What Americans call the Great Recession of 2008, we call the Global Financial Crisis (GFC). As you would expect with a name like that, it affected the whole world. The first signs of distress in the financial markets were when two funds related to the US financial company Bear Stearns announced serious problems with their holdings of mortgage-backed securities. This was particularly acute in the case of securities containing sub-prime mortgages, which are mortgages to people with a ‘non-standard’ (i.e. poor) credit history or on lower incomes. This rumbled throughout the credit markets until March 2008, when Bear Stearns effectively collapsed and had to be rescued by JP Morgan. In September of 2008, the crisis reached its zenith when securities company Lehman Brothers went bankrupt. The large insurer AIG, and two large mortgage agencies, Fannie Mae and Freddie Mac, had to be rescued by the US Government1.
The Lehman bankruptcy saw many parts of the global financial markets come to an almost complete halt, and fears arose over the stability of the entire global financial system itself. Governments and central banks responded to these developments with sizeable fiscal stimulus, large reductions in interest rates, bank deposit guarantees, and bank debt issuance, and in some cases sizeable government ownership of troubled financial institutions1.
In Australia, the first significant macroeconomic policy response was on October 7 of 2008, when the Reserve Bank of Australia (RBA) cut interest rates by 100 basis points (i.e. 1%), down to 6%. Less than a week later, the Australian Government announced it would guarantee all Australian bank deposits, and for a fee, the wholesale funding of Australia’s banks, the first time this had been done in Australia’s history. The Australian banking system was in good shape, with the big four (Commonwealth, NAB, ANZ & Westpac) being among the 10 banks globally who were rated AA or higher by the ratings agency, Standard & Poor2.
Two days after the financial stability measures were announced, the Government announced a $10.4 billion stimulus package (about 1% of GDP). The package consisted of $8.7 billion in cash grants that would go to pensioners and low-income families, $1.5 billion to support housing construction, and $187 million for new training positions. This had been discussed for some time and considerable thought had gone into its design. The package was directed at the weak sectors of the economy, which, at the time, were consumption and housing, which represented about 60% of the economy2.
One other important factor working in Australia’s favour, was the depreciating dollar. The floating of the dollar had been one of the most important economic reforms in Australia’s history because it worked as a stabiliser, cutting demand in good times and supporting it in bad times2. Its depreciation made our commodities cheaper on the international market, thereby increasing demand.
As the financial crisis became even deeper, the Australian Government announced a $42 billion stimulus package, entitled the ‘Nation Building and Jobs Plan’. This consisted of more support for consumption, and a fast-acting infrastructure program. These stimulus measures supporting consumption worked exceptionally well. In Australia, in April 2009, retail trade turnover was up 4.8% on pre-stimulus levels, whereas in Japan, the US and Canada, where stimulus packages were not aimed at consumption, retail trade was 2-3% lower over the same period2.
The infrastructure package consisted of the following: $14.7 billion on school infrastructure; $6.6 on social and defence housing; $3.9 billion on energy efficiency (mostly on ceiling insulation); $890 million on transport and community infrastructure; and a $2.7 billion business investment tax break2.
In previous recessions, many of the unemployed were under 25, and the government followed the February stimulus package with an agreement with the states. This guaranteed a training position for all unemployed people under 25 years of age.
Neoliberals and the old Liberals across the chamber hated this package precisely because it worked. It showed that the way to make an economy grow, particularly in extremis, was to give those lower down the scale some cash and to invest in infrastructure. Of course this stimulus could not continue, but as a one off it was an absolutely brilliant strategy.
The Liberals hated this solution also because it showed trickle-down for what it was, a sham. The liberals have attempted to come up with an alternative suggestion for how Australia handled the GFC and they lay it at the foot of the mining boom. They even tried to sheet home the blame for the several deaths in the installation of insulation to the government. However, the main reason these deaths happened was because of a lack of public service capacity to manage such a program; the result of the constant gutting of the public service by politicians. As a consequence, the programme was outsourced to the market; and some believed that was an accident waiting to happen3. So it proved to be.
Joseph Stiglitz, Nobel laureate in economics, stated, in 2010. That “You were lucky to have, probably the best designed stimulus package of any of the … advanced industrial countries, both in size and in design, timing and how it was spent – and I think it served Australia well.” While he stated that there was some waste, that is always the case for such stimulus packages, he stated that such waste was preferable to the waste of human and capital resources that would have resulted in the absence of any stimulus4. No wonder the Liberals hated it.