This Sunday Essay begins with skepticlawyer's On simplifying without simplification. This is an example of a brief written for a Scottish client on the causes and consequences of the global financial crisis. I found it interesting in a professional sense because of its topic and also because a fair bit of my work over the years has involved the preparation of just this type of briefing. As you would expect from SL, it's clearly written.
The brief includes this rather striking graph showing Australia's astonishingly good relative performance over the period. SL comments:
That said, Australian banks remained fairly conservative in their lending practices in the lead-up to the financial crisis, a practice allied with higher interest rates set by the Reserve Bank of Australia. This had the extraordinary consequence that Australia did not experience the GFC.
It is correct, I think, to say that the Australian financial system was arguably more conservative and indeed better regulated. It is also correct that the higher interest rates gave the Reserve Bank more room to move. It is not correct to say that Australia did not experience the GFC, nor is it correct that more conservative lending policies plus higher interest rates were the reason why Australia came through the GFC so well in relative terms. I say this not to carp at SL's analysis, but because of the tendency in analysis to attach too much weight to financial and regulatory issues in explaining Australia's better performance. These were necessary but not sufficient conditions.
Two important things happened in the year leading up to the GFC. First, Australia's balance of trade improved quite remarkably. Secondly, and somewhat perversely given the first, the value of the Australian dollar declined. In combination, the two provided something of a natural buffer to the GFC. They were a key part of the reason why I took a contrary position at the time on the likely implications for Australia of the GFC.
When the GFC hit, it affected Australia in two main ways.
Australian banks dependent on international markets for wholesale funds experienced just the same type of borrowing difficulties as banks elsewhere. This did flow on to lending. Australian borrowers faced credit constraints similar to those experienced elsewhere, if on a somewhat smaller scale. The psychological impacts were just as important.
I was in China in September 2008 when the GFC hit its most critical phase. From my hotel room in Shanghai I watched the crisis unfold.
Returning to Australia, I was quite astonished at the pessimism I found. The gloom was affecting everything. It really was.
One can argue about the scale and composition of the Australian Government response to the crisis. Was it too much? Was money wasted?
Regardless of these issues, the key point is that the quick response at multiple levels from bank guarantees to cash splashes directly targeted both the pervasive gloom and key economic variables. I remain of the view that these responses were a major achievement for the then Rudd Government and the institutions of Government including Treasury.
The capacity of the Government and the Reserve Bank to respond were greatly aided by the country's fiscal position. With no net Commonwealth Government debt and a good budget position, both the Government and the Reserve Bank had considerable freedom to move. There is a lot of debate in Australia at the present time centred on the failure of Governments, past and present, to take proper advantage of the benefits offered by the minerals' boom.
I agree, but in relative terms, we have done pretty well. We were able to stimulate the economy at a level comparable to countries elsewhere, but actually come out better off in relative terms in things such as budget deficit and Government debt than most countries. This brings in the last variable, China.
China kept growing during the crisis. Whereas much of the rest of the developed world struggled to stabilise, Australia experienced a minerals boom based on Chinese demand. You don't have to be very good to do well when things break your way!
Australia truly has been a lucky country. This brings me to my last point.
I don't think that Australia actually offers much in the way of lessons about how to handle things such as the GFC. There were things we did right, but we were also just lucky. If the value of our currency had not declined at just the right time, if China had stalled instead of growing, things would have been very different. In a perfect economic storm, we had perfect economic luck, allowing competent but not perfect economic management to play its part.
Now we appear to have overtaken Spain to become the twelfth largest economy in the world. Who would have believed it? Just remember, it's not us who did it.