These remain contentious issues and still have the power to influence political positions.At the end of the 1980s expansion, the Australian economy was over-stretched on a number of ways.
He has never put a number on it, but most people think it is around 2% or 2%-3%.Finally, the operation of monetary policy is based on the central bank's power to determine short-term interest rates through its control over the cash rate. While incurring deficits during a recession is still regarded as sensible policy, there was now more focus on offsetting these in the good years with surpluses, and more concern with the sustainability of the government's debt position in the long run.In Lecture 5, we will see how these general principles of demand management were made operational over the following 15 years.Next week, The Long Expansion. It is the former of these two views, however, which has become the popular explanation for the 1990s recession, and the one I intend to discuss — and take issue with.Looking back, the cash rate of 18 per cent seems extraordinarily high.
These included the State Bank of Victoria, the State Bank of South Australia, the largest credit union (the Teachers Credit Union of Western Australia), the second-largest building society (Pyramid Building Society), several merchant banks, a mortgage trust, and a friendly society.A number of well-known businesses that had been bought by highly geared acquirers had to be sold in distressed circumstances and two of the Big Four private banks incurred losses and had to be recapitalised.
In Australia's case, the main author of the policy was seen to be Paul Keating, and the whole episode occurred during the Hawke-Keating Labor government's period of office. The need for early action well before the cases become clear to all, says something about who should be making the decision, and leads to the issue of central bank independence, a subject that was becoming widely discussed around the world in the late '80s and early '90s.On fiscal policy, ideas were also evolving, and like monetary policy, the emphasis was shifting towards a medium-term perspective. The further asset prices rise above their intrinsic value, the more likely it is that a reassessment will be made and they will stop rising. However, if GDP per capita is looked at then Australia has had three per capita recessions since 1991 using the two or more consecutive quarters of decline approach – in the September and December quarters of 2000, the March and June quarters of 2006 and the September and December quarters of 2018. The more nuanced answer includes a substantial decline in spending over a number of months with an associated rise in the unemployment rate (of at least 1.5 per percentage points). Australia was thus in the middle of the field, its fall in GDP of 1.7% was similar to the weighted average fall of 1.8% for the oeCD area.The countries that experienced a milder recession than Australia were Japan, Denmark, the United States, France, the Netherlands, and Austria.Why did all these countries, particularly the Anglo Saxon and Scandinavian ones, have a recession in 1990? I am in good company, as most economists and observers who have analysed the period in any depth come to the same conclusion.Unfortunately, it remains a controversial subject, and one where political feelings still run high. The laggard countries, those which had failed to return to low inflation after the early 1980s recession, did so in the early 1990s. It is not surprising that some are fearful when the possibility of its return is drawn to their attention.But to return to some longer-term issues.
By 1990 our good times were over, and for most of the world's developed economies, recession was once more the order of the day.
In contrast to this, Bob Hawke was able to defeat Andrew Peacock in 1990 immediately after the peak in interest rates. Its ultimate objective had to be something expressed in nominal terms, such as the rate of inflation or the rate of growth of nominal GDP. The boom begat the recession. In his 1992 assessment, Paul Kelly said of the Keating phrase:"It was perhaps the most stupid remark of his career and it nearly cost him the prime ministership. Unfortunately, it remains a very controversial subject and one where political feelings still run high.
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