Global Financial Crisis And Economic – Discussion And Solutions

Discussion

Discuss about the Global Financial Crisis and Economic.

The Global Financial Crisis (GFC) also known as the global economic crisis that began in July 2007 was caused by the credit crunch. It was the result of a loss of faith by the investors of the United States of America in the value of sub-prime mortgages. This has caused a liquidity crisis. Many economists have compared this financial crisis with the Great Depression of the 1930s. This was followed by the US Federal Bank injecting an enormous amount of capital in the financial markets. In September 2008, when the stock markets around the globe crashed and became volatile, the situation deteriorated. The housing market of many developed nations suffered, which resulted in evictions and unemployment in countries like America. Australia avoided the consequences of the crisis with some early measurements taken by the authorities. Australia not only bypassed this lean period, but also passed the test of economic strength with flying colors. According to some economists like John Quiggin, when most of the countries in the world faced recession, Australia did not. The leading roles were played by the Federal Government, the Reserve Bank of Australia and foreign trade.

On September 14, 2008, Lehman Brothers collapsed which marked the beginning of the Global Financial Crisis. The governments struggled to rescue the affected institutions facing grave liquidity issues. This situation stayed for a while. The government of Australia announced the first of its “stimulus packages” which were targeted to fire up the torpid economy. The government of United States even proposed to use $700bn of the taxpayers’ money to revive the investment bankers but failed to pass because of some members of US Congress. By the month October of 2008, people started investing in massive amounts on gold, bonds, Euro, US dollar assuming those were safer alternatives to the stock market and housing market (Fratzscher 2012).

In January of 2009, the Australian government proposed another “stimulus package,” pledging to give cash handouts to taxpayers. The government has designed to spend more capital on long-term infrastructure projects. The Australian Ex-Prime Minister, Kevin Rudd, and Ex-Treasurer Wayne Swan presented their first response budget against the global financial crisis. Their primary objective of this budget was to fight inflation which became a major problem in the domestic economy at the time. The Rudd government announced guaranteed bank deposits in October of 2008. When the Australian economy was about to face a recession, the government announced the stimulus package of $10.4 billion. The package consisted of payments to seniors and families. In December of that year, the payments were made. The payments were made just before the Christmas so that spending will increase (Haas and Lelyveld 2014).

Effect on Australia

According to the Keynesian economy, Aggregate Demand in an open economy = C + I + G + (X-M); where C = Consumption, I = Investment, G = Government expenditure, X = Export, and M = Import. In the case of an autarkic economy (X-M) is not included. The idea was to increase the aggregate demand as well as the output of the economy to avoid the crisis. By increasing government spending and payments, C and G will increase. It will have a joint effect on the GDP of the country. The figure below shows that the increase in government expenditure is shifting the demand curve outward increasing the autarkic aggregate output of the economy from Q1 to Q2.  The C’ and the G’ shows the increased consumption and the government expenditure levels. This increase will help the economy to avoid the Global Financial Crisis (Mankiw 2016).

Figure 1: Shift of Demand

Source: (As created by the author).

“The first home buyer′s grant was doubled to $14,000 for existing houses and tripled to $21,000 for new houses” (Subedi 2016). The automotive industry needed help as the major investors had withdrawn from the market for good. The banks had to fill up the gap. The situation was yet to improve. This made the government introduce the second, a larger than the previous stimulus package. In February 2009, the Australian government allocated $47 billion to support the economy. This package consisted of “$14.7 billion for schools, $14.7 billion for schools, $6.6 billion for 20,000 new homes, $3.9 billion to insulate 2.7 million homes, $890 million for road repairs and infrastructure, $2.7 billion in small business tax breaks, $12.7 billion for cash bonuses. $950 for every Australian taxpayer who earned less than $80,000 was announced to be paid out in March and April 2009” (Shiller 2012).

The reason behind this huge spending is the significant portion of the population who were retirees, pre-retirees, nervous investors. The retirees were living off their pensions or savings. When the crisis hit the economy, they could not replace the loss with new salary. Their wasted investments reduced their living expenses and reduced their standard of living. The pre-retirees had restricted time left to pull them up from the crisis to the place they were before, financially. The timing of the retirement of many workers was changed due to the Global Financial Crisis. The nervous investors risked selling at the lowest price, which was not the best decision available (Ollivaud and Turner 2015).

Government policies

The Global financial crisis led to inflation. To keep the rate of inflation at a manageable point, the Reserve Bank of Australia began to monitor the interest rate. While the rate of interest stretched towards zero in some countries, it remained steady at Australia at 7.25 percent until the year 2008. In the year 2008, the Reserve Bank of Australia reduced the interest rate by full percentage points. The policy settings in Australia are very accommodative, and the policy rate of interest reached a record low of 2 percent (Benchimol and André 2016). The Reserve Bank of Australia regularly kept track of it to ensure that low rate of interest acts to support both borrowing and spending. It also notes that low rate of interest serves to sustain that the credit accessibility is not restricted. The overall financial situation was very stimulatory as well as strong with a significant lift in economic growth force. The budget in Australia was in deficit (Cukierman 2013). The Rudd government declared that it would assure back deposits while the economy faces recession. The Australian government declared the first economic stimulus package this time. As the Global Financial Crisis intensified, the Australian dollar contracted rapidly and declined over 30 percent. This urged the Reserve Bank of Australia to interrupt the market to improve liquidity. In the year 2009, this helped the Australian dollar to recover indicating the comparative strength of the Australian financial system. Ex-Prime Minister Rudd wrote a comprehensive essay during the Global Financial Crisis in the year 2008 addressing the citizens regarding the crisis (Wanna 2015).

During the Global Financial Crisis, a million of Australian jobs vanished. The high unemployment level pushed the Australian dollar to its lowest level in more than three years. According to the Australian Bureau of Statistics, unemployment had risen due to more than 223,900 workers losing their jobs in the year 2008 prompting the unemployment rate 4.5 percent (Parker 2013). Australia steered away the crisis through the recession not only by taking help from the government provided stimulus but also from its exports.  Other countries like Germany and Japan witnessed drops in their exports by 22 percent and 46 percent respectively. Exports in the US also decreased over 22 percent and in the mass terms, world trade fell 7.1 percent. However, simultaneously in this scenario export in Australia decreased by only 1.9 percent in the year 2008. The reasons behind this are India, China, Japan, and South Korea take 45 percent of total Australian exports, and the total export represents over 10 percent of the nation’s GDP. Another major factor that saved Australia was the strength of the Australian economy that was mainly due to the government’s measures resulting from the absence of fall of any major Australian financial institution. The deadly liabilities that tainted the financial system of the rest of the world were largely absent from the Australian financial system (Paramati, Roca and Gupta 2016).

Low-interest rates

Social-democratic governments mainly face the continuing challenges that tie together the power of the market to add to investment, innovation and productivity growth. This is merged with an active regulatory structure that manages risk, improves market failure and provides public goods. Australia is called the miracle economy as it was able to overcome recession during the Global Financial Crisis. The overall reason that associated with the good performance of the economy was the marvelous economic management system by the authorities (Foster 2016).

Year	GDP (real) with Stimulus (tn)
Dec-08	311
Mar-09	314
Jun-09	315
Sep-09	316
Dec-09	320

Table 1: Real GDP with stimulates.

Source: (As created by the author)

Figure 2: GDP (Real) with Stimulus Level (tn) over the year 2009

Source: (As created by the Author).

The figure above displays that stimulus affected the path of growth positively. The collision of stimulus has been aimed by allocated spending as close as attainable to when stimulus funds were spent. The figure also exhibits the level of real GDP as well as the likely impact of stimulates. The slope of the lines can assume the result of GDP growth. In December 2008, the graph exhibited a deeper downturn. In the month of March, the chart indicates that there has been no increase in the economy. The “loose monetary policy,” a low rate of exchange and stimulus in China were more than to avoid recession. The recession in Australia was also avoided by a cumulative of $7 billion from September 2008 to December 2009 (Lavoie and Stockhammer 2013).

Although, the economy did not experience the recession during the Global Financial Crisis, however, it recognized a very sharp fall in the month of December in 2008. There was other measures helped Australia to stay away from recession during the time of crisis. One of them is that Australia did not have any issue related to the election in national level. The Australian policymakers also foretold the coming recession, as they were intensely connected to global financial developments (Lindquist, de Vries and Wanna 2015).

Australia also formed a separate prudential controller for economic establishments. This, in turn, produced a strong background of the micro-prudential controller that can efficiently prevent the emergence of sub-prime finance. It also ensures the capital supply of the banks in Australia via general stress (Han 2016). As a result, the domestic sub-prime exposures by the banks in Australia were trivial during the global financial crisis. A flexible rate of exchange was able to absorb a large peripheral shock. The change in the monetary policy influences the economic growth; however, it spread approximately evenly over the two years after the modification (Frankel and Saravelos 2012).

Government spending

Conclusion:

The economy of Australia is noticeably the more elastic than most of the developed countries’ economies. The banks in Australia have defended to be more profitable and as a result, they have not required any capital ‘injection’ from the Australian government. The main reason that saved Australia from the Global Financial Crisis included the pre-existing strength of the finances of the Australian economy. It has also been concluded that the policies of the Federal Reserve Bank led to the bubble burst that caused the crisis. The robustness of the banking system in Australia has been made possible by the efficiency of the monetary as well as the fiscal policies, which strengthened the backbone of the economy.  The trading sector of the country also played a huge role to hold the economy from slipping into the well of the crisis.

References:

Benchimol, J. and André, F., 2016. Nominal income versus Taylor-type rules in practice.

Cukierman, A., 2013. Monetary policy and institutions before, during, and after the global financial crisis. Journal of Financial Stability, 9(3), pp.373-384.

Foster, J., 2016. The Australian growth miracle: an evolutionary macroeconomic explanation. Cambridge Journal of Economics, 40(3), pp.871-894.

Frankel, J. and Saravelos, G., 2012. Can leading indicators assess country vulnerability? Evidence from the 2008–09 global financial crisis. Journal of International Economics, 87(2), pp.216-231.

Fratzscher, M., 2012. Capital flows, push versus pull factors and the global financial crisis. Journal of International Economics, 88(2), pp.341-356.

Haas, R. and Lelyveld, I., 2014. Multinational banks and the global financial crisis: Weathering the perfect storm?. Journal of Money, Credit and Banking, 46(s1), pp.333-364.

Han, M., 2016. The Global Financial Crisis: The Challenge for Central Banks. In Central Bank Regulation and the Financial Crisis (pp. 40-50). Palgrave Macmillan UK.

Lavoie, M. and Stockhammer, E. eds., 2013. Wage-led Growth: An equitable strategy for economic recovery. Springer.

Lindquist, E.A., de Vries, J. and Wanna, J., 2015. 1. Meeting the challenge of the global financial crisis in OECD nations: fiscal responses and future challenges. The Global Financial Crisis and its Budget Impacts in OECD Nations: Fiscal Responses and Future Challenges, p.1.

Mankiw, N.G., 2016. The GDP and its discontents. Science, 353(6297), pp.356-356.

Ollivaud, P. and Turner, D., 2015. The effect of the global financial crisis on OECD potential output. OECD Journal: Economic Studies, 2014(1), pp.41-60.

Paramati, S.R., Roca, E. and Gupta, R., 2016. Economic integration and stock market dynamic linkages: evidence in the context of Australia and Asia. Applied Economics, pp.1-17.

Parker, J.K.M., 2013. Saving neoliberalism: Rudd Labor’s response to the 2008 global economic crisis (Doctoral dissertation).

Shiller, R.J., 2012. The subprime solution: how today’s global financial crisis happened, and what to do about it. Princeton University Press.

Subedi, M.N., 2016, March. Effects of macroeconomic policy shock on the labour market dynamics in Australia. In Proceedings of Economics and Finance Conferences (No. 3205612). International Institute of Social and Economic Sciences.

Wanna, J., 2015. 4. Australian and New Zealand responses to the ‘fiscal tsunami’of the global financial crisis: preparation and precipitous action with the promise of consolidation. The Global Financial Crisis and its Budget Impacts in OECD Nations: Fiscal Responses and Future Challenges, p.92.