The financial crisis in context

Contrasting Australia and America

There are two important differences between Australia and America with respect to this issue. The first is that all major markets of Australia have stringent land use regulations, and, as a result, all major markets have experienced unprecedented house price escalation relative to incomes since 2000. In the United States, only some markets have stringent land use regulation. Australia’s housing bubble is cause for concern.

The second difference is that Australia’s financial institutions are more sound than America’s. The World Economic Forum ranks Australia’s banks as the fourth most sound in the world, behind only Canada, Sweden and Luxembourg. The United States ranks 40th out of 134, trailing, for example, Botswana, Brazil and Indonesia.

At the same time, there is rightful concern about the extent to which financial institutions may have become over-exposed in the Australian housing bubble. At this point, the cash rate policy of the Reserve Bank appears to have worked quite well. Australia may escape the pain suffered in America because Australian lenders were not caught up in the hysteria of lending to unqualified applicants and inducing them into financial payment schemes they could not meet. Only time will tell.

The bottom line

It is not at all clear, at this point, that the expensive actions being taken by governments around the world will bring a quick conclusion to the international financial crisis. Many economists continue to believe that virtually none of the government strategies employed against the Great Depression had much of an effect, which is why, a decade later, economic conditions were still very difficult. Only time will tell how wise or foolish are the responses of governments.

Nonetheless, it is well to review what the market system has produced. We have attained profound affluence that is far above anything dreamed of by our parents and grandparents. Poverty has been reduced substantially. By 2007, the nation’s gross domestic product per capita had risen to more than a four times the 1945 level and more than five times the level of 1928 (in 2008 dollars). Even now, the unemployment rate is well below 5 per cent, a fraction of the nearly 30 per cent reached during the Great Depression. No other economic system has ever come close to producing such wealth for so many people. Further, the same economic system, with appropriate corrections, will doubtless produce an even more affluent society in the years to come.

It is quite appropriate to question fundamental principles. However, any such inquiry requires a clear understanding of the context. For all of its problems, the market system has produced far better lives than we ever had before. It will be important to correct the causes of the financial collapse, to ensure that they cannot again inflict similar damage.