Why australia survived the gfc

In spite of its good economic performance, Australia implemented a variety of regulatory responses to the global financial crisis. These included reforms relating to: deposit and wholesale funding guarantees; covered bonds; short selling; executive remuneration; and retail investment protection.

Australia also introduced a large economic stimulus package, which Joseph Stiglitz has praised in terms of its size, design and timing.

The chapter assesses these reforms and initiatives, raising questions concerning the extent to which they addressed international or national problems. An abridged version of the chapter can be found here. The stock market has bounced back almost 30 percent since mid-July.

And housing? Home prices are actually higher now than in the summer of Americans, Europeans and Japanese watched, enviously. Not only did the Aussies have the easiest time during the recession; they were the first to escape. What did Australia do right that the rest of us did wrong? Ten years ago, the story for Australia might have been very different.

Had Australia stayed hitched to these economies it almost certainly would have been pulled down with them in the crisis. The China Syndrome is often cited as the single most important reason the Australian economy weathered the downturn.

Economist Neal Stoughton, head of banking and finance at the Australian School of Business, argues that Australia had to do very little to stimulate the economy when the crisis hit. As China's demand for raw materials grew it became Australia's No.

In , non-performing loans were 0. Non-bank lenders at their peak just before the credit squeeze accounted for 20 percent of all loans. The banks did a good job of grabbing most new home loans by cross-selling low-cost bank accounts, credit cards and insurance — the more you bought the more you saved.

That gave home buyers less incentive to shop outside their bank for low-cost, low-documentation mortgages. Fearing inflation in an overheating economy, the Reserve Bank was whacking up the cash rate. That sent thousands of households under and put tens, perhaps hundreds of thousands, into financial distress. But it was below the threshold that would have seen tens of thousands more homes repossessed. Imagine what would have happened if the RBA had felt the need to keep pushing up the policy rate.

Had mortgage interest rates risen into the double digits you might have seen carnage in the mortgage belts, as monetary policy was used to curb inflation and crunch demand. Australia could have seen a recession induced by its own imbalances, rather than avoiding one caused by global imbalances.

We were also lucky we were China's quarry. China's hunger for minerals meant Australia did not suffer the export collapse that hit other nations so hard. Hitched to China's big red engine, Australia enjoyed an ongoing infusion of national income that helped stop the economy here from going backwards and minimised the job-shedding.

Plus, courtesy of China, Australia benefited from the positive flip side of the interest rate story already described. The land Down Under was devoid of the ultra-low interest rates seen overseas former US Fed chairman Alan Greenspan's sustained 1 per cent policy interest rate for example.

Higher interest rates meant there was less ultra-cheap debt to inflate asset price bubbles. Imagine how house prices would have soared if the cash rate had fallen to 1 per cent here. Imagine all the extra money that would have gone into margin loans to buy stock - and how much harder Australians would have been whacked when the bubbles burst.

The absence of negative real interest rates allowed Australia to escape some of the financial shenanigans that happened elsewhere when investment bankers and other traders, searching for yield, borrowed short at very low rates and invested long for higher returns, then got hammered when the proverbial hit the fan.

It was lucky, too, that we'd already had our banking crisis. Remember the State Bank of Victoria? The State Bank of South Australia? The Pyramid Building Society?

They were among the string of banking failures in the late s and early s. Even Westpac, one of the Four Pillars, nearly fell. The banking runs and ruination that Australia had back then helped to curb the enthusiasm of Australian banks for excessive leverage and excessive risk taking. The bank failures put the regulators on notice, as did the collapse of the insurer HIH in When the swarm of private equity firms descend like locusts and start gobbling up companies through leveraged buyouts, it is a sure sign the credit cycle is reaching the pinnacle of excess.

Luckily, in Australia, the swarm arrived late. The leveraged buyout firms and private equity raiders only began targeting Australia in earnest in The business cycle turned and the credit ran dry before they had time to buy too many Australian companies and load them up with debt, otherwise there might have been a lot more corporate failures.