Mrs Bronwyn Bishop (Mackellar, Liberal Party) Share this | Hansard source

In speaking on Appropriation Bill (No. 3) 2008-2009 and Appropriation Bill (No. 4) 2008-2009 I want to range fairly wide and talk about commentary we currently have from the Prime Minister and his now famous, or infamous, essay entitled ‘The global financial crisis’, in which he said:

…barely 30 years since the triumph of neo-liberalism—that particular brand of free-market fundamentalism, extreme capitalism and excessive greed which became the economic orthodoxy of our time.

That could not be a statement which is further from the truth. There has been a great deal of theorising and fantasy making by our Prime Minister in trying to explain why his left-wing ideology is about to become the orthodoxy. He likes to say that the market failed, that capitalism failed and that there was too little regulation and therefore it collapsed. Nothing could be further from the truth. The case is in fact the direct opposite. There was too much regulation and there was bad centralised government policy, and the combination of all those things meant that the market did not fail; it was excluded.

I would like to talk now about an act that had its origins in the United States in 1977 under Jimmy Carter called the Community Reinvestment Act 1977. This was an act that was passed which was designed to force banks to lend into areas which were known as red-lined areas, where the banks had decided that there were certain pieces of geography in their territory where repayments would be difficult to get and therefore they would not lend into those areas. This act was designed to make the banks lend into those areas. It was reasonably benign in the early years. You could put an ad in the paper to say that loans were available and you could satisfy the CRA requirements and go about your banking business. In those days, of course, the American banking system was different from ours. There was no real interstate banking; they were very much chartered banks and they were limited to geographic areas. But this geographic concept has become quite significant in the problem which has resulted in the United States and which has now spread throughout the world.

In 1994 there was the beginning of the liberalisation of banking in the United States whereby they could have interstate banking and whereby they could open further branches and so on. But in 1995 Clinton introduced new regulations under the Community Reinvestment Act which required not some benign advertisement or involvement with the community but in fact an enforcement and a requirement for a counting of the number of loans given to low-income families and minority groups. What this meant was that the reserve bank was charged with the function of auditing banks, and if they did not get a high CRA rating then mergers were not permitted and interstate banking, which had just been able to come about from the 1994 reforms, was not permitted. In addition to this, the Clinton policy was to fund left-wing political activist groups to be the enforcers, making banks lend in accordance with this policy and these regulations. The net result was that it was estimated that by about the year 2005 $9.5 billion had been paid to these left-wing activist groups to force banks to comply with the CRA requirements. But they did more than that. They would make a pre-emptive strike. They would say to a bank: ‘If you want to get an approval or if you want to get a good CRA rating, then perhaps you’d better give the money to us. Give us the right to underwrite these loans and then you’ll get a CRA approval rating and you will be able to open new branches and have interstate banking or indeed be able to merge.’

A lot of this material was put into the public arena in the year 2000 by a man called Howard Husock from the Manhattan Institute. His background is that he is vice-president, policy research, and director of the Manhattan Institute’s Social Entrepreneurship Initiative. He was formerly the director of case studies in public policy and management at Harvard University’s Kennedy School of Government. He is a prolific writer on housing and urban policy issues. He has become well known for the articles that he has written and for drawing attention to the impact that bad policy has had in bringing about this crisis. He wrote in 2008 that the CRA bad mortgages on their own could not have created it. He said that through them together with other bad policies of government ‘we found ourselves in this mess’.

Not only did you have these left-wing groups like ACORN saying to a bank, ‘Well, you’d better give us the money or we won’t recommend your CRA rating; some of these organisations were also particularly skilled at disrupting meetings. Indeed one of these organisations required that anyone who got a loan through them had to perform five functions for that organisation a year. One of those included being prepared to make telephone calls or to disrupt meetings and, in particular, to register for a political party. Usually that would be the Democratic Party. An example of this type of extortion, if you want to call it that, is that by the year 2000 ACORN had a $760 million agreement with the Bank of New York, the Boston based Neighbourhood Assistance Corporation of America had a $3 billion agreement with the Bank of America and a coalition of groups headed by New Jersey Citizens Action had a five-year agreement for $13 billion with the First Union Corporation. Similar deals operated in almost every major US city and, as Tom Callahan, the executive director of the Massachusetts Affordable Housing Alliance, which had $220 million in bank mortgage money to parcel out, observed, ‘CRA is the backbone of everything we do.’

The really alarming thing is that these organisations had the power, once they had the money, to have total underwriting authority and to place those loans with people who they chose to place them with—and this had nothing to do with their ability to repay. Then it got worse. I again quote Mr Husock:

… in 1992, the Department of Housing and Urban Development pushed Fannie and Freddie to buy loans based on criteria other than creditworthiness. These “affordable housing goals and subgoals”—authorized, ironically, by the Federal Housing Enterprises Financial Safety and Soundness Act—became more demanding over time and, by 2005, required that Fannie and Freddie strive to buy 45 percent of all loans from those of low and moderate income, including 32 percent from people in central cities and other underserved areas and 22 percent from “very low income families or families living in low-income neighborhoods.” As one former Fannie Mae official puts it: “Both HUD and many advocates in the early 2000s were anxious for the GSEs to extend credit to borrowers with blemished credit in ways that were responsible.”

These loans were then parcelled up in what was known as securitisation. Alan Greenspan, in his evidence to the US Senate Committee of Banking, Housing and Urban Affairs in February 2004, said:

Although the risk that a home mortgage borrower may default is small for any individual mortgage, risks can be substantial for a financial institution holding a large volume of mortgages for homes concentrated in one area or a few areas of the country.

This of course was exactly what the CRA legislation was designed to do. Mr Greenspan went on to say:

The possible consequences of such concentration of risk were vividly illustrated by the events of the 1980s, when oil prices fell and the subsequent economic distress led to numerous mortgage defaults in Texas and surrounding states. The secondary markets pioneered by Fannie and Freddie permit mortgage lenders to diversify these risks geographically and thus to extend more safely a greater amount of residential mortgage credit than might otherwise be prudent.

What that meant was that, simply, debt was taken from all over the country, bundled up into mortgage backed securities and then sold. They were sold to Freddie Mac and Fannie Mae. But there was no account taken of the creditworthiness of these bundles, merely that they came from all sorts of geographic areas which, because of the nature of banking in the United States originally, was based on banks being chartered to an area or serving a very specific geographic area. Greenspan then, of course, in 2008, said that he was bewildered; he did not understand why it all went wrong. Then he admitted that it did go wrong.

Kevin Rudd, in his now infamous essay, said that those people who believe that the market acts and acts well talk about something called ‘moral hazard’, which he pooh-poohs and says should not be discussed. But, in reality, Freddie Mac and Fannie Mae were evidence of that sort of moral hazard because, although it was specifically said that there was no government guarantee for these institutions, the public believed that because they were government instrumentalities they would never be allowed to fail and therefore they would take a higher risk for a lower return. It was because they thought there was that implicit understanding. Of course, we now know that there is not and that both of those institutions have failed. When other pressures were put on them because of liquidity difficulties with those two institutions, what happened was that the banks then started to sell those mortgage backed securities which had been bundled up with that toxic component to each other. And ultimately they ended up in some of our local councils here in Australia, through Lehman Brothers.

So the long and the short of it is: in all this discussion that we are having, we have to get real. Kevin Rudd is wrong. The market did not fail. Capitalism did not fail. The market was excluded; it was not allowed to act. In fact, Greenspan, in part of his testimony, virtually admitted that. He said that these policies really did not allow the market to act in the way it normally would. So what we have to be careful about in this situation that we find ourselves in is that we do not go down the path of the state knowing best, that we do not go down the path this government has chosen—racking up additional debt and throwing money at the problem without even really understanding what the problem is.

There is no doubt about it. We are caught up in the whole global financial crisis, as it is now known. We certainly are. But let us understand what failed. It was bad government policy and too much regulation to enforce that bad government policy. And that is what we are getting now: bad government policy. Forty-two billion dollars is going to be expended—on what? On building school halls and libraries, which is the job of state governments and which they should have been doing already.

Where is the grand vision of some form of infrastructure which the people understand—like bringing water from Northern Queensland, where the floods are, down to the parched south where our food bowl needs to be. And there are people who have worked it out. There are people who can in fact deliver a project like that for somewhere between $6 billion and $11 billion, as opposed to the Penny Wong fantasy of buying back water from farmers, who are asking, when their land and their living is destroyed, that they get payments that will amount to between $6 billion and $12 billion. Where is the vision of the government? If the answer to the problem is pink batts, it must have been a hell of a question!

If we are not to simply ignore wisdom and are to learn from what has happened in the past, we must understand that if we are to invest public money there has got to be some infrastructure and some policies put in place which will allow productivity in the future, so that we see gains in the growth of our economy. And we need to hear a few other words—we need to have words like ‘work’, ‘save’, and ‘invest’ come back into proper usage, as popular concepts of the way we need to go.

We have heard people on our side of politics say very wisely that what this government is doing is going to plunge us right back into debt. When we came into office in 1996 they had left a debt of $96 billion. And we had to repay that. Doing so saved us an enormous amount of money in interest repayments. It also freed up capital which the government was otherwise absorbing so that the private sector could have access to it. This government has been asked in question time and at other times: where does this government intend to borrow the money from that it is going to need to borrow in order to finance the money it has given away?

We have just passed legislation that will enable this government to borrow up to $200 billion. When they start borrowing that money, where are they going to borrow it from? Are they going to borrow it domestically? In that case, they will be in competition for those funds with the private sector—including banks, who then on-lend to small business and to homebuyers. Are they going to try and go overseas to borrow it? Who are they going to borrow it from? The Chinese. The five biggest banks in the world today are all Chinese. Yet, before this crisis, the biggest bank in the world was Citibank. The capitalisation value of Citibank today is the same as that of St George Bank prior to the Westpac takeover. From where are we going to borrow the money internationally? From the Chinese. Does that put us in a vulnerable position with regard to any Chinese offer to buy our corporations, which are part of our national assets? How is that conflict of interest going to be dealt with by the incumbent government?

Have we been given any indication of where the money is going to be borrowed from? No. Will the government answer the question of where they are going to borrow the money from? No. The answer has been no every time a package has come forward, whether it was the $10.4 billion before Christmas, the $42 billion being promised now, the $22 billion for the infrastructure fund or, indeed, the money that is to be handed out to the state governments—rewarding them for doing I am not quite sure what. What are the criteria for that? Is that to bail out the state governments? Is the federal government going to borrow to bail out state governments who have failed miserably? We are entitled to know the answers to these questions. I simply repeat: the market has not failed; the market was excluded. The answer is not more bad public policy and regulation. The answer is enabling the principles of free enterprise to really work so that jobs can be created for people who, in turn, can save. This will then allow them to invest. That is the way forward, not the centralised socialist method of collectivism.

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