Less ideology, more economics

The second structural development was the unprecedented debt accumulated by Western households living beyond their means and plugging the gap with East Asian credit. This savings imbalance supercharged growth in Western economies. Banks, particularly in the US and Britain, were earning so much from writing and repackaging loans that lending discipline suffered, allowing unsecured, high-risk loans to proliferate.

A second lesson, therefore, is the need to rethink bank regulation. Financial deregulation is rightly hailed as a key enabler of Australia's economic success. But deregulation is somewhat misleading: banks still need regulatory oversight. Today's task is not to re-regulate banks but to update regulatory design to address the weaknesses exposed by the crisis.

Lax banking rules explain why Westerners were so eager to borrow but not why Asian citizens were so eager to save. In many developing countries, the only means of insuring an income is to save. If these nations (especially China) could provide social safety nets through pensions and welfare, the need for household savings would diminish, reducing the global credit glut.

A third structural feature of the crisis is the divide that has emerged between shareholders, executives and employees. In the present crisis, shareholders and workers have been the big losers while senior executives are the only clear winners.

Last year, shareholders lost half their portfolios and millions of people lost jobs, yet Wall Street bonuses totalled $US18.4 billion despite banks losing more than $US100 billion.

How can executives be rewarded so generously for performing so badly? This, too, is a gross failure in the market for executive management.

The US administration has responded by recouping American International Group bonuses, while the Australian Government has reduced the golden handshake ceiling.

This highlights the next key lesson: community expectations matter if the crisis is to be overcome politically. The notion that executive failure can be rewarded while victims suffer offends the public. These governments are smart to sense legitimate community unease and respond appropriately.

A fourth underlying cause of the crisis has been governments' willingness to distribute state largesse with no reciprocal sharing of risk and reward, encouraging excessive risk-taking.

In the worst cases, publicly subsidised profits are privatised while losses are borne by taxpayers and employees. This approach may be justified for banks whose failure threatens the entire economy, but not for non-finance companies.

Government must demand reciprocal obligation for corporate welfare as it does for individual welfare.

As policymakers work through these lessons, there is a temptation to blame the crisis on ideological excess and respond with similar ideological fervour. Rudd's The Monthly essay rightly identified the ideological currents at play and their effects on the politics of the crisis. But by focusing on ideology, Rudd does not adequately explore the economics underpinning the politics. His argument would have been far stronger if it had buttressed ideology with real-world economics as a basis for addressing the crisis.

Progressives correctly observe that extreme laissez-faire policies have driven the present malaise, in particular the central assumption that markets are self-correcting. But we should not reject outright the economic liberalisation that has delivered Australia such remarkable prosperity.

Instead, we should address the structural causes of the crisis, recognising the singular role of governments in restoring growth and maintaining stability. It should then be some time before the BBC scriptwriters write their next financial drama.