The Joe Walker Podcast - When The Sky Fell In - Kevin Rudd

Episode Date: October 25, 2018

Joe speaks with the 26th Prime Minister of Australia, Kevin Rudd. Kevin led Australia from December 2007 to...See omnystudio.com/listener for privacy information.

From Swagman Media, this is the Jolly Swagman Podcast. Here are your hosts, Angus and Joe. Hello there, ladies and gentlemen, and welcome back to the Jolly Swagman Podcast. My name is Joe Walker, one of your co-hosts, and it has been some time. It's great to be back with you. I've been doing a deep, deep, deep, deep, deep, deep dive into the Australian housing market. I'll be sharing some research with you on that very soon. And my co-host and friend Angus Isles is in the middle of a very exciting move from Australia to another country. And I'm sure we'll update you on that

very soon. So it has been a while, but we have some excellent episodes to release and share with you. The first of those is this one right here. And my guest is Kevin Rudd, who was the Prime Minister of Australia from 2008 to 2010, and then again in 2013. He's most notable, perhaps, for leading Australia through the global financial crisis as we call it down under because thanks to a number of factors including our floating currency the Chinese demand for our resources and the rapid and strong fiscal stimulus package introduced by the Australian government both at the end of 2008 and the beginning of 2009, Australia almost uniquely avoided recession entirely.

So we continued growing through the global recession. I asked Kevin about what it was like making the call to announce those stimulus packages, about the anxiety at the time in the highest levels of government. And I asked him especially about the first homeowner's boost, which was a particular piece of the stimulus package, which defibrillated the Australian housing market, but for which we might be paying for the consequences further down the track. We delve into philosophy and economics. We talk about the Gillard coup of 2010, when Rudd was overthrown as Prime Minister

and whether he's forgiven Julia. And we also talk about China and whether he sees war between China and the US as inevitable. I hope you enjoyed this conversation as much as I did. So without much further ado, please enjoy this chat with Kevin Rudd. Kevin Rudd, thanks for joining me. Good to be with you. I'm just munching my ice favo here. No worries. You're welcome. It's good. It's tasty and it's nutritious. Do you listen to many podcasts? I do. Yeah. Like the United States where they're probably even more popular than they are here. But they're cutting for a huge demand in the media marketplace. People are tired of trivia, a little tired of titillation, and they have a deep feeling in their guts that there's something going wrong with the world and our country. And they want to have a seasoned,

detailed conversation about what those challenges are, and most critically, what can credibly be done about them in substance. So I'm really happy to meet you and speak with you today. I want to talk to you about the financial crisis, Australian politics, and China. Those are the three topics I want to touch on in the time that we have. But before we get started, I wanted to ask you about speech writing. So I did a little bit of speech writing for Andrew Lee while I was at ANU. And the first two guests we had on the podcast were Bob Lehman, who was Al Gore's speech writer, and Don Watson. Don was a great speech writer. He was, yeah. I love his lyrical

style. I thought it was interesting. So a couple of days ago, Scott Morrison delivered a national apology for the victims of institutional sexual abuse. And I always think the thing that makes great speeches great is that they're about important things first and foremost, but I'm always fascinated at the same time by the power of words to enhance the impact of a speech. And I feel like, I think you're a very instinctive orator. And although the sorry speech you gave to Indigenous Australians, especially the Stolen Generations, and the apology that Scott Morrison gave on Monday

were both about important things, I just wanted to kind of highlight a subtle difference I saw in the use of rhetoric. So when Scott Morrison reached his crescendo, he said, and again today we say sorry to the children we failed, sorry to the parents whose trust was betrayed and who have struggled to pick up the pieces, sorry to the whistleblowers who we did not listen to, sorry, and it carries on. In your speech, in your crescendo, you said, for the pain, suffering, and hurt of these stolen generations,

their descendants and for their families left behind, we say sorry. To the mothers and the fathers, the brothers and the sisters, for the breaking up of families and communities, we say sorry. And for the indignity and degradation thus inflicted on a proud people and a proud culture, we say sorry. I thought that was interesting because so both speeches use what's called epistrophe, which is the Latin terminology for repetition at the end of the sentence.

But whereas Scott Morrison just uses the word sorry, you use we say sorry. And I really liked that because I thought that sorry, in contrast to the suffering that authorities have inflicted on people, feels a little bit inadequate. It's a bit like, sorry. But also it adds a lovely cadence when you say, we say sorry. And there's that sort of active verb, we say, like we're doing something to make reparations. And I wanted to ask you, after that lengthy introduction and recitation, whether you could tell us if you have a theory on speech writing,

firstly, and secondly, any technical tips. Well, I think the first part of what you said is the most critical. That is, for a speech to be worthwhile, it has to be about something that is real. Too much political speech making is about bullshit. it. It's got to deal with the real state of challenge and opportunity. It has to deal with what you're going to do about those challenges or in seizing those opportunities. And then lifting people emotionally or spiritually to that plane so that they can then engage. It is both a rational and a cerebral process, but it's also a spiritual and a poetic process as well. There's a reason for that.

It's not manipulative. It's just that we're all built that way. We're both rational and emotional human beings simultaneously. Anyone who says we're one to the exclusion of the other is just nuts. I think the other thing I'd say about speechmaking or effective speechmaking is that it has to be credibly in your own voice. Anyone who seeks to imitate the voice of someone else will be spotted for a fraud at a thousand paces. It's got to be your voice. And what I think you see through the cadence of the apology,

people who have known me over many years would say, yep, that's him and that's what he says and that's how he says it. And it's therefore got to be naturally in your style, which brings me to my final point. I've never really used speechwriters. I've had a few people who have done a bit at the sides of what I've done in public life. But anything that's important like the apology, I write out by hand or I type out with these two very bent index fingers on my iPad because it's got to authentically be me and using what I think is the natural sense of cadence and of rhythm and, where necessary, rhyme and alliteration, which comes naturally to me. If you subcontract that, you lose part of your soul on the way through.

I think you were still writing that speech, the sorry speech, the morning of the delivery, right? Yeah, yeah. Albo came rolling into the office for the apology, which was due at nine. We had a few things going wrong those days, including an attempted coup in East Timor. So I'd been distracted. Apart from the fact I had writer's block for so long

trying to write the apology. And I'd only really done it the previous weekend and still hadn't finished it as of that morning. So Albo walked in and expletive-deletive, God, you leave these things late, mate. And I said, no, I was just trying to get the conclusion right. And this was at 20 to 9 for a 9 o'clock start. Place was full. I've already welcomed all the Indigenous leaders into the Parliament building by that stage. But it had to be right. And sometimes you sit down with a

terrifyingly blank piece of paper and you just stare at it because nothing happens, known in the writing business as the dry times. And I've had a few of those. And then suddenly it opens up. For me, the credible thing also about and the critical thing about the apology was to sit down with Nana Fiji, someone who had been a member of the Stolen Generations, and something which politicians really do, which is just shut up and just listen to somebody explain in their voice what happened to them.

Because part of speechmaking is to enter into the emotional world of somebody else, not just your own emotional world. So we're speaking 10 years since the global financial crisis and 10 years and... This is known as a change of pace. 10 years and one week, in fact, I think, to the date that you announced the first $10.4 billion stimulus package. Weekend, I think, of the 14th and 15th of October, if I remember.

That's it, yeah. So Friday was the 10th, weekend 11th and 12th, and you announced it on the 14th, which must have been the Tuesday then. Something like that, yeah. It was several layers of scar tissue again. I still exhibit the secular stigmata from that time. Did you grow up as a Catholic? I did, actually.

I went to Catholic school. Yeah, it's stigmata, right? I do, yeah. Those weeping wounds? Yeah, the weeping wounds. I had the secular version of those. I was following a great Twitter account recently. It was live tweets in real time following the financial crisis

10 years before. Wow. So I was following the collapse of Lehman Brothers in real time on the 15th of September and it was really interesting, kind of chilling. At the time, I mean, I was in year 11 at high school. I didn't quite grasp the significance of it. Only now do I in hindsight.

But I want to ask you what it was like, but let me ask a specific question to make it easier for you. We deal with complex questions too. So on October the 10th, this was the Friday, you were anticipating a run on the banks the following Monday. And the key reason for that, or one of the key problems for Australia, was the refinancing of the Australian banks. Can you just tell us what that means? on a series of interbank lending arrangements with other Australian banks, but predominantly international banks. And so the problem that we faced

was that the normal operations of the financial market, which was banks lending to each other to cover liquidity in the markets, was suddenly being interrupted, in particular from offshore. And there's a reason for that. And that is once the international banks, those in New York primarily, but elsewhere, feared the state of their own balance sheets in the light of the unfolding financial crisis in the United States and questions being asked about mortgage-backed securities,

those guys in the United States look after themselves first. They repair their own balance sheets or they defend them. That means that the normal lines of credit they extend to the rest of the banking system, or least of all those abroad and least of all of those in Australia, become the first casualties. As a result, the lines of international credit began rapidly to dry up. And of course, stand behind the normal operations of Bank X, Westpac, seeking its international lines of credit from the major banks of New York.

It worked. But it was a near-run thing, as Wellington said after Waterloo. The plumbing of the banking system is very esoteric. Not many people understand that banks actually share liquidity with each other domestically, but also they need to borrow money usually from the US. Yeah. It's true. It's a complex market.

For most of us, it's invisible because it's just how markets operate and normally they function perfectly well. But I'd begun having these conversations with Ken Henry, the then Secretary of the Treasury, quite some months before about worst-case scenario planning, both for the banks, for our ultimate balance of payments in Australia, and beyond that, the implications of any genuine global financial crisis. So we had, as a government, worked up a number of contingency plans. And as of about the middle of this year, we're talking about 2008,

we had developed a memorandum for addressing the challenges of Australian financial institutions with distressed assets. I think that was the euphemism we used for it at the time. And so we had a fair bit of the policy preparatory work done. Many other economies and financial systems around the world were just caught with their trousers down. You were a very financially illiterate prime minister for someone who never had a formal education in economics or finance.

But I suppose Paul Keating's a good example of not needing that. But I remember you were quizzing Ken Henry from when you first took office about things like the capital account and the current account and what the likely scenarios were for Australia. What do those things mean? Why were they important? Well, what I was seeking to explore with Ken at the time was worst-case scenario planning, which has given our country has historically been a capital importer because we've run a series of current account deficits over a long period of time. We import a lot of – we've traditionally run trade deficits where they have to be financed from somewhere, usually on the basis of us being a net importer of capital through foreign investment into the Australian economy.

And that as a result, all these things then ultimately balance out, except that if the cash ceases to flow, then you have a problem at mill. We had a problem at Mill. So what I was seeking to explore with Ken as of about February of 2008 is what happens if the normal operation of these capital markets stops or slows, which goes to a question of, well, to what extent do we have sufficient reserves to handle that kind of crisis? Answer, limited. If you look at the actual state of Australia's foreign reserves, and then therefore what happens after that? Well, if you can't ultimately meet your payments to the rest of the international economy, you have what's classically

described as a balance of payments crisis. We've seen that unfold in other economies around the world, and not all of them developing economies. It happened to the British in the 1970s. Then you have interventions by the international financial institutions like the IMF. Of course, if you have a simultaneous crisis facing all financial systems around the world, that's plainly beyond the capacity of the IMF to deal with. So we had to think through our worst-case scenario planning for what we would do. Had the sovereign guarantees that I signed off on on that fateful weekend in November not worked,

then I would have been held accountable in history as the Prime Minister who signed off literally a trillion dollars plus worth of financial guarantees to a bunch of private banks only to see it all blow up. It's a very focusing moment when you do that. What was the feeling like in the room at the time? It was one of deep anxiety because we knew what we were facing. It was one of analytical clarity because I wanted us above all to spend time getting the analysis right, both of what was happening in financial markets on day one of that critical weekend when we took the decisions on the guarantees,

both for interbank lending, but equally critically, for everyone's savings deposits as well. Combined guarantees worth a cool two and a half trillion. Signed, Kevin Rudd, graduate Nambour High School. By the way, year 12 economics. Did you have any hesitation about doing it? No, because there's never anything perfect in public policy. Usually it's the question of which is the least bad of these options or on balance which is the better of several options put before you. But intellectually we've been working to this point for some time

in the midst of everything else you happen to be doing in government at this time. So it was the right course of action, but it still ultimately hangs on me. I'm the Prime Minister, so take out your fountain pen and sign on the bottom line, which is what I did. But it worked. We had no run on the Australian banks.

No one lost their savings deposits. Our banks did all their interbank lending for the subsequent, I think, three months using the guarantee that we provided. And then by the time we got to month four, month five, it was partially used. By about six months out, markets had begun to stabilize, particularly after the March 2009 London summit of the G20. Hairy months. Indeed. So the Australian economy only contracted by – negative growth was only 0.1% in that December quarter, the end of 2008.

That really pissed me off. A mild technical recession, but it sort of marred your scorecard. Now it was one quarter. They've been past the technical definition of a recession because it was a single quarter. It's very cheeky of the economy. And I sort of want to fast forward now to that summer of 08-09 when you penned the famous monthly essay.

I was rereading it again last week and I was thinking to myself how deeply charismatic it is for a political leader to pen a 10,000 word essay because what it sort of says is here's my thinking on this issue in its completeness and entirety and here's every step of reasoning in my argument and it's there for all to to see and I'm not hiding you know there's no there's no sort of 280 charactercharacter tweets or anything like that. There was a really interesting point in the essay which I just want to ask you about in particular, which was your discussion of the efficient markets hypothesis.

Catalexy. And what its implication... Hayek and madness. That's right, yeah. That term was perhaps not coined but made famous by Eugene Farmer from the University of Chicago in a famous paper in 1969 does proceed from Hayek through the Chicago School and through efficient markets hypothesis, as you've just described. But it pays no account whatsoever to what Keynes at an earlier stage had correctly identified as the animal spirits. And anyone who thinks that markets under these sorts of circumstances act as perfect rational barometers of rational self-interest has got rocks in their head or they're smoking something. So I came to that conclusion about efficient markets theory

as someone who intrinsically believes in markets. I'm a disciple of Adam Smith, both volumes, Theory of Moral Sentiments plus The Wealth of Nations and Smith's elegant Theory of Price, which frankly is the revolution in modern economics over the last 200 years. But Smith would describe himself and has been described legitimately since

as a political economist. He would see himself actually as a moral theologian at the time. And the bottom line is it ain't purely a function of markets. There is a role for the public good in the regulation of markets. But Hayek, who was Keynes' great rival, basically in the economic theoretical debates of most of the first half of the 20th century, because of his own experiences in Eastern Europe

and road to serfdom and everything else, had such an instinctive emotional reaction against any control by the state that it pushed him in the reverse direction. And if you go to the Reductio ad absurdum infinitum of Hayek's thesis and you ask, well, why does this ultimately work? And he's reduced to this primitive argument of this ancient game of chance deployed, I think, by the ancient Greeks called catalaxy. And that formed his crucible of logical argument in defence of efficient markets. Well, his concept of efficient unregulated markets.

I think that ultimately it rested, therefore, in a form of his own primitive deism. There was some ultimate, ultimate invisible hand holding all this together. Whereas Smith, I think, had a much more sober view of where markets were located within the wider responsibilities of society in the state. As Joseph Stiglitz said, the reason the invisible hand seems invisible is because it's not really there. I love Joe's comment on that score. It's a great line.

I think I've also quoted it in perhaps that piece in the Monthly. No, you did. By the way, the piece in the Monthly enraged the Murdoch boys. No, yeah. Because it was a direct ideological assault on the Hayekian view of the state and the economy, which was a good state was a dead state and a great economy is one where markets could proceed unfettered, screw the workers and screw everybody else.

Well, it was a very tribal essay in one sense, but it was also quite compelling. Well, it was intellectually tribal. I mean, it wasn't me saying boo-hiss to the Australian banks or anything like that. Through a royal commission process, it was saying markets operate for a purpose which is to serve society and the polity, that markets are not moral endpoints in themselves.

And that's the profound delineating point between those of us who describe ourselves as social democrats who believe in markets and those who are neoliberals who regard markets with some form of what i describe as mindless idolatry but without even putting to one side the question of morality for a moment and focusing just on the the efficient markets hypothesis there's a question as to whether markets are truly efficient. And Robert Shiller, who famously won the, from Yale, who won the Nobel Prize jointly with Eugene Farmer and another guy in 2013, says that it's somewhat of a half-truth. Whereas Eugene Farmer, who's a great debater, is very strict about it and says that they're not, you know, perfectly efficient, but most of the time they're really, really good and prices incorporate all available information.

And therefore, he says that means that there's no such thing as a bubble. And everything that we identify as a bubble is really just ex post rationalization. In the total set of prognosticators, there'll be some people who predict a bubble. And if after the fact you elevate those people and say, look how smart they were, you're probably just being fooled by randomness, so to speak. And Farmer would say that not only that, but what part is the bubble,

given that prices always typically rise after the fall? Is the bubble the up? Is it the down? Both? Neither? And he says, therefore, governments shouldn't get involved. They shouldn't lean against the wind and prevent bubbles in asset prices. Worked well in the 30s, yeah. Well, yeah.

So on the other hand, you have Robert Shiller and, you know, someone like Richard Thaler, for example, who says that, you know, maybe there's something to this, maybe these bubbles do form. And there was a word you used in your essay which I really liked, which was the word probable. And you said that the efficient markets hypothesis excludes the possibility or the idea of probable bubbles. Because that's the thing, you can never say with certainty

that something's a bubble. It's always a probabilistic question. The other thing that I think... I think there's another element to that, though, as well, which is efficient markets hypothesis depends on the transparency of price-related information. And when you were looking at the size of financial markets relative to, let's call them goods markets

and markets in general, the sheer complexity of contemporary financial markets and the invisibility of ultimately ultimately who owns owes what to whom and by when creates an inherent impediment to the full operation of markets in the pricing of risk. Go to the question of mortgage-backed securities and for what was then an unregulated derivatives market. Frankly, how could you make an intelligent punt in those market circumstances about a particular financial product when you didn't know or had no capacity to know where the ultimate liability within the financial system lay? actually can't answer the question how much, owed by whom, by when, we have a problem. That's why we had an enormous financial asset bubble at the time and as a consequence it escalated to crisis. And as for the reverse, the second half of the argument was

once it implodes, well, we just all stand around and wait for it mystically, magically, through the hand of Zeus to reconstitute itself as once again an efficient operating market. That involves a level of religious belief in how these things actually work in practice, which I think defies any element of rationality, empiricism, let alone what you and I would describe as common sense. That's where the state must step in, either as the guarantor of last resort, the re-regulator of the markets. I note for the empirical record, it was only after the social democratic state,

led by me at the time, intervened in October of 15, that we had stability in markets in Australia or something beginning to approach it. And only after the collective states of the G20 intervened in March of 2009 with a five trillion plus global stimulus package and coordinated action by the monetary policy authorities of the largest economies in the world, that private capital markets said, well, thank God, they're in control. I think these are worthy of some empirical reflection. And so for those who argue that in perfect efficient markets hypothesis that these were

outrageous interventions in marketplaces which only made things worse, I mean, that involves a level of religious fundamentalism which would send your average Southern Baptist into retirement school. I want to make this point to you before we move on. So the other flaw, I think, in Farmer's reasoning about bubbles is that he extrapolates from stock prices to house prices. And I think housing markets are actually a very different species. And what I'd say is that housing markets aren't well modeled as efficient markets. They're better modeled as information cascades. And this is a

point that Schiller and a number of other economists have made. The reason is threefold. Firstly, because of the large transaction costs, you don't have the instantaneous revelation of information that you do in stock markets. There's not as much liquidity. Secondly, there's no ability to convey negative information because you can't short sell houses. And thirdly, there's a prevalence of amateur investors in housing, which you don't see to the same scale in stock markets. So housing bubbles can happen probabilistically, to use your word, a probable bubble. And I wondered if you have any thoughts on the Australian housing market at the moment, because my deep concern is that we're in the mother of all bubbles.

Hmm. Well, traditionally, the tools of public policy in this country have disproportionately favoured one particular asset class for investment, and that's real estate, and most notoriously reflected in what we do in terms of the negative gearing regime. If you compare the Australian real estate and housing market to most other advanced economies, you see a massive differential in terms of where people locate, lodge, invest most of their personal wealth.

And ultimately, that rests on a series of public policy instruments which have made this advantageous. It's partly the emotional psychology of every Australian's right to own their own home. Got that, tick. Wastefulness of rent, more open economic argument, open-ended economic argument. But thirdly, oh, by the way, if you have stacks of these properties,

then it's the best way for you to earn a quid long time, as opposed to taking that investable capital and putting it behind another form of productive business investment or economic activity. So you're right to observe that we have a almost unique distortion in the Australian economy because of this. And most foreign visitors to this country or analysts of our economy often scratch their head about what the hell we're doing. As to whether we now have an uncontrollable housing asset bubble, that's not my field of analysis. I don't wish to make prognostications about that in Australia in the current context.

But I think some of the reforms currently being contemplated by the Australian Labor Party in terms of the future of negative gearing, etc., I think these are wise in the long term to begin to, as it were, create a more normal economy, one less prone to a particular asset class inflation. Then there's the broader question, just the efficient allocation of investment capital. Like it's all fine and dandy for people to own, you know, seven investment properties.

Well, that's great. Tick. But why should we, as Australians with available capital, simply assume that's the only way to make a quid? There's something about our culture which sends most of our capital in that direction as opposed to putting a slice of it into venture capital, putting a slice of it into getting behind a good business idea which Ted and Fred down the back

have come up with with a new outboard motor engine or whatever it is. I think there is a job of economic policy and social and cultural policy in this country to shake us out of the great Australian default position. I've got a hundred grand in my back pocket. What do I do? I know. I'll take out another loan on a house and salt it away in the outer suburbs of Melbourne. Uniquely among most advanced economies, we have a tradition of auctions and foreigners who come here find it bizarre or almost distasteful. I think auctions drive that mimetic desire.

But houses are very tangible. It's a very honest signal of your net worth. The topics of barbecue conversation, as you said, we have such a high rate of ownership. And there's something very mimetic about housing. But also there are people who bill housing as the ticket to a better life. I was at a conference last weekend in Sydney, the real estate millionaires next door, just observing. But it's a meme in Australia.

And it's sad because 65% of the loan books of the big four are residential mortgages. Well, it induces a level of lethargy on the part of the major Australian banks, as you know, where you're going to put your – let's call it your creative entrepreneurial spirit. I know, behind the residential mortgage market because it's safe, it's secure. Unproductive capital. Well, that would be my argument in aggregate terms and more broadly across the Australian economy. When I came to office in 2007, one of our key pillars was how do we broaden the base of the Australian economy. You look therefore at the then comparative and competitive strengths and

natural advantages of Australia, courtesy of previous public policy interventions, namely PJK, Keating. We had this, at that stage, $1.5 to $2 trillion superannuation industry. Of course, that had grown up a whole bunch of funds within Australia who were happily living off the fat of the land, courtesy of PJK's public policy intervention, dead hand of the state again,

for which we all remain eternally grateful because it's one of the great elements in terms of our ultimate balance of payments. You've got this huge national nest egg. But then the funds management industry, by that stage, 10 years ago, was the fourth largest in the world because of what we had done. And so I did ask for some numbers to be done.

Well, how much of these services are being exported to the rest of the world, given we've got such a bucket of talent and ability here? Answer, two-fifths a bugger all. Why? Because they're all very happy just being here. And then secondly, we had a withholding tax at that stage running at 30%, as opposed to that which applied to the funds management industry in Singapore of only 7.5%. So I said, okay, guys, is this the answer? They said, yep. I said, okay, so the tax is coming down from 30 to 15.5 to 15 then to 7.5.

And we did it across two budgets the dial barely moved in terms of what these guys then did to take their inherent set of comparative strengths as funds managers within the australian industry to become the funds managers for the pension funds of East Asia over the last decade. They sat on their fat derriere and did virtually nothing. It's a further illustration that there is too much complacency associated with Australians being comfortable with asset classes which have yielded a reasonable return over time, aided by public policy in the case

of housing and real estate, but in their case, not becoming creative, innovative, entrepreneurial, taking the critical mass that PJK had established for the Australian superannuation industry and becoming, in fact, the superannuation industry leaders of the world and the effective running of pension funds around the world. We haven't done that. And despite the tax advantages I brought in to make them competitive with the rest of the region, they sat on their dig because it was all too comfy and cosy.

Your senior economic advisor during your first term as Prime Minister, Andrew Charlton, wrote a book before he started working for you called Ozanomics. But in the book, he made a very good point, which is that governments receive either the blame or the praise for what happens in the economy during their term of office. And sometimes that's fair, but sometimes it's not because they don't necessarily have control over economic events nor do they necessarily cause them. It's fair to say that if we'd gone into a deep recession

while you were Prime Minister, you probably would have copped some political flack for that, but you managed to prevent it. I wonder whether you've considered the first home buyers boost, which was part of the first $10.4 billion stimulus package. So you guys increased the grants for purchases of existing homes from $7,000 to $14,000 and new homes from $7,000 to $21,000 or something like that. It was $14,000 and $21,000. House prices were coming down, but... You can blame me for all of that.

These were my decisions. Yeah. So what was the genesis of the first home buyers boost? Well, in our analysis in that fateful weekend in October of A, financial system stabilisation, then B, the real economy and the maintenance of growth and employment, in the B part of the conversation, which was the maintenance of employment and growth,

we had to look at all the drivers of final demand. And so my discussion with the Treasury that weekend together with the colleagues was, okay, let's look at consumption, 60% plus of final demand. What can we do there? Answer cash payments, big injection, 10 billion plus, about 1% of GDP before Christmas, political objective, policy objective, economic objective, cause employers to think twice about

sacking their staff in retail before Christmas and to leave it instead until February to see whether the economy came back because retail had people sacked right around the world in other economies leading through to Christmas. But then it was the other drivers of total final demand as well. It was what could we do in terms of private fixed capital investment? So we brought in the temporary investment allowance. Timely, targeted and temporary. Three Ts.

The three Ts. We also looked at, and prior to fixed capital investment, correct me if I'm wrong, it was about 20% plus of final demand in the economy. Then you look at, obviously, public investment, and, of course, we had other measures planned for that, which we were getting ready, including the school modernisation program.

But then if you look at the slice of the economy represented by private residential construction, it was about 6% or 7%. And so you can't sneeze at that and it was collapsing in a heap and that was of itself enough to take us screaming into recession if it went to zero. So what you needed was a huge psychological hit in order to say to people, hang on, we could actually do something at this time. So on the doubling of the first-time owners scheme

from 7 to 14 for existing residential real estate, yep, that was my decision. But the particular decision I owned with pride was the trebling of the investment allowance for new home owners. Why? If you look at the subsequent quarters of performance in that sector alone, it still came down. It was still bumping along the bottom but didn't crash. And I think we had a lot to do with that.

And it certainly helped our aggregate performance stay north of zero. But I wonder whether, I mean, it would have been a hard decision not to implement the first home buyers boost. Ken Henry was, if we fell into recession, Ken Henry was forecasting unemployment of 8%. Or more. Or more, yeah. And remember the rest of the OECD was in double figures. was forecasting unemployment of 8%. Or more. Or more, yeah.

And remember the rest of the OECD was in double figures. And by the way, historically, when the world has had recession before, Australia ended up with a deeper recession and higher levels of unemployment than the rest of the developed world. Sure. That was the picture of the 80s and the 90s. And there's a terrible human cost associated with that, obviously. But I wonder whether it might have been hard to let the housing market slip at that time, but whether we've just sort of taken the hair of the dog strategy and continued the bender. debt deflationary recession to me. We've got a current account deficit that is about 3% of GDP. Asset prices have risen rapidly until the last quarter of last year. GDP growth sort of slowed,

although it did uptick slightly in the last quarter. And our private debt to GDP ratio is around 200%. We've got the second highest household debt to GDP ratio in the world after Switzerland. We have the very dubious honour of winning silver in those Olympics. So, I mean, are you as concerned about this as I am the next few years? Yes, I am. I am concerned about the future, but specifically on the first-home owners boost. When I said timely, targeted and temporary, in our case they were temporary.

It ended on the 31st of December 2009. And we got rid of them. So our job was simply to plug collapsing final demand because we'd read our Keynes, we'd read our general theory, and we saw what needed to be done in the midst of an existential financial and economic crisis. But the Australian debt binge has a real problem associated with it, both corporate, private, and were it not, for example,

for the mandatory savings culture which Paul Keating engineered through the compulsory superannuation, that we would be in a significantly worse position than we are. But yes, there is a problem with debt finance consumption. It's a problem in many countries and cultures around the world. And it's a continuing challenge for policymakers. I want to totally shift gears now, and I've just got a few more quick questions on those other topics. So politics, firstly. Have you forgiven Julia for the coup of 2010?

Yeah, I'm quite explicit about that in the book. And there's a reason for it. You just end up bitter and twisted if you don't. And I don't intend to end up bitter and twisted. But there's a difference between forgiving and forgetting. I haven't forgotten. That's why the book is there as a historical record and of a narrative of what occurred, factually based in 1,400 footnotes. Julia's book, I think, had 79 footnotes in total, as I've sought to construct the historical account of what happened with the coup and subsequent to the coup. Define forgiveness. It means not carrying within your guts and in your soul not just a sense of bitterness

but a desire for retribution and revenge. I'm not into that business at all. Never have been, never will be. It just ultimately suffocates you as a human being. There's something about that definition. Read your Shakespeare. That's what happens. There's something about that definition which is in a sense sort of neutral.

And I sometimes, I know this is a very high standard, but look to Mandela for a more positive version of forgiveness because what he did was, you know, despite being forced into prison for 27 years by the Afrikaners, he actually took active steps after he was released to embrace that community, so reaching out, the reconciliation. Why not that model of forgiveness as opposed to just not harbouring bad intentions? Well, hang on, I say at the end of this book and leaving open

the opportunity of Julia and I working together in the international field in the future, Bill Shorten was a member of the group which sought to bring about the coup in June of 2010. And I've been out there supporting Bill and the team's efforts to form the next government of Australia, notwithstanding what's happened to me personally. I said the same at the launch of this book of mine recently in Parliament House in Canberra. So in terms of embracing what I describe as the future of progressive politics, I think there are some runs on the board there, my friend, in terms of not just what I've done, but what I've indicated I'm prepared to do in the future as well. But, you know, you've still got to establish the historical record. And we shouldn't resile from that.

Even former prime ministers deserve a right of reply. When you've had works of fiction produced by a combination of Julia, Wayne Swan and others which have sought to elevate naked ambition into some higher political purpose

in terms of the events of the coup of June 20. And some of us will have a different account of that period. Mine's there. It's in black and white. People will form their own judgment. And last question while I've got you here. So there's a book by Graham Allison, which I'm sure you've read or at least heard of called Destined for War? And he talks about the Thucydides trap and that in the last 500 years in 12 of 16 cases where a rising power threatened to displace an existing military power it ended in war. I want to ask you firstly why do you think that statistic exists? Why does war become almost inevitable, as Thucydides said of Sparta and Athens? And secondly,

what can the US and China do to make sure they don't fall into the same trap? Well, when I left Australian politics, I went to Harvard to the Kennedy School, and I worked with Graham for a year. And we spent a lot of time talking about what became his book, Destined for War. And you'll see me mentioned in quite a few dispatches at the back of that book because we did a lot of work on it together. But it's his own idea. Part of the academic critique of Graham is that how do you know there are 16 case studies worthy of study from 1500 to the present

and have you skewed the historical example? Yeah. And that's part of the critique, for example, delivered against Graham by Joe Nye, his friend and colleague from Harvard just across the Kennedy School quad. But there is an elementary logic to the proposition looking at the history of the Peloponnesian Wars in the 5th century BC, which has resurfaced many times in history. Applied to China, I think it's a bit like this. In the last 12 months alone, what I've observed in the United States, where I now live and work and run an American think tank focused in part on US-China relations, the Chinese economy and military capability for the first time have been identified in the United States as having achieved a critical mass which for the first time challenges United States global dominance.

And the United States in the year 2018 began responding to it. The official proclamation in Washington being we've moved from strategic engagement now to official strategic competition with China. What the slippery slope is between competition to confrontation to containment to cold war to conflict and to real war is, I'm not sure. But the lesson of Thucydides, I believe, is that we still have, as the political theorists would remind us, and the international relations theorists, some of them at least, would suggest human agency. We can make a difference. So if you look at an address I delivered to the US Naval Academy recently at Annapolis

and then published in Foreign Affairs magazine, there is therefore a concerted search by many of us for the third way through this, not in search of either Chinese capitulation or confrontation with China, but a way in which you can accommodate this rising phenomenon within the existing global order and do so peacefully. It remains to be seen whether that's possible, but I worry about the language we use about this relationship now, which suggests that we're on a one-way track to hell. What odds do you give?

I'm not into the odds-giving business. I was brought up as a conservative Catholic like you, so we weren't allowed to bet. So basically, it's even money. Kevin Rudd, thanks for joining me. Good to be with you. Cheers. Thanks very much for listening guys for links

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