear and block out the deafening noise of the rain; this meant I still had a hand free to take notes. A truly Australian experience, it could be said.

The sub-prime crisis had begun early in 2007, and by April of that year fifty mortgage companies had declared bankruptcy. This bursting of the US housing bubble had had devastating consequences on US financial markets, and by now was reverberating around the world. At the time of my conversation with Paulson, the crisis wasn't yet over. Although the US was in recession, he was confident his country could ride it out. The principal reason for his call was to offer this reassurance. Yet the very fact that he had rung meant that neither of us could be assured of what was over the horizon.

I can remember every word of our conversation: 'Look ... if we can avoid a meltdown in house prices, then we might be able to see a way through this,' he said. This was a big 'if ', and I suspect the real motivation behind his call.

It seemed a dicey prospect that the health of the entire US economic system was underpinned by the housing market stabilising, given that it was the very stench of toxic home loans that had, only a few months earlier, brought to their knees two of the managed hedge funds run by Bear Stearns, one of America's oldest investment banks.

What if their housing market did deteriorate further, I wondered. Then what for America? Indeed, then what for Australia? Back on the phone, I urgently sought the latest update from Treasury experts about just how exposed Australia would be in the event of a US downturn more substantial than had so far been imagined. Treasury came back a few days later with its considered advice. The executive minute read: 'The risks to the global economy posed by the US housing market are substantial.' Counterbalanced against this, its analysis also concluded that there were 'significant upside risks to the Australian economy, which would lead to higher growth outcomes than forecast'.

* * *

Like many Aussies, I'm a voracious summer reader. So, being at the beach at this time, I was ploughing through three big books, along with thousands of pages of Treasury briefings in thick white binders that took up a lot of space in the back of the Territory. After my conversation with Paulson, each of these three books felt more prophetic than the next.

Alan Greenspan's memoir, a weighty read about his time in charge of the US Federal Reserve, was defiant in defending his legacy of the so-called 'Greenspan Put'. Ross Fitzgerald's biography of 'Red' Ted Theodore examined the life of this Queenslander who became the federal Treasurer just two days after the US stock market crash of 1929 and was a member of the Scullin Labor government, destroyed by the Great Depression and by the disunity in its ranks that developed during that crisis. Theodore, an early Keynesian, was ultimately forced to stand aside by a political scandal. Then Nicholas Taleb's bestseller The Black Swan explored the impact of truly extreme outlier events — unpredictable phenomena that change the world.

Understanding the gravity of Paulson's call, I gave my deepest thought to Fitzgerald's book and the events of the Great Depression. It was impossible not to. The long queues of the unemployed — people like my own father's brothers, who had been forced off my grandfather's war settlement farm; the community destruction that accompanied this failure of the economy to recover until after World War II. Its cause was the economic orthodoxy of the day. That is, in circumstances of rapidly falling revenue and debt repayment obligations, governments believed they had no alternative than to slash public expenditure. This had caused untold misery in Australia and around the world. These events helped shape the core of my political beliefs.

I had spent the better part of two decades talking about growing prosperity — not as an end in itself, but as a means to spreading opportunity to every postcode in the country. My entire working life had been in preparation for this moment, a chance to fully implement a Labor program to make sure working people got a fair go.

Now the risk was looming ever larger that all our plans could be derailed by a financial crisis of a magnitude that had not yet been fully comprehended. In short, what if Theodore's fate somehow awaited me? What if our nation now confronted a challenge as big as the Great Depression? I knew then, even if the downside risks didn't eventuate, that I wouldn't have the easy cruise my predecessor Costello had had.

On this wet and rainy morning, Paulson's call and this possibility was really when the whistle blew for me.

CHAPTER 2

INFLATION GENIES AND WORST-CASE SCENARIOS


Election eve 2007 was different to any other I had experienced during my time in politics. While Labor was always in the hunt for a win in previous federal elections, there was a genuine mood for change behind us in 2007, and it could be felt on the ground in the suburbs of Australia. Although I was only eighteen when Gough Whitlam swept to power in 1972, I distantly remember a similar popular groundswell.

Late on the Friday before election day, my electorate office in Nundah received a call from the office of Treasury secretary Ken Henry asking what Treasury officials should wear to the first briefing on Sunday, if Labor were successful. By this time, worn out and high on adrenalin after a gruelling election campaign, I yelled out to the staff member who took the call: 'Tell them to wear board shorts and to throw in a couple of Hawaiian shirts. Don't they know we're Queenslanders?'

After spending most of election day on the polling booths in my northern Brisbane electorate of Lilley, I caught a late-afternoon flight to Canberra and the National Tally Room, having agreed to be on Channel Nine's election-night panel. This meant I would miss Labor's victory party, to be held at Lang Park in Brisbane, but was able to celebrate in Canberra with my mates Stephen Conroy, Tanya Plibersek and Steve Smith, who were also doing broadcast commentary there.

While others were devouring Iced VoVos and cups of tea in Brisbane, I savoured the moment with a few beers and some deep-fried party food at the tally room. The congratulatory calls and texts left my phone out of battery (something that I'd never let happen before).

The next morning I woke in my Canberra flat, dusted myself off and headed to the airport to get back to Brisbane for the lunch-time barbeque I was holding in my backyard for local branch members and supporters.

Touching down in Brisbane, I could tell something quite remarkable had happened the night before. Whether it was the thumbs-up I received from one middle-aged bloke or the best wishes I was offered from other travellers, arriving back home at Brisbane airport that day was different to every other time. And I bloody loved the feeling!

I've always been very lucky to have a strong team of dedicated true believers in my electorate, devoting so much of their energy to me and our shared cause. It was not uncommon for my wife Kim and me to have them around for a backyard barbeque at our humble Kedron Queenslander, the house we bought over thirty years ago. But this time, we'd won government and not just the seat. This was special to all of us.

Later that afternoon, I headed over to the Commonwealth Parliament Offices in Brisbane's CBD, a journey of ten kilometres or so, for my first official Treasury briefing. While my suggestion of board shorts and Hawaiian shirts hadn't been taken literally, I could tell, nonetheless, that it was one of the rare times that those assembled public servants had ventured out for such a meeting without their dark suits. They looked for all the world like a bunch of plain clothes secret service agents. But it was a Sunday after all.

It was clear how much they were looking forward to getting back to Canberra, where they'd be able to don their well-pressed suits, not least Department secretary Ken Henry, who was never more comfortable than in double-breasted suits that would have made his former boss Paul Keating proud.

During my previous twelve years in federal parliament, I had received just one briefing from Treasury, and that had been under the watchful gaze of Phil Gaetjens, chief of staff of the then Treasurer, Peter Costello. Sitting now on Level 36 of the Waterfront Place office tower in Brisbane with Ken Henry and his officials, I reflected for a moment on just how satisfying it was to finally have the reins in my hands. After relentlessly slogging it out during the long dark years of opposition, I was now in a position to put into action policies aimed at improving the lives of everyday working Australians.

I was first of all presented with the Red Book, the detailed brief Treasury prepares for an incoming government. Henry and his senior officials took me through Treasury's current summation of the macro-economic outlook, as well as their advice on fiscal strategy, federal — state relations, resource pricing, Reserve Bank independence issues and competition policy, to name just a few issues.

The next day they came back for more hours of briefings, and we turned our attention to supply-side measures to lift economic capacity and productivity. We reviewed anti-inflationary strategies and discussed the domestic agenda of the incoming government — carbon pricing, water reform and federal financial relations, all of which had seldom seen the light of day under my predecessor. The enthusiasm with which these matters were discussed left me with the impression that these experts thought it was a good time to be in the business of public policy.

In retrospect, it now seems extraordinary, and even alarming, that there was little reference in the entire five hundred or so pages of the Red Book that pointed to any risk in the global financial system. Over the previous years, the country had developed healthy and growing surpluses and at this stage Treasury's forecasts were that this pattern would continue in the current economic climate.

* * *

The first weeks of the Rudd government were focused on the enormous body of work we had committed to in Opposition. If we had identified a problem that required our attention, a formal review was quickly established now we were in government. Ross Garnaut's inquiry into climate change grabbed the most attention.

At the time our government was accused of 'hitting the ground reviewing', but that always seemed beside the point to me. Unlike the previous government, we were determined to ensure that we listened attentively to our public service advisers, particularly those from Treasury, even if we didn't always agree with them.

There was real merit in considering weighty questions carefully before taking action. Although our record of persuasively explaining our thinking on the big issues deserves some criticism, we didn't feel (and shouldn't have felt) any shame in taking our policy formation duties seriously, especially after expert advice had been so routinely ignored in the years before we took office.

From a political perspective, there was no issue in my patch that drew more attention than mortgage interest rates. The Reserve Bank still had a big job on its hands subduing inflation. The informed economic community widely acknowledged that these inflationary pressures had been caused by the previous government's massive overspending during the boom years of seemingly endless rising revenues. Ironically, during this period of undisciplined largesse there had been a chronic failure to invest in the productive base of the economy.

Peter Costello had ultimately paid a political cost for his failure to rein in his profligate prime minister. At the 2004 election, the Coalition campaigned hard on keeping interest rates at record lows, yet rates had risen ten times in a row leading up to the 2007 election. This trend repeatedly crippled the Coalition's ability to sustain any political momentum after Kevin took over as Labor leader. Now that we were in office, as Treasurer I would soon enough be held responsible for interest rates rises, even if early on our watch they were still widely attributed to Costello's flawed stewardship.

Dealing with cost-of-living pressures was at the core of our government's policy agenda. With this in mind, an enormous effort was put into explaining to the public the causes and the policy positions required to tackle inflation in the short and long term. From my earliest discussions with the Prime Minister and in our Cabinet deliberations, the focus was on how we were going to use our first Budget to make substantial savings. This would serve as a signal to the country that we meant business in cutting waste, and would support the Reserve Bank (RBA) in containing inflationary pressures.

With all that followed, it is sometimes easy to forget just what significant political issues interest rates and inflation were in the pre-Global Financial Crisis domestic economy. For the better part of three years — from 2005 onwards — I seldom opened my mouth in public without either mentioning interest rates or inflation.

Kevin's first major foray into domestic economics as Prime Minister took place in mid-January 2008, when he delivered a speech in Perth outlining the government's five goals for tackling inflation. This was a very good speech, closely worked on by many people in his office and mine. It was an early example of both our offices working as one, and helped form the basis for what would evolve into an effective policy machine over the coming years.

The speech went to great pains to explain the dangers of spending the windfalls of the mining boom on ongoing expenditure — in other words, in committing the government to expenditure it could easily afford during the good times, but that it would struggle to meet during tougher times. The government would commit itself to a surplus of 1.5 per cent of GDP, thus gazumping every Costello Budget. It would allow no room for pussy-footing as we went in search of budget savings.

The purpose of this speech was to send a signal — not just to the community, but to our own troops (the Cabinet and the Caucus) — indicating the path ahead. It acted as a reminder as the budget process evolved.

The case for an increased surplus was reinforced by the first CPI data we received on our watch, in early 2008. For the 2007 December quarter, the average underlying inflation came in at levels that had not been seen for sixteen years. Not surprisingly, in response to that data, the RBA lifted the cash rate yet again at its February meeting to seven per cent. It was hard to question the logic — it was an appalling legacy to have inherited. It also prompted me to utter a phrase that would return again and again over the months that followed: 'The inflation genie is out of the bottle,' I said. It was colourful line, and subject to parody, but it was meant to make a splash. Interest rates were inevitably going to go up again, and I had to drive home the need to tackle the poisoned chalice our predecessors had handed us — out-of-control inflation.

Quite simply, there was too much pressure building up in the system, and the RBA's determination to do more to meet its inflation target necessitated a government response early in our term in office. We had to make clear the need for a fundamental shift in government priorities — towards more investment in critical infrastructure, so as to lift the productive capacity of our economy. We could not continue to squander the mining boom legacy, as our predecessors had.


(Continues...)

Excerpted from The Good Fight by Wayne Swan. Copyright © 2014 Wayne Swan. Excerpted by permission of Allen & Unwin.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Table of Contents

Contents

Prologue,
PART I THE ECONOMY IN CRISIS: AUSTRALIAN TREASURER 2007–09,
1 No ordinary phone call,
2 Inflation genies and worst-case scenarios,
3 Storm clouds on the horizon,
4 Buckling up for a rough ride,
5 The greatest US government intervention since the Depression,
6 Go early, go hard, go households,
7 Why confidence is everything,
8 The need for overwhelming force,
9 Nation-building jobs plan: getting it through the parliament,
10 Dodging the bullet and avoiding recession,
11 Utegate,
12 Under Opposition fire, even as the economy recovers,
PART II THE EVOLUTION OF A LEADERSHIP CRISIS: KEVIN RUDD'S PRIME MINISTERSHIP, 2007–10,
13 The policy traffic jam,
14 Tax reform,
15 An epic fight to the death,
16 A leadership crisis,
17 The leadership change,
PART III MINORITY GOVERNMENT, BIG LABOR REFORMS: THE CURTAIN FALLS,
18 A short honeymoon and a knife-edge election,
19 Struggling in an economic Bizarro World,
20 Hanging tough,
21 The curtain falls,
PART IV THE GOOD FIGHT GOES ON,
22 Enemies worth having,
23 The good fight,
Epilogue,
Appendix 1 The 0.01 per cent: the rising influence of vested interests in Australia,
Appendix 2 Land of hope and dreams,
Appendix 3 Timeline,
Acknowledgments,

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