Comparisons are being drawn between the economic challenge posed by the coronavirus and the global financial crisis. Which is fair enough, given estimates from the Reserve Bank that the virus – and the reaction to it – will wipe half a per cent off Australia's economic output this quarter.
But at times like these it's important to keep a sense of history.
The GFC marked the unwinding of a period of rampant greed, excessive risk-taking and lax regulation.Credit:Wayne Taylor
I remember the GFC, which began unfolding about 13 years ago, and this ain't it. In case you've forgotten – and it seems many have – the GFC marked the unwinding of a period of rampant greed, excessive risk-taking and lax regulation in the finance sector of the United States.
In a bold bid for profits, US banks had begun lending money to households who simply couldn't afford it. That was bad enough. To make matters worse, investment banker types decided to package up all these loans and on-sell to investors the rights to the incoming stream of mortgage payments.
With the imprimatur of the same ratings agencies now warning about the impact of COVID-19, these opaque financial products, with fancy names like "CDOs", planted a seed of contagion in the global financial system that nearly sent it into a death spiral when homeowners inevitably started defaulting on their loan repayments and the whole thing went belly up.
Which is a great metaphor, but it's nothing like what is happening today.
Illustration: Dionne GainCredit:
The GFC gave way to a broader "credit crunch" whereby investors became incredibly wary about lending to anyone, and, if they did so, they would only do it at a huge premium to official interest rates. Indeed, more than a decade later this widespread rethink on acceptable risk and debt levels remains, arguably, a major driver of tepid business investment in our economy.
There is no reason to think the coronavirus will have such a long-lasting effect.
Today, what is spreading is an actual disease which not only spreads quite rapidly, but from which the vast majority of healthy people can expect to recover, perhaps within days.
Our Reserve Bank's second in charge, Guy Debelle, is watching closely. As head of the Reserve's financial markets division during the GFC, Debelle was the guy up all night getting international reports on the rolling crisis and deciding the bank's best response.
In a speech yesterday, he confirmed that what we’re seeing today is nothing like the deep ructions in funding markets we saw in those dark days.
Yes, there will be an impact on economic activity, and yes, sharemarket investors are busily responding to that by readjusting their expectations for future profit growth.
But the basic plumbing of the world financial system is still functioning well, according to Debelle.
"We have not seen any particular sign of pressure in our daily market operations to date … nothing at all like what occurred in GFC," Debelle confirms.
Partly thanks to regulations which sprung up out of the GFC, Australia's banks today are well capitalised with plenty of access to cash. They have locked in funding at very cheap rates and deposits keep coming in.
Still, with economic activity drying up, Debelle says some government stimulus will provide "welcome support", alongside recent interest rate cuts.
Events have certainly conspired to sweep the revenue rug out from under Prime Minister Scott Morrison's promised budget surplus.
It's not so much a government decision to abandon the surplus, as having it melt away before their eyes, as tax revenue from business profits in major sectors of the economy like education and tourism dries up.
With jobs at risk, Morrison is understandably feeling pressure to respond with a multibillion-dollar stimulus package. Indeed, given the very low cost of borrowing at the moment, some strategic spending to keep affected industries on their feet and employing their workers is prudent until normality returns. But Morrison must also tread carefully.
"The effect of the virus will come to an end at some point," reminds Debelle. "Once we get beyond the effect of the virus, the Australian economy will be supported by the low level of interest rates, the lower exchange rate, a pick-up in mining investment, sustained spending on infrastructure and an expected recovery in residential construction."
In the aftermath of the GFC, then finance minister Lindsay Tanner attributed the government's stimulus success to a perception by Australians that the government was prepared to throw everything, including the kitchen sink, at countering the crisis.
But this isn't the GFC and now is no time to be pursuing the sort of "kitchen-sink-onomics" of that time. Go too far, and Morrison runs the risk of only heightening the panic and hoarding behaviour we're seeing at the moment.
If anything, households could benefit from some calm reassurance that things are about to get back to normal soon and that the government still has a plan to return the national budget to balance at some point.
Because this isn't the GFC. There is no run on the banks, only loo paper.
And given a choice between the two, I know which I'd prefer.
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