Lead Story
Issue No. 44 - December/January 2008
SA Economic Forecast [take 2]
by Professor Richard Blandy
My article on the economic outlook in the last issue of in-business was finished on 3 September. I spoke of major financial issues that had emerged in American and European credit markets, and concluded: “If Washington’s bailout of massive mortgage lenders, Fannie May and Freddie Mac, does not have a positive effect on the world’s capital markets, a weaker global economic outlook will be confirmed.”
Within weeks, the global financial situation became very, very much worse. Banks refused to lend to each other. People and companies hoarded cash. Stock markets all around the world fell by very large amounts, as shorting and margin calls propelled them downwards.
The $A fell from more than 95 cents to less than 65 cents in the space of a month. These dramatic events – events that can properly be described as a ‘run’ on the global financial system – prompted unprecedented action by governments around the world to counter the crisis. Fears of an economic downturn of a magnitude comparable to the Great Depression were not unreasonably being canvassed.
Action by Ireland to provide a government guarantee of all bank deposits necessarily triggered a wave of similar guarantees in other countries, including Australia – notwithstanding the negligible risk to depositors in Australia’s well-capitalised and well-regulated major banks. Failure to react would have seen a run on these sound institutions, as depositors transferred their cash to safe havens offering sovereign guarantees.
The Australian Government did well, notwithstanding that its actions exacerbated, and possibly provoked, a run on a number of Australia’s near-bank financial
institutions. The Government also did well to initiate a $10 billion financial transfer to various household groups in an endeavour to offset expected falls in aggregate demand in the “real” Australian economy in the coming year, precipitated by the financial crisis and the panic accompanyi...
