Global Financial Crisis and Australian Policies - Case Study Example

Global Financial Crisis and Australian Policies Name Class Unit Introduction The global financial crisis which occurred in the late 2008, led great impacts on the global financial system. The global credit markets were frozen while the investors lost confidence and governments struggled to prevent economic meltdown. The crisis led to the sovereign debt crisis which threatened the world economy. The financial regulators and fiscal policy makers were challenged. The policy makers in most countries were forced to make difficult tradeoffs. There was an increase in risk and the subprime mortgage market collapsed as well as related markets. The crisis was led to several events such as the large disparity in savings and investment that existed between the US and China (Berlatsky, 2010). Global imbalances were a key contributor to the crisis. Australia in response to the global financial crisis was strategic. There was increase in focus on the finance, competition and governance which were aimed at gaining sustainable growth. Australia was able to escape the worst of the financial crisis due to extraordinary policy actions. Australia had a sound financial system during the crisis (Australia & King, 2009). This report looks at the impacts of the global Financial Crisis (GFC) and its impacts on the Global Financial system. The report then looks into ways which the Australian policy makers dealt with the problems presented by the GFC. Causes Poor financial regulations in some of the countries were blamed as a part of the cause of the GFC. This involved collateral debt requirement, bank regulations, credit rating agencies regulations and remuneration arrangements. Most of the international banks were poor in managing financial risks. The resultant was poor pricing of risks leading to boom in the credit markets. Due to the low cost of risk, the global financial system became venerable (Forrest & Yip, 2011). The US mortgage market took advantage of the low interest rates. Most of the Americans households took mortgages on a fixed rate, which was being guaranteed by the government enterprises. Mortgage lenders in US engaged in riskier segments that were not guaranteed. At the onset of the crisis, the lending standards started to ease. The arrears rate rose more than what the lenders had anticipated. US mortgage lenders collapsed. The global financial system was affected by the crisis. It is important to note that economies are run in a great way by the confidence. Consumers and firms pull back when they lack confidence (Woodford, 2010). The industrial output in most parts of the world contracted and commodity prices declined. The world trade volume collapsed and the global macroeconomic became weak. Most of the borrowers globally faced tough times to finance their debts. The global banking sector became weakened (Berlatsky, 2010). Impact of GFC on Australia Australia had the shortest and the least effect of the GFC among the advanced industrial economies. The country did not experience a recession in 2009 as opposed to other countries. During the recession, Australian economy grew by 1.3%, which was 4.5 times higher than the advanced economies average (Hawtrey, 2009). The country had eased the monetary policy and put in place fiscal stimulus measures. Without the stimulus measures, the Australian economy would have contracted with a corresponding fall of the GDP by 1.3%. The consumer confidence in the country had been supported by the positive assessment of the country performance relevant to other economies. The retail and housing sectors had been cushioned which helped to stall collapse in the aggregate demand. The magnitude and composition of the Australian fiscal packages made them appropriate and effective (Sykes, 2010). Australian success in dealing with the global financial turndown is attributed to their monetary and fiscal policies. These include reduction of the interest rates, government stimulus packages, bank guarantees, robust national economy, surplus budget and low debt rates (Sykes, 2010). The Australian governance institutes were of great importance. The advice and support of the Australian policy makers played a great part in shaping the decisions that were taken. The political leaders were able to help the country take timely and effective decisions. The policy makers were keener on the international developments and anxious to make sure they do not repeat the mistakes of the previous government (Eslake, 2009). Australian policy makers and the GFC Australia was under the Rudd, who was elected in 2007. The government was keen on avoiding the looming threat of financial crisis. The country was observant to the effect of the mortgage crisis, which had paralyzed the US market. There was the collapse of the institutions and loss of consumer confidence in the US market, which threatened the global financial market. There were concerns of the ability of Australia booming economy capability to keep pace with the rising inflation (OECD, 2010). The Australia treasury made a forecast that the economy would grow by 4.5% between 2007 and 2008. To keep the inflation within the set target of 2 to 3%, interest rates were tightened. The country’s interest rates rose by 3.25% between April 2002 and March 2007. Australian interest rates remained at a steady rate of 7.25 until 2008 while other countries interest rates approached zero (Gruen & Clark, 2010). The country ministers had travelled extensively and made connections worldwide. The country interactions with the international counterparts had made them more aware if the concerns on global financial crisis. In 2008, Australia had received dire warnings based on the global economic outlook. The new Australian government was keen on maintaining its authority and credibility. This led to making non bureaucratic channels open to advice. The government took advice from the business contacts, industries and academia on the looming financial crisis (Gruen & Clark, 2010). Policy makers in Australia acted decisively. The treasury and the Australian Securities and Investments started by realizing their crisis plan after the collapse of the Lehman’s brothers in the US. The crisis plans were released looked into ways which the government would handle a similar crisis if any of the Australian financial institutions fell into crisis (Hawtrey, 2009). The plans were based on the Asian crisis of 1997. The plans included the ability of the banking system in Australia to obtain offshore finance in event of helping Australia account deficit. The country introduced a temporary ban on the short-selling which was based on the fear of the ability of second tier bank viability (Eslake, 2009). In 2008, interest rates were cut by a full percentage point by the Reserve bank of Australia. Following Lehman’s collapse the bank Australian dollar lost 25% of its value. The share market suffered a great blow with a decline of 8% daily (Hawtrey, 2009). The instabilities made the reserve bank of Australia to reconsider its approach to the monetary policy. The government adopted a guarantee to all banks deposits which were under $1 million. The government also pledged to give banks unlimited guarantee for a fee. These were measures that were aimed to improve the consumer confidence and enable access to borrowing (Australia & King, 2009). Australian government came up with a crisis management team, which was made up of official and policy advisers from the treasury. The ministerial staffers and the treasury secretary were engaged in country’s spending discussions in a meeting. They were keen on coming up with sending options which could help in buffering the country from the global crisis. The main task of the policy makers was to prevent loss of consumer confidence. The government announced the Economic Security Strategy in 2008 (Sykes, 2010). This was made up of payment of $8.7B cash to the lower income households. $1.5 was to be used in the housing and construction while $187 was to be used in training. This comprised of $10.4 which accounts for 1% of the GDP (Sykes, 2010). The judgement by the policy makers was based on the political instinct and preparedness for worse (Gruen & Clark, 2010). Though strategic decisions, the government was able to shift the crisis into a footing. There were daily meetings between the ministers and advisers to review on the international market developments. The policy makers tackled the issue of the rising unemployment, which outweighed the political risks. The country came up with a job building plan which was announced in 2009. The government also increased their expenditure in education which was the largest in Australian history (Australia & King, 2009). Australian performance was based on the timely and effective policies. The policies used were both monetary and fiscal. The easing of the interest rates by the reserve bank helped a lot. The country engaged in aggressive fiscal policies which were carried out ahead of other economies. The actions led to an increase in consumer confidence which led to demand in times when there was diminishing confidence (Eslake, 2009). During the crisis, the country financial system continued to function. The government had taken reforms and financial regulatory that had strengthened the banks. The country had a comprehensive structural reform, which helped it to succeed in the global crisis. The policy makers in both political divides worked together in ensuring that there were prudent fiscal policies. The strong performance in the Australian economy is owed to the policy makers who made reforms which in some cases were difficult politically. The policy makers and advisers persuaded the ministers on the benefits and also supported them during the implementations. The success was thus a result of shared efforts of the policy makers and the advisers. The policy makers were keener in creating credibility through decisions with long term perspective (Eslake, 2009). Australia economic success during the financial crisis was based on collective actions. The policy makers and the advisers helped to shape a long term reform agenda which made Australia to have the economic strength during the crisis (Hawtrey, 2009). These institutions provided advice to the newly elected Rudd government, which took power in 2007. The government ministers were neither economists nor bankers, but relied mostly on the expertise advice. The advice given to the government comes from the treasury, Independent reserve bank, policy and regulatory agencies. The government official advisers have been supplemented by the ministerial staffs since 1970s. The advisers in the Rudd’s government had a long term experience than was in a span of more than 30 years (Eslake, 2009). Ministers and their staffs worked in close collaboration with officials and policy makers. By looking at the crisis and coming up with policy response. Advisers and policy makers debated on the options which could make Australia reduce unemployment and ensure past mistakes were eliminated. The country political and personal networks were a good source of warning on the looming crisis (Hawtrey, 2009). The Australian policy makers, advisers and the political system worked together towards enhancing consumer confidence and creating employment as their main goal. They had rich personal experience from previous crisis and hence had to take action. Australia was thus able to avoid GFC largely due to policies based on fiscal stimulus. The country was able to absorb the shocks coming from the crisis than most countries. The collective efforts thus saved the country from the GFC (Australia & King, 2009). Conclusion Global financial crisis occurred in 2008 and led to great impacts on world economies. Global credit markets were frozen while the investors lost confidence and governments struggled to prevent economic meltdown. GFC led to the sovereign debt crisis which threatened the world economy. The crisis started with the collapse of the US mortgage market. Global saving imbalance and poor financial risks management by international banks was a major contributor to the crisis. Australia ability to escape from the GFC has been due to the country’s policy makers’ interventions which prevented the collapse of the financial system. The country macroeconomic policies and institution were well set for the crisis. Australia was the only advanced economy that did not suffer setback as a result of the financial crisis. The country had the strongest growth rate among the developed countries. Good regulation had made it possible to avoid financial collapse. The country created a strong fiscal position which enabled substantial fiscal response. References Australia. & King, C. (2009). The global financial crisis and regional Australia. Canberra, A.C.T: Commonwealth of Australia. Berlatsky, N. (2010). The global financial crisis. Detroit, MI: Greenhaven Press/Gale Cengage Learning Eslake, S. (2009). ‘The global economic crisis of 2007-2009: An Australian perspective’. Economic Papers, Vol 28, No. 3, pp 226-238. Forrest, R. & Yip, N. (2011). Housing markets and the global financial crisis: The uneven impact on households. Cheltenham, U.K: Edward Elgar. Gruen, D. & Clark, C. (2010). What have we learnt? The Great Depression in Australia from the perspective of today. Economic Analysis and Policy, Vol 40, No. 1, pp. 3-20. Hawtrey, K. (2009). The global credit crisis: why have Australian banks been so remarkably resilient? Agenda. Vol 16, No. 3, pp. 95-114. OECD, (2010). Australia: moving to a seamless national economy. Organisation for Economic Cooperation and Development, Policy Brief, February. Sykes, T. (2010). Six months of panic: How the Global Financial Crisis hit Australia. Crows Nest, N.S.W: Allen & Unwin. Woodford, M (2010). Financial Intermediation and Macroeconomic Analysis. Journal of Economic Perspectives, Vol. 24, no.4, Fall. Read More