NOTHING beats a relaxing summer holiday with a couple of good novels: a time to wander lazily in the world of imagination and fantasy.

But while the rest of the nation chilled out over the festive season with a light and breezy summer read, the midnight oil was burning at Kirribilli House.

There, a lonely figure sat hunched over his laptop constructing a political fantasy of his own. The Prime Minister was having great fun. Imagining himself once more in a heroic pose.

Last year he was Churchill defending us all from "the economic equivalent of a rolling national security crisis". But during the summer, in his essay on the "the ideological causes of the financial crisis", he has cast himself as a great socialist hero, carrying the banner of social democracy and striking out against the wickedness of neo-liberalism, 30 years of which, he assures, is the root cause of the global financial crisis.

Neo-liberalism's central thrust, he writes, is "that government activity should be constrained, and ultimately replaced, by market forces".

He says these "unchecked market forces have brought capitalism to the precipice". Only the intervention of social democracy -- a euphemism for socialism -- can "save capitalism from itself" and protect us from the perils of "the extreme Left and the nationalist Right".

Phew! While the rest of us were relaxing during the summer, perhaps reading some fiction, our Prime Minister was tapping away, imagining himself battling off communists to the Left, fascists to the Right, clad only in a suit of shining ideological purity.

All of us remember Kevin07, shiny faced and earnest, proclaiming himself an economic conservative. In one television advertisement after another his message to Australians was clear: there wasn't a cigarette paper's difference between him and John Howard on economic policy.

Free markets? He loved them. Surpluses? The bigger, the better. Tax? Well, of course it should be lower.

Well, all of that is cast away now. Instead, he preaches social democracy. It is important to remember that social democrat was a term created by avowedly socialist political parties in Europe who wanted to emphasise that they were (unlike their communist comrades) committed to achieving a socialist society through democratic means as opposed to violent revolution.

So in little more than a year, the economic conservative has become a socialist. The essay in The Monthly is such a poor piece of work and has been so widely ridiculed and debunked, it is difficult to believe he imagined it would be regarded as a serious contribution to the debate about the global financial crisis.

It is above all a political document designed to ensure that Australians accord no responsibility to Rudd for our present economic problems. Everything is the fault of the global financial crisis. Nothing is to be blamed on St Kevin.

We saw a good example of this strategy this week. The gross domestic product numbers for the December quarter showed growth was negative. It was perfectly plain that the $10 billion December cash splash had been almost entirely saved: household savings were higher than they had been for many years.

So the cash splash had failed as an economic stimulus. What was Rudd's response? "We cannot swim against the tide."

As usual he is deliberately confusing impotence with incompetence. Just because our Government is bungling its economic response does not mean it is powerless. Rudd has chosen to borrow tens of billions of dollars to spend in ways that simply will not deliver an effective boost to the economy: too little bang for too much buck.

These borrowings will undoubtedly result in higher taxes and higher interest rates in years ahead.

We have offered the Government the opportunity to agree on measures that would cost less and be more effective because, like tax cuts and investment incentives, they would benefit every business across the board.

Because, whether it be fiscal measures or investments in infrastructure, the priority must be to spend money to improve the productivity and efficiency of the whole economy and every business.

Having sought to establish that there is nothing he can do to alleviate our problems -- in other words, however bad it gets it isn't his fault -- he then seeks to identify those people who are responsible for what he describes as 30 years of "failed neo-liberalism". A lot of politicians will argue that the reforms of their immediate predecessor were mistaken, but not many would contend that 30 years of economic reform has been a misguided failure. And yet this is precisely what Rudd argues throughout his essay. He pillories Margaret Thatcher, Ronald Reagan and John Howard as being exemplars of the neo-liberal extremism he so despises.

And yet the past 30 years of economic reform have been undertaken by governments of all political persuasions. If privatisation, deregulation, promotion of competition are symptoms of neo-liberalism then Paul Keating and Bob Hawke, Howard and Peter Costello have a lot in common.

And when we look overseas we see the same pattern. Reagan did undertake economic reform in the US, but then so did Bill Clinton. Indeed, Rudd criticises the repeal of the Glass-Steagall Act in the US, which had kept deposit taking and investment banking businesses separate. Whatever the merits of that particular reform, he should have mentioned that it was repealed under Clinton, not Reagan or the Bushes.

Equally, across the Tasman, the great microeconomic reforms were undertaken by Labour's Roger Douglas and even in Britain, when Tony Blair took the Labour Party into office he did not seek to wind back Thatcher's reforms, which had so transformed and energised the British economy.

The truth is that across the world, even in Rudd's beloved China, there has been a move, often uneven to be sure, towards more open markets and greater economic freedom, including greater free trade. Hundreds of millions of people have been lifted out of poverty as a result. As Henry Ergas observed recently, the 30 years of liberalisation was not a religion but a remedy for stagnant markets, inefficient work practices and, above all, for poverty and unemployment. But if Rudd's global ideological analysis is at odds with the facts, it becomes even more absurd when he turns to Australia. Naturally, he contends that the political home of the dangerous neo-liberal ideology is the Liberal Party.

"The contrast between the competing political traditions within Australia on the role of governments and the market is clear. Labor, in the international tradition of social democracy, consistently argues for a central role for government in the regulation of markets and the provision of public goods."

Rudd's thesis is wrong in every respect. First, the proposition that the global financial crisis was caused by wicked neo-liberal governments deregulating their financial markets and "letting the free market rip" is nonsense. At a fundamental level the crisis arose because of too much cheap money being available for too long. The developing world, especially China, ran huge trade surpluses assisted by an overvalued currency.

Instead of these surpluses being invested in China, domestic consumer demand remained constrained and these surpluses were on lent to the developed world, especially the US. There was some degree of symmetry. Chinese surpluses were lent to Americans to enable them to purchase more goods from China. But they also financed a bigger and bigger asset bubble. Real estate in particular became more overvalued. Interest rates were kept too low for too long.

I should digress here to note that Rudd argues that easy credit is the defining characteristic of "the neo-liberal financial order". But wasn't it Rudd who chastised the Howard government because interest rates were too high and in particular higher than they were in the US?

So if low rates in America were symptomatic of neo-liberalism, how can higher rates in Australia mean we too were in the grip of a neo-liberal conspiracy?

Nonetheless, right through the US financial system growth was fuelled by higher and higher levels of debt, especially in financial corporations and, of course, households. Many people predicted the debt and asset bubble would burst, but with long periods of growth complacency can set in and, as they say, nobody rings the bell at the top.

The immediate trigger was the collapse in the sub-prime mortgage market in the US beginning in the second half of 2007.

Far from being a creature of "unchecked market forces", the US mortgage market is the subject of extensive Government intervention.

For a start, large government-backed mortgage finance companies, in particular Freddie Mac and Fannie Mae, provided between them $7 trillion of low-cost finance to the mortgage market. These companies used an implicit government guarantee to borrow at lower rates than the private sector could borrow and then proceeded to finance about two-thirds of the US mortgage book.

Fannie and Freddie were using the credit of the US Government to finance a housing bubble. And why was that? As with most governments, the US through administrations of both persuasions has tried to promote home ownership, especially for people on lower incomes. Fannie and Freddie were part of that agenda as were many laws that obliged lenders to extend credit to minorities. Far from being a reckless lending practice, "low doc" and "no doc" loan forms were seen as a way of enabling people with bad credit histories to get into their first home.

Add to that the fact that for all practical purposes residential mortgages in the US are without recourse to the borrower. In other words, if a house is worth less than the mortgage, the borrower can give the keys back to the bank, which is unable to pursue the borrower for the difference. All of this added to a long period of cheap credit, which contributed to a housing bubble. Sub-prime loans, which were loans made to people with poor credit records, amounted to about 15 per cent of the total US mortgage book and about 40 per cent of the mortgages written in 2006.

As housing prices rose and rose, loans were made not because the borrower could repay them out of his or her cash flow, but rather out of the sale or refinancing of the property.

When the housing bubble burst, as inevitably it had to, the sub-prime mortgage industry was exposed for the colossal exercise in imprudent lending that it was. By this stage the sub-prime mortgages had been sliced and diced into different financial instruments and had found themselves on the balance sheets of many, if not most, of the world's financial institutions. This added element of complexity, indeed obscurity, made the crisis much worse. It was not simply that banks were holding assets that were worth less than book value, their complexity made it extremely difficult to work out what they were worth.

One of the perennial mistakes bankers make is not to connect the value of the assets against which they are lending to their preparedness to advance credit. Banks lend more money, asset prices go up. Encouraged by the growth in the value of their security, banks lend more money. And so it goes, until the bust.

But let us compare the US housing finance market with that of Australia. Unlike our American cousins, Australian governments had not sought to manipulate or influence the lending practices of banks. There is no Australian equivalent of Fannie or Freddie. Mortgages are with recourse to the borrower. Banks are expected to make their own credit assessments and lend on commercial terms. Overall, the financial and prudential regulation of our banks and other financial institutions was restructured by the Howard government with the establishment of the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission and the granting of independence to the Reserve Bank of Australia, among many other reforms.

We have had no sub-prime crisis in Australia. In fact, sub-prime loans in Australia represent less than 1 per cent of the total mortgage book. Despite the buffeting from the global financial crisis, our banks are acknowledged as among the most secure and well capitalised in the world.

So there are the facts that demonstrate the delusional nonsense at the core of Rudd's thesis. In the US a mortgage market in which government played a central and directing role blows up. In Australia, where government's role is simply to provide an efficient financial and prudential regulatory framework, the mortgage market remains sound.

And to underline how Rudd's essay is at odds with reality, in the same week that his 7700 words hit the newsstands, Deputy Prime Minister Julia Gillard was in Davos boasting of how Australia's system of financial regulation was "better than world class". She did not mention that it had all been put in place by the "neo-liberal free market extremists" in the Liberal Party.

While Rudd's essay is confused in terms of history and economics, the politics is transparent. He sees the reality of the global financial crisis as an opportunity to strike a blow against his political opponents.

Like a bent copper, he wants to fit up he Liberal Party with the crime of causing the crisis. Similarly, he wants to take aim at me as the leader of the Liberal Party, point to my career in business and investment banking and thereby link me with the downturn in the US.

There is no word in English adequate to describe Rudd's audacity here -- but it is certainly covered by chutzpah, a wonderful Yiddish word that describes bare-faced, shameless behaviour.

A classic definition is a man who kills his parents and then seeks clemency from the court because he is an orphan.

It is bad enough to have Rudd trying to turn himself, in the blink of an eye, from an adherent of the cautious, responsible economic conservatism of Howard into a slightly more genteel version of a foaming-at-the-mouth radical such as Hugo Chavez.

But to add to that effrontery, we see him every day in the parliament denouncing neo-liberal extremism as he describes me as "the member for Goldman Sachs".

All the while, he knows there is not one person in the parliament who has been delivered greater affluence and personal benefits through neo-liberal policies than himself.

Remember, Rudd defines the difference between Labor and the Liberals as Labor's commitment to "a central role for government in the regulation of markets and the provision of public goods".

One of those public goods is the provision of job placement services for the unemployed. In 1998, the Howard government closed the Commonwealth Employment Service and outsourced its functions to the private sector, and one of the private firms that benefited conspicuously from this deregulation was the Rudd family business.

I congratulate the Rudds, especially Therese Rein, on their success. Their business grew into a very substantial one in Australia and as other countries followed the Australian approach, grew there as well exporting the expertise developed by them when they seized the opportunity created by Howard's decision in 1998.

But what are we to think of the wealthiest Prime Minister Australia has ever had, a man greatly enriched by the privatisation and outsourcing of government services, standing up again and again to denounce the very policies from which he and his family have profited so extensively.

It is more than a bit rich. It is as hypocritical, as chutzpadik, as his essay is absurd.

Malcolm Turnbull is the federal Opposition Leader.