A paean to the Keating legacy

Evan Jones, The University of Sydney

David Love, Unfinished Business: Paul Keating’s Interrupted Revolution, Scribe Publications, 2008 (265 pp). ISBN 9-78192137-219-3 (paperback) RRP $32.95.

A growing literature, albeit unrecognised as a genre, is concerned with two grand themes in debate about Australian economic policy over the last 25 years—the relative merits of the current ‘neoliberal’ regime compared to the policy structures in place until the 1970s, and which side of politics should be given the most kudos for engineering the presumed successes of the neoliberal era. Unfinished Business hails the neoliberal era and awards the laurels to Labor (1983–1996) in office rather than to the Coalition (1996–2007).

David Love is a sometime senior economic journalist and economic consultant turned author. The themes of Unfinished Business are essentially those argued in his earlier book, Straw Polls, Paper Money (Love 2001; reviewed in Jones 2002), here repeated as backdrop to praise Paul Keating’s national superannuation agenda. Unfinished Business is an important book—for what it omits and gets wrong as much as what it contains. It is a joint hagiography of Paul Keating and Macquarie Bank: ‘Together the two forces—creative politics and creative finance—combined to create a phenomenon which most of us have not yet grasped’ (p. 67). Interviews with Keating and David Clarke, Macquarie Bank co-founder and long-time Executive Chairman, pepper the text. Love claims that Keating and Macquarie were the central activists in the revolutionary transformation of Australia from a cringeworthy backward country into a potentially global standard for economic robustness and finance sector excellence. The admiration for Keating is over the top:

Keating must have been able to stand off from himself before he was 40 and to know objectively that he had an intelligence and craft only given to great generals (p. 67).

As the leader of an egalitarian party, Keating had kept hidden an image he had of himself as a man of destiny. But deep down he knew himself to be a rare bird, as rare birds do. In every generation, a person arises with a capacity well above the ordinary in foresight and in the ability to lead their community to greater things. Keating had come to see this as a responsibility placed upon him (p. 166).

Love ups the ante on the famous Laffer curve napkin myth, recounting Keating’s exuberant genius dashing out grand plans on restaurant menus (p. 85). And so on.

Keating’s achievements, Love claims, are rooted in three inter-related transformations. As Treasurer, he deregulated the financial sector (following courageous initiatives by John Hewson)—in particular, he (with the then Prime Minister, Bob Hawke) floated the dollar, an act that Love claims would not have occurred if the Coalition had been returned to power in 1983. Second, in conjunction with Australian Council of Trade Unions Secretary, Bill Kelty, Keating engineered an industry-based superannuation regime, which mandated that a certain percentage of employee earnings was to be paid by employers into an accredited superannuation fund. Third, Keating engineered a transformation of the company tax regime via the establishment of dividend imputation, reduction of the company tax rate, and abolition of the undistributed profit tax.

Unfinished Business is a joint hagiography of Paul Keating and Macquarie Bank.

There followed what Love calls ‘the golden circle’. The dollar float facilitated the rapid creation of robust bond and Australian currency markets. The super scheme substituted marginal money wage claims for superannuation savings that fed into thankful capital markets what was estimated to be $1 trillion by the time Keating was ejected from office in 1996. The taxation changes facilitated the take-up and use by the capital markets of this nest egg for productive purposes.

In dialectical fashion, Love claims that Macquarie Bank was both beneficiary and root facilitator of this virtuous circle. MacBank started life in 1971 as a gung-ho colonial outfit, formally as subsidiary of the relatively staid British merchant bank Hill Samuel. Hill Samuel Local burst into prominence with several sophisticated arbitrage instruments, notably the cash management trust, and the securitisation of insured home mortgage securities. The local crowd’s ambition to go global came with the changes engineered under Keating. According to Love (pp. 105–107; see also pp. 43–44):

… once having established the conditions for institutional change, Keating needed someone to show what could be done with the change, and it was Macquarie that was able to do that. … So it is fitting that the progress of Keating and of Macquarie are viewed in tandem. …

Macquarie took up the money that the Keating-Kelty pension funds had garnered, and provided a return and financial rationale for those funds that was hard to fault for years. Macquarie put together packages of toll roads, power stations, and by-passes with assets that were semi-governmental in quality, and gave the nascent pension-fund managers the financial returns and peace of mind that were essential to allow this extraordinary Australian movement to get into its stride.

However, he claims these two great achievers are unloved, with their unblemished achievements either unheralded or criticised. The detractors expose only their own mediocrity, ignorance, malice or self-interest. The negative stories circulating about Macquarie are merely unfounded rumours spread by nasty hedge funds looking to short Macquarie shares and make a killing.

Love’s world is populated by a fairly stark divide between goodies and baddies.

The union movement and the Labor Party is a breeding ground for myriad baddies. Love laments the schism that saw the ‘admirable’ forces of Catholicism driven from the Victorian and the federal Party in 1955. Fortunately, Labor was driven into long Opposition where ‘[t]he remnant bunch of dreamers, trade union hacks, and truculent lefties that now constituted official labor were left to stew and plot in negative juices …’ (p. 56). Unfortunately, ‘Back into the party came a stream of crypto-communist, anti-capitalist, popular-front romantics, who got their first chance to show their capacity for real damage when they became the core of caucus in the disastrous Whitlam government’ (p. 47).

Love’s world is populated by a fairly stark divide between goodies and baddies.

Another baddie is the group of establishment banks: ‘… constipated, incompetent, over-cautious, arrogant, and shallow’ (p. 19). The banks and the staid life insurance offices are seen as key institutions in what was ‘… a dull, tight little island run as a conspiracy against the population as a whole’ (p. 73).

Yet another baddie is the Howard government in office, an atypical judgement for a ‘dry’ economist. Love condemns Prime Minister Howard and Treasurer Costello for not increasing the superannuation charge beyond the 9 per cent rate that they inherited, for doing everything in their power to destroy the lower cost industry-based superannuation funds, and for pissing away record surpluses in election-driven tax cuts.

Finally, Love lays into the post-Keating Labor Opposition for discounting Keating’s legacy. In particular, he is vitriolic towards Senator Nick Sherry, current superannuation Minister, who has explicitly put on the back burner any increase beyond 9 per cent in the guaranteed rate of employer-funded superannuation contributions.

Love’s narrative can be read as a simple morality play, with Keating as the economic Messiah and Macquarie Bank as the Holy Church, leading us to material salvation. The superannuation pot of gold has steeled Australia against the vicissitudes of 1990s crises raging across the seas. A certain crude conceptualisation, a ‘national economy macro fetishism’, underpins the story. Love commends the globally integrated capital markets ensuing from financial deregulation but imagines (with Keating) that greater capital generated from a higher employer superannuation contribution rate will lead to a reduced call on capital from overseas. Keating also imagines, fancifully, that the extra capital would counter the yawning current account deficit. Love sums up the singular solution thus (p. 245): ‘“Now look at the result”, Labor could have said. “If the original Keating target had been sustained, there would have been no sudden banking-share slump in 2008 and no pensioner disillusionment.”’ Utopia unlimited.

Consistent with the crude conceptualisation is an unquestioning optimism that the superannuation nest egg is being channelled into productive ends. There is no concern that the enhanced capital might lead to inflated asset values—Love sees only the creation of substantive material wealth. There is no concern for the institutionalised rorts of the Macquarie Bank model, leveraging ‘management’ fees from the monopoly ownership of essential infrastructure. Keating does offer an off-hand critique of the Macquarie model (pp. 231, 235) while simultaneously praising it (p. 234), but Love ignores the critical element. There is no concern for the institutionalised rort that is the managed funds sector for whom the super cash cow has been manna from heaven.

The last phenomenon offers a clue into Nick Sherry’s stance. Sherry is part of the camp that believes that there’s no point topping up the reservoir any further until the leaks are plugged. Sherry himself was involved in the establishment of an industry super fund (HOSTPLUS) so he is no novice to the sector. Yet he is here denigrated (with Keating’s imprimatur) as a ‘leftwing conservative’ without a clue.

Love and Keating are in agreement on contempt for the pre-Campbell era.

The larger context of Love’s peculiar vision is provided by his rose-coloured glasses on financial deregulation—the wretched Old has been replaced by the vibrant New. The black/white divide forces Love to externalise phenomena that even he finds odious or problematic—hedge fund ruthlessness or the uncontrolled derivatives explosion.

A dramatic anomaly is Love’s telling vignette about the plight of the two giant US specialty municipal bond insurers, commonly called monoline insurers (p. 250). The monolines are private companies that have served an essentially public function—insuring municipal bonds so that the instruments of local governmental fund-raising, assured of AAA credit ratings, become high security investments for bond holders. The monolines moved into Wall Street’s mortgage bundles of unknown composition and their public role is now threatened by their stupidity, a break with conventional practice comparable to that of the American Savings and Loan Associations in the 1980s. Love’s horror at the monoline’s fall from grace is inconsistent with his disdain for an earlier regulated regime in which particular private institutions serving public functions were constrained in their portfolios.

Most striking in Love’s inconsistent treatment is that the book opens with a vignette on the foreign currency loans phenomenon of the 1980s. Love meets an old school friend who, as a farmer, took out a foreign currency loan in Swiss francs, the currency most pushed by the bank lenders. Love claims to have had no knowledge of the foreign currency loans fiasco, a scandal in itself for a then prominent financial journalist and economist. Worse, Love blames the affair on a calcified pre-deregulated banking culture. The attribution is absurd. True, the old regime naturally lacked competence in foreign currencies in a fixed exchange rate world. But the banking sector’s descent into madness was the product of the spanking new deregulated regime—a regime in transition, of course, but nevertheless the new regime. The depredations of the foreign currency loans affair, save for contemporary media minutiae, have never been publicly documented. Yet the affair is representative of the essential character of the new regime—its instability and its inevitable generation of winners and losers on a grand scale.

It is instructive that Love displays unblemished admiration for the Campbell Committee’s 1981 Report that provided the ‘intellectual’ legitimacy for the ensuing deregulation. Yet the report eschewed any coverage of the past, conveniently ignoring an analysis of the reasons for existence of the encompassing post-World War II regulatory structure, instead guiding its prescriptions by the light of a utopian fictional free market. Love thus witnesses elements of the ensuing wreckage but is incapable of locating their causal mechanisms.

The architects are disarmed by the beast that they have created.

Love and Keating are in agreement on contempt for the pre-Campbell era. Love recounts an important moment in Keating’s education. Keating’s father ran a successful engineering equipment business. Armed with a letter of intent from the Malaysian government for prospective business, Keating father and son went to the company’s bank, the English Scottish and Australian (now part of ANZ), only to have the application for further capital declined. Down the track, Keating gets his own back in 1985 when he issued sixteen banking licenses to foreign banks.

But there the antagonism ends, a transformation again missed by Love. Keating admits as much to Love:

Said Paul Keating: ‘The old domestic banks went like charging bulls into credit expansion from 1985 on … They did this at the expense of their book quality. … And in a sense they won. Eventually, they had us in a position where we dared not check them less they failed. Westpac and the ANZ virtually did fail: the government and the Reserve Bank had to hold them together until they got back on their feet. There was an obvious time in the 1980s to stop this credit creation, but no one would stop’ (p. 78).

Here is financial deregulation at large, and the architects are disarmed by the beast that they have created. It is curious that Keating was, at that very moment, continuing with the dismantling of instruments that could have contained the excess credit creation that he later deplores. In particular, statutory reserve deposits with the central bank, the variation in which had been used since World War II to dictate quantitative constraints on banking lending, were formally abolished in 1988.

This claim to Love is possibly the first time that it has been admitted that the Labor Government purposely underwrote the recovery of an incompetence- and corruption-ridden banking sector. The underwriting was paid for by the unacknowledged casualties. Labor offered some measures of support under the table, but the most public was the elaborate strategic whitewash engineered by the 1991 House of Representatives banking inquiry (the ‘Martin’ inquiry) that absorbed and neutered the huge groundswell of then hostility to the banking sector.

In this volatile environment, how Keating came to be the beneficiary, as partner in a piggery, of a $3 million loan from the Commonwealth Development Bank (the battlers’ bank) when a senior parliamentarian remains a mystery. Moreover, Keating is now a paid-up member of the club—‘I am already involved in an investment banking business, and mergers and acquisitions are our staple, and that’s interesting. There’s a lot of cleverness in it; I enjoy that. And there’s an honest dollar to be earned in that’ (p. 220). An honest dollar indeed.

The implicit hot and cold mentality regarding the finance sector’s role since deregulation on the part of both Love and his subject imparts a root incoherence to Love’s narrative. This lack of clarity, coupled with a macro fetishism regarding the general economy, may explain the simple ‘holy grail’ attachment of both Love and Keating to the fount of guaranteed capital spewing from the compulsory superannuation scheme.

Love’s prose is fluid but his efforts at playing the compleat author have additional uneven results. The description of key events lacks dates. He regularly furnishes classical and Shakespearean quotations, but has trouble with the big picture of Australian politico-economic history which surely demanded priority in his self-education. For example, Love treats Australia’s historical fixed exchange rate regime (blamed for Australia’s ‘financial insularity’) as if it were a national peccadillo and not a global standard (p. 17). He trashes the Whitlam years in throwaway lines, conveniently neglecting both the Whitlam era’s substantive achievements and the broader environment responsible for its seeming ‘anarchy’. This crude interpretation of the past underpins Love’s crude interpretation of the Keating era.

The 1994 RBA decisions have disappeared into history but Love is right to resurrect them.

However, one component of Love’s story has a laudable exposure—the decision of the Reserve Bank under Governor Bernie Fraser, Keating’s long time mate (and supposedly in Keating’s pocket, according to Coalition polemicists) to raise the cash rate three times in late 1994 (Ch. 8). Love also faults Fraser for not having the RBA cut the cash rate when Fraser first assumed the governorship in September 1989. Ironically, Fraser is praised unequivocally in Love’s Straw Polls, Paper Money, not least for successfully defending the Australian dollar against several speculative attacks in the early 1990s. (The contrary opinion on Fraser’s role is the only difference of vision in Love’s two complementary books published seven years apart.)

The 1994 RBA decisions have disappeared into history but Love is right to resurrect them and emphasise their importance. A mere three months after Keating’s job-creating White Paper Working Nation was delivered in May, the RBA increased the cash rate by a whopping 2.75 per cent between August and December to combat an inflation rate of 2 per cent! This string of decisions by Fraser, as much as any actions by Keating as Prime Minister, lost Keating the election in 1996. The aggregate scale of the rises has no rationale.

Love treats Fraser’s actions as anomalies. But he is too kind to the economics establishment. Love’s generosity to the ‘experts’ is consistent with his benign view of the neoliberal age, but it does not sit well with the adversities (both macroeconomic and sectoral) experienced during the period of Labor in office. It is curious that Love does not cite John Edwards’ dense biography of Keating’s Treasuryship (Edwards 1996). Love would have found there, in spite of Edwards’ intent, a detailed account of our key economic policy makers in action that should leave the detached observer with a jaundiced view of their capacities (cf. Jones 2004). The autodidact Keating sat at the feet of his masters to learn the secrets of the temple, but he was not well served. More significantly, neither was the hapless Australian public.

There is a larger story to be told here, elements of which Love neglects or treats misleadingly. It is good to have a spirited defence of Keating and Kelty’s superannuation revolution, and that from a dry economist. But one hopes that the book is not taken as definitive regarding Keating’s contribution to public life and of the era in which finance sector incompetence and greed have been institutionalised and legitimised.


Edwards, J. 1996, Keating: The Inside Story, Ringwood, Penguin Books.

Jones, E. 2002, ‘Movers and shakers of Australia’s economic miracle’ [Review of Straw Polls, Paper Money], Australian Review of Public Affairs, 15 February [Online], Available: http://www.australianreview.net/digest/2002/02/jones.html [2008, Sep 5].

Jones, E. 2004, ‘On first looking into Edwards’ Keating’, Australian Review of Public Affairs, 17 May [Online], Available: http://www.australianreview.net/digest/2004/05/jones.html [2008, Sep 5].

Love, D. 2001, Straw Polls, Paper Money, Ringwood, Viking/Penguin.

Evan Jones is an Honorary Research Associate in Political Economy in the School of Economics and Political Science at The University of Sydney. His research on industry policy has been published in such journals as the Australian Economic History Review, the Australian Journal of Public Administration, and the Journal of Australian Political Economy.

View other articles by Evan Jones: