Rudd successfully challenged Beazley in December 2006 and seriously considered replacing Swan as shadow treasurer with Lindsay Tanner. But for the sake of party unity, Rudd kept Swan and later confirmed that he would appoint him as treasurer in a Labor government.
Swan had a successful 2007 election campaign, performing credibly in his National Press Club debate with Costello and engineering the matching of Costello’s proposed tax cuts, with the exception of those for high-income earners. Labor was victorious in the poll, and Swan was sworn in as federal treasurer on 3 December.
The Global Financial Crisis
The conflagration that was the GFC began before Swan became treasurer. Very few people around the world could have foreseen that the financial problems that were being identified in both the United States and Europe would become the first synchronised global financial contraction since the Depression.
The US housing market experienced a considerable boom, sparked by the low interest rates of 2001, which peaked in 2005–06. As the housing market came off the boil, it slowly became apparent that the lending practices of a number of American financial institutions had been lax, with too many loans given to people who could not afford to keep up the repayments, and who entered ‘negative equity’ as the value of their homes fell below the amounts of their mortgages.
In hindsight, the GFC began in May 2006, when a company called Merit Financial filed for bankruptcy. Merit had specialised in lending to people with poor financial records. In the American parlance, this was known as ‘sub-prime’ lending, a term that would soon become recognisable throughout the world. Merit was an extreme case, but poor lending standards were actually much more widespread in the United States than had previously been understood. Over the next nine months, another twenty-nine mortgage originators went bankrupt in similar fashion. Financial collapses being much more common in the United States than in most other countries, this was hardly noticed either there or elsewhere. More notable was the joint announcement in February 2007 by two US Government–sponsored mortgage providers, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, known respectively as Fannie May and Freddie Mac, that they would no longer purchase sub-prime mortgages. This led to some commentary that the move might presage a broader problem. But the speculation soon disappeared from the financial newspapers as Federal Reserve chairman Ben Bernanke and US Treasury secretary Henry Paulson assured markets that any problems in the mortgage markets had been contained.
The collapse of many more US mortgage originators—by October 2007, 171 mortgage firms had gone broke—led to increasing domestic uncertainty about which US banks could be trusted to be good lenders and which could not. In August 2007, this concern went international as the large French bank BNP Paribas halted trading in asset-backed securities that were closely linked to the US market. The following month, the UK’s most aggressive lender and its fifth-largest mortgage provider, Northern Rock, found it difficult to roll over its debt, as other financial institutions began to doubt that its lending was sustainable. The Bank of England was obliged to step in and provide assistance to ensure Northern Rock maintained its liquidity.
The uncertainty reached Australia in October when well-known non-bank lender RAMS found it impossible to refinance $6 billion of debt in short-term markets, as it had successfully been able to do since its creation. RAMS’ business model was now unsustainable, and it was bought by Westpac in a distressed sale for a relatively puny $140 million. However, none of this played a significant role in Labor’s election win in November 2007, nor was it front-of-mind at the start of the new administration. The main focus for new treasurer Swan in the early months of his tenure was dealing with Treasury advice that inflationary forces in the economy were proving difficult to contain. (As assistant treasurer at the time, I remember receiving a call from Swan over the Christmas break in which his chief concern was how to deal with inflation.)
In January 2008, Rudd gave a speech in Perth that highlighted the fight against inflation as the key economic task for the government. He committed the government to bringing down surpluses of 1.5 per cent of GDP, healthier surpluses than each of those Costello had brought down. Accordingly, that year’s Budget had the fight against inflation as its main task, though with a surplus of just under 2 per cent of GDP targeted. Savings including the means-testing of the Baby Bonus, tighter means-testing of the Family Tax Benefit, an increase in the tax on alcopops (drinks in which soft drink is mixed with alcohol) and an increase in the Luxury Car Tax.
In the weeks following the May Budget, however, the global economy experienced shockwaves. The US housing market continued to experience a decline in prices that saw an increasing number of home owners become distressed and more pressure come to bear on mortgage providers. Fannie May and Freddie Mac were the focus of concerns. The share prices of both companies had fallen by more than the stock market average during the year. In September it was announced they would be placed into ‘conservatorship’, an American term that
