I recently attended a function where Julie Bishop observed that one of the ministers she shadows did not know the difference between government debt and government spending.  This was based on the person in question responding to a question about government spending in the financial sector by observing that the government had issued bonds.  I’m still trying to get my head around how this person has not been moved to another portfolio – as an Arts graduate I know that we’d be more suited to ministries like Foreign Affairs or even Deputy Leader.  Yet still, Rudd persists in having Swann as his Treasurer.

Actually just to show how open I am to giving the guy a chance, I will state for the record that I am paying to hear him speak – at FINSIA.  I was initially worried that I would miss out on registration for this function as it might fill up quickly, however as it turns out I didn’t need to worry.  There’s still two weeks until registrations close.  I’m sure people will turn up…

I am wondering, however, what he will have to say that will impress a bunch of finance professionals as that is something he has failed to do so far (I’m also a Finance graduate for those not in the know).  Even the journalists in at the Australian have commented that he gives the impression that he is madly swotting through Economics for Dummies in the back room before he delivers speeches.

But for all that we could (and do) say about Swann, the one thing I don’t get is how he thinks that lowering the official cash rate will be passed on or even help at the moment.  The reason for this is simple.  Due to problems faced by banks in the US, Europe and the UK, there is a liquidity crisis.  That means that there is not a lot of cash available for borrowing and lending in the market.  When there is not a lot of something, the price goes up.  So the cost of borrowing and lending on the international market will go up – if you can convince someone to take your counterpoint in the contract, which is getting harder – we also see this with the US Dollar.  Even though the US economy could be diplomatically described as stuffed at present, their dollar is going up against ours.  This again stems from the fact that every one is holding on to what cash they have and not exchanging or lending it.  The way Australian banks get money to give to people in loans is through this international money market.  The rate that banks get is passed on to consumers with an added margin (so they can make some money, their share price goes up and my super fund looks healthy – not that anyone’s super looks very good at the moment).  Even though the official rate may be set by the RBA, there is also a margin added on when the Australian banks borrow and lend based on their credit rating and various other factors.  As these credit ratings have changed due to the International economic turmoil, the official rates for borrowing and lending could quite conceivably go down, but the rate at which money is exchanged is not.  If the banks can’t borrow at a cheaper rate to cover what they have lent to customers, then they can not pass on a cut in the official cash rate as the impact of the rate cut is zero.

An aside for those who are wondering why the rate is not fixed at the start of the loan for the whole 20 or 30 years.  Money Market borrowing and lending and the execution of interest rate derivatives is done in large quantities, but for short periods – from a day to a couple of months being most usual to a maximum of 3-5 years.  Also people working in the money markets tend not to like to borrow or lend for long periods as the more time elapses, the more one party may loose out (ie they could get a better rate elsewhere) and the risk that they will not pay or close the contract early increases.

So all of this seems fairly straight forward to me.  And I’ve only worked at a low level in a bank, finished a finance degree and done some consulting work for a few different corporate treasuries.  Which does put me a bit ahead of most other Arts graduates*, but is should not put me ahead of the Federal Treasurer.  I will also say that I am not knocking Swann just because he’s a member of a party I don’t support (but that is a good reason), if our current government wants to be seen as having any credibility at all, it does need to put good and appropriate people into ministry positions.  Just doing a quick survey of the biographies of the current front bench – the Ministers Rudd have chosen overwhelmingly hold Arts and Law degrees (in most cases both, including, to my surprise, Peter Garrett) however Joel Fitzgibbon holds a Grad Cert in Business Administration, not quite the full MBA, but a start, Jenny Macklin has a Bachelor in Commerce, which is really just a fancy way to say a qualified accountant, but again a solid financial background, and Anthony Albanese, Stephen Conroy and Martin Furguson all hold Bachelors of Economics.  Obviously ministerial positions are not being chosen based on experience or qualifications.  We could do better, we could even have someone who knows the difference between debt and spending.

*I will say that I went to UQ for my Arts Degree, and the university offered 52 different majors (only 49 now) including Mathematics (which I studied) and Economics.  So it is possible that it is a suitable qualification for an economist.