The GFC provided the secret sauce we used to ward off the COVID recession

aldegonde/Shutterstock

Peter Martin, Crawford School of Public Policy, Australian National UniversityWe got an awful lot right during the COVID crisis — an awful lot that we couldn’t have got right just a few years earlier.

Which is another way of saying we were incredibly lucky.

Had COVID attacked during the 1980s there would have been no way to make a messenger RNA vaccine, not even for animals.

The national broadband network wouldn’t have been thought of. It wasn’t complete until 2020.

Even three years earlier, in 2017, the NBN reached only half of Australia’s 10 million households.

Had COVID struck then, before the broadband network was complete, working from home, telehealth and home schooling might have been impossible for many Australians, with devastating educational and other consequences.

And had it struck just a few years earlier still, we wouldn’t have learnt from the global financial crisis.

War Games

Australia’s handling of the GFC was exemplary, as evidenced by the fact that in much of the rest of the world it isn’t called the GFC, but The Great Recession.

Getting that crisis right owed something to a happy accident, as Ken Henry, head of the treasury at the time, explained on Monday at a seminar organised by the Institute of Public Administration.

A few years before the crisis in 2004 he was sitting in a room with senior officials discussing “some macroeconomic topic” when his deputy Martin Parkinson, sitting on his right, poked him with his left elbow.

“Martin said: you know it’s just occurred to me that you and I are probably the only people in this room who have ever experienced a recession — maybe we should have a workshop on that, what we would do if there was another crisis”.

The early 1990s recession was handled badly

Parkinson and treasury secretary Henry had worked for the Hawke and Keating governments during the early 1990s recession which scarred the Australians who it threw out of work for a decade.

In a series of “war games” held away from the treasury building, they and other officials determined that next time they should advise the government to quickly abandon budget discipline and fight what was coming with overwhelming force.

As Henry put it: “no matter how great the importance of fiscal discipline in establishing policy credibility, it is nothing compared to the loss of credibility associated with a recession”.

If the treasury didn’t tell the government this, the government would catch on anyway and sideline it for advisers who would.

Megan Aponte-Payne, Steven Kennedy, David Gruen, Ken Henry, Malcolm Edey, Meghan Quinn and David Tune at the GFC seminar.
Isabelle Franklin

“I came out of those discussions determined that if Australia were to confront a large negative shock during my tenure as secretary, the treasury would seek to put itself front and centre in advising the government,” Henry said.

“We would not be taking seats in the back row by counselling a government to rely on monetary policy, the exchange rate, or automatic stabilisers.”

As for the idea of “proportionate response”, which was still being counselled by some in the early stages of COVID last year, Henry said the word “proportionate” could be applied to a response, but never to preemption.

Preemption is not proportionate

“If you want to preempt something, you don’t talk about being proportionate,” he said. “I remember some commentators saying you should wait until you see the ‘whites of the eyes’ before taking action. “I wouldn’t know what action to take at that stage, presumably it would be to run as fast as you could, I just don’t know.”

The key thing was to get money into Australian’s hands immediately. Spending on infrastructure (spending on almost anything other than households) would take too long.

During the financial crisis Labor got money into households’ hands by handing out cheques. During COVID the Coalition did it by doubling benefits and routing payments through employers and calling them JobKeeper.

Bandwidth matters

Henry, and David Tune who was in the department of prime minister and cabinet at the time and later headed the department of finance, told the conference that attempting to do other things while getting money out the door got in the way, among them insulating homes and building school halls.

Governments have limited “bandwidth” or “thinking space”, and during the GFC the Rudd government was also considering taking over hospitals, taxing carbon, reforming the tax system and building the NBN.

The Morrison government seems to have learnt that lesson, but it doesn’t seem to have learnt another, which is that the Commonwealth isn’t good at managing projects.

The Commonwealth can’t run projects…

Whether it’s vaccinations or quarantine or insulating homes, projects are best managed by state governments who have actual experience of running things.

Another important lesson, reinforced during COVID is that in practical terms the ability of the Reserve Bank to support the government in keeping a recession at bay might be unlimited.

The Reserve Bank deputy governor at the time Malcolm Edey told the conference that the next step after low interest rates and buying government bonds is direct “money-financed fiscal expansion”, where the bank creates money for the government to spend.

…but its financial power is unlimited

With all of the government’s borrowing now in Australian dollars, and most private overseas borrowing effectively in Australian dollars because it has been hedged against exchange rate movements, and with the debt ceiling gone, there’s no limit to the force and speed with which the government can stave off a recession.

The current treasury secretary Steven Kennedy conceded that in one way fighting the COVID recession had been easier than fighting the GFC.

COVID had a clear start date. The GFC had a rolling series of starts that made it hard to be sure the worst hadn’t passed.

---

Read more:
Frydenberg spends the bounty to drive unemployment to new lows

---

And perhaps because of that, we discovered what Australians can do.

Treasury Deputy Secretary Meghan Quinn praised the banks for deferring payments on $250 billion of loans, Coles and Woolworths for working together to stock each other’s stores and the private and public health systems for working together in a way that wouldn’t have been thought possible before the pandemic.

We read the GFC playbook, then went further.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Australian household wealth has taken its biggest dive since the GFC, but things are looking up

Warren Hogan, University of Technology Sydney

The latest data from the Australian Bureau of Statistics confirms household wealth has fallen, on the back of falling house prices, in the past year.

But it’s not all bad news. There are signs of hope in the portents for the next six months.

During the first quarter of this year, the net worth of all Australian households rose 0.2% to A$10.2 trillion. Total household net worth in March 2019 was 0.7% lower than in March 2018, largely because of steep falls over the final six months of 2018.

The per capita annual decline was larger, falling by about 2.4%, because of population growth. This means the average wealth of Australians dropped by about A$9,500, from A$414,400 to A$404,900.

---

ABS

---

This household “balance sheet event” – defined as an annual decline in household sector net wealth – is the third in the past 30 years. The other two were through the Global Financial Crisis of 2008 and immediately after.

Housing (land and dwellings) comprises 52% of household-sector assets. Superannuation comprises 24%. Property values fluctuate with real estate prices, while superannuation is highly exposed to volatility within the financial markets.

Consumer spending

The next chart highlights the relationship between changes in household net worth and spending on discretionary items and durable goods.

---

ABS

---

But what is interesting is that consumer sentiment has not been significantly affected.

The following chart shows household net worth vs Westpac’s consumer sentiment data. This is the first major downturn in household net wealth in 30 years that has not coincided with weaker consumer sentiment.

---

ABS & Westpac

---

It’s hard to know for certain why consumer confidence has remained relatively steady, but two things stand out.

First, the consumer financial adjustment has been orderly and deliberate as opposed to rapid and forced. It appears people have consciously adjusted spending and savings patterns to achieve long-term savings goals.

Second, there has been ongoing strength in the labour market. Despite falling wealth, people still have jobs and this reinforces confidence.

Shares and housing stocks

It is safe to say consumers will start spending more once they feel their asset position has stabilised.

Strong equity markets have played a big role in shoring up household wealth since the start of this year. As the next chart demonstrates, they could continue to do so over the period ahead.

---

ABS & Bllomberg

---

But the big swing factor is house prices – specifically land values. The Reserve Bank’s interest rate cuts should help stabilise house prices over the second half of 2019.

Our last chart suggests this appears to have started, with auction clearance rates improving in recent months.

---

ABS, CoreLogic & Bloomberg

---

This all suggests household wealth could start growing again in the second half of the year. That should go a long way to stabilising the economy.

Warren Hogan, Industry Professor, University of Technology Sydney

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Vital Signs: the GFC and me. Ten years on, what have we learned?

Wayne Swan and Kevin Rudd spent big and spent bold, and it almost certainly kept us out of recession.

Richard Holden, UNSW

A little more than a decade on from the the collapse of Lehman Brothers, the largest bankruptcy in history, many of the world’s advanced economies are only now beginning to recover fully.

I was on the faculty at the University of Chicago at the time and, like many, followed the events of the 2008 US summer with a combination of interest and outright fear.

It is hard to describe how scary the two months around the Lehman bankruptcy were. Two anecdotes convey some of that fear, however.

The first was when I spoke to an economics official in the Obama administration who said: “Go get cash and bottled water. Automatic teller machines might not be working two days from now.”

---

Read more:
Anniversary of Lehman’s collapse reminds us – booms are often followed by busts

---

The second reflects just how severely money markets froze up. Goldman Sachs – Wall Street’s most venerable firm – was largely on the good side of trades on credit default swaps, the instruments behind much of the crisis. Yet its stock price was utterly hammered. It wasn’t until legendary investor Warren Buffett sank US$5 billion into Goldman that confidence was restored.

On one day Goldman stock was down by a staggering nearly 50% in intra-day trading. It very nearly went the way of Lehman – all because of what amounted to a modern-day bank run.

---

Golden Sachs stock price: YahooFinanceChart.

---

The Obama administration responded with spending (including on tax rebates for households and firms), big interest rate cuts and measures to ensure banks had access to funds. Combined, these helped avoid a repeat of the Great Depression.

When Australia splashed cash

Australia, too, spent big: A$10 billion in October 2008 and a further A$42 billion in February 2009. More than half of the second sum, $A26 billion, went on infrastructure. Another $12.7 billion was spent on cash bonuses, including $900 for every Australian on less than $80,000.

And we cut interest rates, massively, and guaranteed bank deposits.

The International Monetary Fund, the Organisation for Economic Cooperation and Development, and most good economists think what we did was essential to ensure Australia avoided a severe downturn.

Prime Minister Kevin Rudd and his treasurer, Wayne Swan, deserve a lot of credit.

Yet there are those on the conservative side of politics who claim the stimulus spending was wasteful, not that helpful, and locked in an era of higher government spending.

Wasteful? Not really

As prime minister in 2016, Malcolm Turnbull encapsulated the view that the spending was a waste when he told the ABC’s Leigh Sales: “I think what shepherded Australia through the GFC successfully was the Chinese stimulus and the large amount of cash that John Howard left in the bank.”

Here’s what I think.

The Chinese stimulus helped, but China didn’t do it to help Australia. It did it to help itself, with a happy byproduct being continued demand for Australian resources.

Does Mr Turnbull really think the Chinese government was either mistaken (because stimulus spending doesn’t help) or benevolent (because it wanted to help Australia)? These are not terms normally associated with Beijing.

The “large amount of cash” left by the Howard government was indeed very important. It allowed the Rudd government to spend big without running up huge government debt. As the noted UC Berkeley economists Christina and David Romer have pointed out, using evidence from 24 advanced economies, fiscal and monetary policy “space” is important in ensuring the stimulus programs work.

---

Read more:
Government spending explained in 10 charts; from Howard to Turnbull

---

So, yes, Howard’s debt-free budget was important, but only because it gave the government room to spend.

There is an important point here. Namely, that prudent fiscal management through ordinary times is essential in order to build up the firepower to respond in extraordinary times.

Australia still enjoys government debt to GDP that is low by OECD standards, but its growth has been very rapid even in post-crisis years because of the structural gap between government revenues and expenditures. Both sides of politics say they are committed to narrowing it. We shall see.

Space matters

“Space” to act with monetary policy (official interest rates) is also important.

It’s the basis for much of the talk about a “new monetary policy framework” that would lift interest rates from their present lows in Australia and overseas to around 5%. It’s a goal articulately and forcefully argued for by former US Treasury Secretary Larry Summers. Getting there would give central banks the firepower they might need.

These lessons have been learned to varying degrees, but are now thankfully at least part of the mainstream debate.

And regulation

One thing that everyone should have learned from the financial crisis in general, and Lehman in particular, is the need for effective regulation of financial institutions.

The combination of massive leverage, opaque financial instruments and radical interconnectedness of financial firms in the US was a disaster waiting to happen.

In many ways it still could be.

Republicans in the US want to dramatically roll back the Dodd-Frank Wall Street Reform and Consumer Protection Act introduced by President Obama in response to the financial crisis.

Although far from perfect, it helped de-risk the US financial system.

In Australia the failings of financial regulators play out every day at the Hayne Royal Commission, in excruciating detail.

---

Read more:
Royal commission scandals are the result of poor financial regulation, not literacy

---

It entitles us to ask if Australian regulators can’t prevent outright theft by financial institutions, how equipped are they to prevent more complicated transactions that might put the financial system at risk?

The answer is: not very.

We’ve learned some things

A decade after Lehman it’s fair to say we have learned lessons.

We know how to use big and bold fiscal (spending) policy and monetary (interest rate) policy to create a virtuous circle of beliefs that can pull us out of a downturn.

And we know that we need to reload both fiscal and monetary policy in the good times so we are ready for the bad times.

But on financial regulation the US might be about to go backwards, and we never really went forwards.

Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

WORLD EVANGELICAL ALLIANCE ASSEMBLY CLOSES IN THAILAND

More than 500 senior evangelical leaders gathering in Pattaya, Thailand from October 25-30, 2008, have wrapped up their General Assembly, after five days of intensive discussion to plan the way forward in world evangelization, reports Michael Ireland, chief correspondent, ASSIST News Service.

On Wednesday, delegates agreed upon six major resolutions setting out an evangelical response to religious liberty, HIV and Aids, poverty, peacemaking, creation care and the global financial crisis, according to a media release obtained by ANS.

“The worldwide financial turmoil is, at its root, evidence of what happens when too many are captivated by greed and put their faith in, and entrust their security and future aspirations to, a system animated by the maximization of wealth. Many legitimately feel betrayed,” read the resolution on the global financial crisis.

“While we hope that the painful consequences of the turmoil will be mitigated, our concern is that its impact will continue to permeate into more regions and economies of the world. We recognize that this economic crisis will have the most painful impact on the poor, who are the most vulnerable.

“We reaffirm our faith in God and acknowledge that He is in control. We repent when we have placed our trust in money, institutions and persons, rather than God. Our security is not found in the things of this world.”

The resolution called on Christians to care for the poor during the crisis and live simply and generously.

“The Body of Christ, His Church, is living with HIV,” stated the resolution on HIV, a major focus area for the World Evangelical Alliance (WEA). “With brokenness we admit that as Evangelical Christians we have allowed stigmatization and discrimination to characterize our relationships with people living with HIV. We repent of these sinful attitudes and commit to ensuring that they are changed.”

In the preamble to the resolution on the Millennium Development Goals, evangelical leaders stated, “In coping with the financial crisis of 2008, governments and international institutions have shown how quickly and effectively they can move to mobilize massive resources in the face of serious threats to our global, common economic well being.

“Yet one child dying of preventable causes every three seconds and 2.7 billion people barely sustained on an income of less than two dollars per day has yet to evoke a similar level of urgent response.

“We believe this to be an affront to God, a shame to governments and civil society, and a massive challenge to the witness and mission of the followers of Christ.”

World Evangelical Alliance (WEA) international director Dr Geoff Tunnicliffe told delegates that they faced additional challenges to fulfilling the Great Commission from radical secularism, postmodernism, declining Christianity at the same time as growing interest in spirituality, trafficking and migration.

He insisted, however, that great challenges also brought great opportunities for evangelical engagement.

“We see this tremendous growth and this seismic shift in the church around the world and we are excited to what God is doing as he raises up women and men around the world in so many different places,” he said.

“As we think about the global reality of the world in which we live, [there are] immense challenges but also immense opportunities.”

Dr Tunnicliffe also said that the WEA would remain committed to integral mission “or holistic transformation, a proclamation and demonstration of the Gospel”.

“It is not simply that evangelism and social involvement are done alongside of each other but rather in integral mission proclamation has social consequences. We call people to love and repentance in all areas of life,” he said.

He reaffirmed the WEA’s commitment to world evangelization.

“If anyone tells you that we’ve gone soft on world evangelization you can tell them that we are totally committed to world evangelization because it is only Jesus Christ that changes people’s lives,” he said.

A highlight of the week was an address from the Rev Joel Edwards, who was commissioned during the assembly as the new director of Christian anti-poverty movement Micah Challenge.

In his address, the former head of the UK Evangelical Alliance told delegates that the power to rehabilitate the word ‘evangelical’ lay in their hands.

“Whatever people think of evangelical Christians, if people are going to think differently about evangelicals the only people who can actually change their minds are evangelicals,” he said.

“We must reinvent, rehabilitate and re-inhabit what evangelical means as good news. We must present Christ credibly to our culture and we should seek to be active citizens working for long-term spiritual and social change.

“Words can change their meaning. If 420 million evangelicals in over 130 nations across the world really wanted it to happen, evangelical could mean good news.”

In another key address, the head of the Evangelical Fellowship of India, the Rev Richard Howell said that an identity anchored in Christ and a universal God was an evangelical non-negotiable in an age of pluralism.

“We have but one agenda: obedience to the Triune God revealed in Jesus Christ,” said Dr Howell. “We are evangelical Christians for the sake of God.”

“Our identity has to be related back to God. Unless we do that, we will never know who we are. Our identity comes from God and God alone.”

“The Christian belief in the oneness of God implies God’s universality, and the universality implies transcendence with respect to any given culture.

“Christians can never be first of all Asians, Africans, Europeans, Americans, Australians and then Christians.”

The assembly also heard from the Chair of the Lausanne Committee for World Evangelization (LCWE), Douglas Birdsall.

The WEA is collaborating with the LCWE in its major Cape Town 2010 meeting, which will bring together 4,000 evangelicals to assess the next steps in realizing the movement’s vision of ‘the whole church taking the whole gospel to the whole world’.

“You might ask is there a need for an international congress that deals with world evangelization,” Birdsall told the assembly. “I would say that throughout history, such a gathering is only necessary when the future of the life of the church is threatened by some type of challenge – either internal challenge or external pressure.”

The assembly also saw the launch of the WEA Leadership Institute, a brand new initiative to see the leaders of the WEA’s 128 national alliances trained to serve and proclaim Christ within some challenging contexts.

“Leading an Evangelical Alliance is not easy,” commented Dr Tunnicliffe. “That’s why we want to provide them with the relevant training and resources.”

Also commissioned during the week was the new leader of the WEA’s Religious Liberty Commission, Sri Lankan national Godfrey Yogarajah.

Dr Tunnicliffe rounded up the assembly with a call to evangelicals to keep in step with God’s work on earth.

“It is my prayer that we in our community will be women and men who live with divine purpose within our lives, that we will be good leaders envisioned by God to make a difference in the world,” he said.

“The most important thing that you can do with your [life] is to integrate it into the never ending story of God’s kingdom. God’s already at work in the world. He’s doing things. We just need to align with what He is doing.”

World Evangelical Alliance is made up of 128 national evangelical alliances located in 7 regions and 104 associate member organizations. The vision of WEA is to extend the Kingdom of God by making disciples of all nations and by Christ-centered transformation within society. WEA exists to foster Christian unity, to provide an identity, voice and platform for the 420 million evangelical Christians worldwide.

Report from the Christian Telegraph