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GFC

The Global Financial crisis

In 2009 Australia and the world faced the most serious financial and economic challenges since CEDA was formed almost 50 years ago. Given that Australia's banking, other finances and investments are heavily integrated with international finance we could not escape the international impact of the tens of $ trillions of toxic debt and unmonitored derivatives. A vast stock of geared products, including roughly $60 trillion of Credit Default Swaps (c.f. world GDP of about $50 trillion) traced back to housing loans, issued against excessive housing finance in the US. Credit sources dried up almost overnight on 15 September 2009 following the closure of Lehman Brothers, a central player in derivatives. Because the CDS did not involve words such as "guarantee" and "insurance" they escaped regulation - a matter endorsed by then Fed Chairman Alan Greenspan and left alone by the Congress. A pass-the-parcel situation arose where it was virtually impossible to track toxic liabilities. All felt vulnerable.

Government Debt to GDP Ratio - Actual and Projected

Source: IMF World Economic Outlook, April 2009

As the world's capital markets imploded from September 2008 and threatened countries such as Australia, there were various measures such as bank guarantees and fiscal stimulus aimed at preventing what was seen as a likely recession of extreme proportions. Unusually, however, this was an economic shock originating in the US capital market; making it possible that the turnaround could also be rapid to the extent that capital market problems and confidence could be dealt with.

Key tools in the financial area were an elastic and quite massive supply of central bank and Treasury funds to banks and other financial institutions and sectors, in Australia and elsewhere. There were also bank guarantees. In the Australian case the actual and projected government Debt-to-GDP ratio was very low c.f. the UK, US and Japan (see above). Thus a reversal of the credit situation was more amenable in Australia and we also had a degree of flexibility owing to earlier labour market, financial sector, state enterprise and trade reforms.

To cut a long story short, our institutional structures and financial regulations and general economic flexibility seem to have served us well, relative to other economies, in that with the help of guarantees the four leading banks have performed well, and other financial institutions and markets have largely weathered the storm.

While debates rage about the extent to which the mixed international recovery at end 2009 is real, and as to whether the contribution of rapid fiscal stimulus was the key to an early recovery, the countries and notably Australia where financial governance had been relatively strong showed the most rapid capacity to bounce back in a sustainable manner. The remarkable demand for our mineral `resources, notably from China and India, also underpinned demand in what might have been a collapse of economic activity associated with the threatened financial system.

CEDA's recent work on the GFC is available below.

• The economic collapse we did not have to have
  CEDA's Research Director Dr Michael Porter explores the foundations of global finance and some of the reasons behind the global financial crisis.