Patricia Dasic
A safe investment haven is not the only benefit of government debt. Another benefit was the investment of that money in long-term infrastructure projects. But again, the economic boffins and financial market engineers decreed, rubbing their hands with glee as the dollar signs spun in their eyeballs, that such matters were better left to the private sector or, at the very least, public/private partnerships.
If there is anything positive in the current financial market meltdown it has at least exploded some ill-founded but widely accepted economic theories. Top of the list is the recent fixation on government debt being an instrument of the devil to be avoided at all costs.
Just ask the hapless victims trapped in plummeting superannuation funds whether, in these circumstances, they would rather have their money in rock-solid government bonds (i.e. government debt) or teetering-on-the-brink private sector financially engineered products such as mortgage-backed securities and my point becomes obvious. Who would choose to have their retirement nest egg in Fannie Maes, Freddie Macs or the Australian equivalent of these securities?
It was an unfortunate coincidence that about the same time as superannuation became compulsory governments were persuaded by the economic boffins and financial market gurus funnily enough, some of whom were the very same people who were flogging mortgage-backed securities that government debt is contrary to sound economic management. Gullible governments of all persuasions fell for this line with the consequence that they stopped borrowing money, i.e., issuing government bonds, and so forced superannuation fund managers into less secure forms of investment.
There was a time when it was compulsory for superannuation fund trustees to invest a sizeable proportion of their portfolios in government or semi-government securities. This was considered prudent and to be in breach of this rule was a serious matter. Now, not only has the government all but withdrawn from the bond market, our semi-government agencies such as the electricity commissions have been privatised thereby choking off another source of government-guaranteed investment choices. Poor Prudence is now an old fashioned, unloved outcast, her place taken by fancier floozies such as Fannie and Freddie.
A safe investment haven is not the only benefit of government debt. Another benefit was the investment of that money in long-term infrastructure projects. But again, the economic boffins and financial market engineers decreed, rubbing their hands with glee as the dollar signs spun in their eyeballs, that such matters were better left to the private sector or, at the very least, public/private partnerships.
The result is that the nation’s infrastructure is now largely in a state of terminal decay and, for what remains, we are exposed to the user-pays principle. Large amounts of money that would otherwise have been used for the public benefit have disappeared into the black hole called consultancy fees. Just how much we will never know. And that is aside from the fact that no private company can borrow the necessary funds to build major projects as cheaply as governments can because the price of borrowing is directly related to the risk of the borrower defaulting on the loan. Because it is riskier to lend to private companies or consortiums than to lend to the government by buying its bonds the public ends up having to pay more for essential services such as power or to use toll roads.
‘Wisdom born of pain’ are words from an old song. It is time governments were wise enough to send the economists and financial engineers with their vested interests packing with a flea in their ear and reconsider the wisdom of government borrowing and its broader implications for our wellbeing.
PS: The ratings agencies such as Moodys and Standard & Poors have egg all over their faces after giving mortgage-backed securities the AAA rating that is usually the preserve of sovereign debt. I haven’t noticed anyone having a go at them yet. They clearly cannot be trusted to know what they are doing.
Patricia Dasic
