Thursday 19 Jul 2018 | 02:44 | SYDNEY
Thursday 19 Jul 2018 | 02:44 | SYDNEY

Financial crisis: Where have we got to?

13 October 2008 08:21

Guest blogger: Peter McCawley is a Visiting Fellow at the Indonesia Project, ANU, and former Dean of the ADB Institute, Tokyo.

Three weeks ago I said (hoped, really) that the US authorities would probably be able to restore order to chaotic markets and that Australia should be able to weather the international economic storm. My proviso was that fast progress was needed from US authorities in tackling basic problems. So where have we got to?

The good news is that, so far, Australia still seems better placed than most major northern hemisphere OECD countries. It's true that some of our markets have taken big hits recently. Commodity prices have fallen sharply, the Australian dollar has plummeted, and not surprisingly, the virulent 'crisis of confidence' virus has caused remarkable falls in the Australian stock market.

But our regulatory institutions are looking stronger than those in the US or Europe, our major financial institutions are still basically holding firm, and the 'toxic debt' problem seems to be better contained in Australia than in some other major OECD nations. And the latest OECD economic survey of Australia, released just a few days ago, points to the strengths of the economy.

But the bad news is that both short-term and medium-term international conditions have deteriorated sharply. Short-term problems have multiplied, threatening to spin out of control. The basic difficulty is that a series of major markets are functioning badly, or have even seized up, while the authorities (both regulatory agencies and politicians) have obviously been floundering in their attempts to work out what to do. There seems to be both 'market failure' and 'government failure'.

Quite a few of the market players have gone on strike. The umpires, in turn, are arguing among themselves about what exactly to do (provide liquidity? Tackle the toxic debt problem? Inject capital directly?). And to make things worse, the disparate attempts by the various economic umpires to start the market game again have just not worked.

To compound the problems, in the medium term it is increasingly difficult to imagine how a recession in the major OECD countries can be avoided. Both short-term and long-term credit are hard to get. Investments are being put on hold. Consumers are cutting spending. Unemployment is expected to rise. We must hope that governments will quickly announce stimulatory fiscal policies.

Looking further ahead, it already seems clear that the financial crisis will lead to much rethinking about how the international economy operates. The pro-market approach that has underpinned much economic policy in OECD countries in the last three decades seems bound to be wound back. And in a range of ways, the relationship between the northern rich countries and the southern poor countries is likely to change markedly.