Luxembourg Finance Minister Jean-Claude Juncker provided a pretty good assessment of the events of the past few days when hesaid: "The least we can say is that we live in interesting times. That's about the only positive thing I can say." How positive one should be about living in "interesting times" is debatable. Many people would regard the concept as a curse.
Anyone who has seen the value of their share investments or their superannuation shredded is unlikely to regard the experience as merely interesting. And if the contagion spreads into the "real economy", those whose jobs are at risk will have more than a passing interest in their prospects for continued employment.
Kevin Rudd and Wayne Swan will have watched the turmoil with interest. The hope that the collapse in equities prices won't translate into a recession is one of their few consolations. Both have spent the week reassuring the nation about the strength of the Australian economy. The data indicates they're right, of course. The chances of Australia's falling into a recession are low. But they, and all market watchers, know the panic that engulfed the markets on Tuesday is not neccessarily being driven by the data. It is being driven by confidence, or rather lack of confidence, about the world's growth prospects.
If general pessimism spreads to Australia, our Prime Minister and Treasurer will be in for a very interesting time indeed. Things used to be different. Politicians could afford to take a slightly more relaxed attitude to stockmarket crashes and potential recessions. These events were perceived to affect a relatively small proportion of the population.
In 1960, the Menzies government induced a credit squeeze in an attempt to curb speculative economic activity. One measure was a directive to the banks to reduce lending for private investment in shares or property. The Liberal Party was not too concerned about the electoral consequences of the squeeze. It comforted itself with the knowledge that the only groups complaining were the press and business. It even imagined that a mild recession was a political bonus.
Party officials believed "middle-class electors generally approved the government's efforts to quell the boom and to clip the wings of speculators". Those officials got it very wrong. At the federal election the following year, Menzies came within one seat of losing office.
More than 20 years later, during the "recession we had to have", Paul Keating boasted that 20 per cent interest rates had "de-spivved" Australia. In Memories of a Bleeding Heart, Keating's speechwriter Don Watson recalled that it was more than "spivs" who suffered during the recession. Watson's wife had to close her publishing business.
In 2008, the situation has changed. More than half of all adult Australians directly or indirectly own shares, for example, so theactions of the Reserve Bank and the US Federal Reserve are of concern to more than speculators and spivs. The audience for financial information is bigger than ever, and the scrutiny of governments and their actions is enormous.
After the events of this week, a possible reaction from Rudd and Swan would be to go slow or delay reform proposals in areas such as federalism, infrastructure, or health and education. They now have other things to worry about. Such an approach is understandable, but it would be wrong.
An uncertain economic future increases, rather than reduces, the imperative for reform. The history of policy reform in this country is that it usually takes a crisis to provoke government to action. If Australia does escape a recession it will be only because of the reforms of the past two decades.
Fixing federalism won't immediately translate into higher share prices, but in the long term it will help to make business more competitive. The more competitive a businesss, the higher its profits. And as the profitability of a business rises, its value to its owners rises.
If we really are facing a global meltdown, and the gravest economic risk of our generation -- as some would have us believe -- it will be difficult to get policymakers to concentrate on the mundane matters of domestic reform. But there's no alternative.
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