The RBA’s Malcolm Edey appeared today to give his rendition of the causes of global financial crisis. The speech is long and tedious but, for all of that, a reasonable enough take on events. I agree with the conclusions but take umbrage with this bit:
I am often asked why Australia was able to come through the GFC relatively unscathed. Unlike the US, the UK and the euro area, Australia didn’t have a recession and we didn’t have any bank failures. My usual response is that it was a mixture of good luck and good management. On the luck side, we do have the good fortune to be geographically well connected to the fastest growing part of the world economy at a time when its demand for mineral resources has undergone a major expansion. That was undoubtedly a factor in the Australian economy’s general resilience over the past few years.
But, without being too triumphalist, there was also the good management side of the ledger. Australia’s monetary and fiscal framework was sound, and it gave us plenty of scope to respond when the crisis hit. Interest rates were at relatively normal levels (actually on the high side of neutral) in the lead up to the GFC. This helped to limit some of the aggressive risk-taking seen elsewhere, and it allowed plenty of room to shift to a more expansionary stance when that was needed. On the fiscal policy front, successive governments had maintained high standards of discipline, and again this allowed plenty of room for expansionary action when needed.
At least as important as all this is that Australia was well served by its prudential regulatory framework. The post-Wallis framework that was put in place in 1998 established APRA as the integrated prudential regulator, affirmed the financial stability role of the RBA and set up the Council of Financial Regulators to ensure appropriate coordination among the regulatory agencies. Under APRA’s leadership, Australian banks were held to much higher standards of resilience than many of their international counterparts. The banks remained profitable and well capitalised. Loan performance did deteriorate during the crisis period, but nowhere near as much as it did in the North Atlantic economies.
My general conclusion from all of this is twofold: the risk of at least low-level crises is never too far away, so we shouldn’t be complacent; but good policy can make a difference in containing that risk.
Despite Edey’s reassurances to the contrary, we did have Australian-style bank failures. Bank West was sold for a pittance rather than let go. And we would likely have had more, in St George, were it not for propitious takeover action.
Moreover, the entire non-bank sector collapsed and we would very likely have seen the investment bank sector follow it down in the absence of government guarantees, not to mention the open question about what would have happened to major bank funding and the current account had yet more government guarantees not popped-up.
That leads me to conclude that the only advantage Australia had over other Western nations in managing the crisis (other than China) was a clean public balance sheet.
You needn’t rely just upon me to draw these conclusions. The APRA insider said much the same the last time the RBA issued such claims of superior management.
