Energetics Draft Presentation

8/2/2019 Energetics Draft Presentation

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Monetary policy of Australia under crisis

FINM 7006 Financial Markets andSystems Presentation

Group W7 Energetics


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Presentation outline1. Introduction to GFC

2. Effects and policy responses in Australia3. Comparison with US

4. Comparison with China

5. Conclusion

6. Recommendations


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Introduction

GFC and topic Housing bubble and Credit card defaults

Over consumption, poor investment

Banks aspiring higher returns Liquidity crisis

GFC in globe and Australia


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Early stage of the crisis: Global economy growing strongly - 5% GDP growth in 2007 and

4% for first quarter of 2008

Commodity prices rising oil reaches $147/barrel in July-08

Australian economy at full capacity (labour shortages, strongcredit demand, CPI inflation close to 5%)

Financial meltdown: Failure of Lehman Brothers in Sept-08 usually taken as the signal

event Crashing equity markets, freezing of credit markets, demand

slumped, most economies went into recession

In Oct 2008 RBA began aggressive lowering of interest rates


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RBA took a risk-managementapproach

Essentially, in the environment of

acute global financial strain, therewas a risk that economic activitycould turn out far worse thanpredicted in their forecasts

Accordingly cash rate was

lowered by 450 basis points in 15months

Floating mortgage rates reachedthe lowest levels since 1964

Australia

lending rates
http://www.rba.gov.au/monetary-policy/images/cash-rate.gi


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Impact on Australia Australia has withstood shocks from overseas better than many others

Goldilocks Economy

Have avoided recession according to the official definition

Why? Entered the GFC better positioned than most

Close links to Asian region

Strength of our banks and financial sector Scope to change macroeconomic policy

Careful regulation of financial sector by the prudential supervisor

Corporate sector conservatively geared on the whole

Housing & mortgage markets well regulated & conservatively geared


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Australian banking sectorremained profitable

Aus banks were focussed onprofitable domestic lendingoperations

Had limited exposure to securitiesthat led to major losses for US andEuropean banks (US mortgage-backed securities, collateralised

debt obligations, etc) Banks housing loan portfolio

remained relatively resilient

Able to raise additional capital atonly modest discounts

Australia - Banking Sector
http://www.rba.gov.au/speeches/2009/images/sp-ag-281009-graph10.gi


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Conduct of Monetary Policy - Recovery Financial sector in good shape

Public finances/debt in good shape budget to return to surplus in 3years

Continued exposure to high growth Asian region

Continued demand for Australian mineral and energy commodities

Still uncertainty around global recovery

Challenge for the RBA is to manage the new expansion

Have already raised rates 150 basis points since 2009


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US Economy Outlook

Stock index (the S&P 500 ) was down 45%

Housing prices had dropped 20% .

Total home equity dropped from $13 trillion to $8.8

trillion . Total retirement assets dropped by 22%.

savings and investment assets lost $1.2 trillion andpension assets lost $1.3 trillion.


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Government Response

Nationalization of financial institutions

Reduction of interest

900 billion dollars to purchase the non-performing

assets of financial institutions Injecting capitals to the financial market

Forbidding the short selling of stocks


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Effectiveness of Monetary Policy

Expansionary Monetary Policy:

lower short-term interest rates

Increased loans to commercial banks

Traditional policies have not been effective:

Banks unwilling to increase their lending because:

Do not trust the creditworthiness of the borrowers

Loss of capital that they have suffered


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ChinaPre-Crisis Economic Strategy Annual GDP growth rate was 9.8%;

Kept Inflation rate under 2%;

Impact of GFC in China


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ChinaPolicy Responses to GFC The Stimulus Package-4 trillion RMB

Monetary Expansion;

Short-Term & Long-Term Effects

Short-Term: work well because of low budgetdeficit;

Long-Term: are concerned

Investment overdrive: overcapacity;

Investment efficiency is falling;

Too loose of monetary policy;


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China Vs AustraliaGFC made a smaller crack on Australias economy

1. The fundamentals of the Australian economy are sound.

2. strong regulatory framework.

3. four of the world's strongest banks.

4. Government acted quickly.

Policy Responses to GFC

1. Put in place a 100% guarantee of bank deposits;

2. Legislated for a financial claims scheme3. Developed the Australian Business Investment Partnership (ABIP)


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Conclusion loopholes in the financial system

Interdependency of economies

Liquidity Bailout packages

4 Recommendations to prevent crisis


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Thank you!From

Energetics

Energetics Draft Presentation

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