Sent: 14-07-2009 10:56:01
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Immunizing Against Crisis
The relatively good economic performance of Australia and Asia are examples of how national economies are able to immunize themselves temporarily against serious economic problems.
Considerable intellectual effort has been expended in trying to understand the causes of the financial meltdown last year. The UK government released a white paper last week outlining its view of what happened and some of the potential remedies.
Meanwhile, a further round of statistical releases has shown the Australian economy to be in surprisingly good health. Surprisingly, because the government itself had conceded that an Australian recession was inevitable. And, surprisingly too, because other advanced economies have been suffering through the steepest deterioration in economic activity in several lifetimes.
Government spin-masters are inclined to credit their economic stimulus packages with achieving this. Almost by definition, reported rates of activity would have been lower without the government's extra spending. However, even with its impact removed, we would be left with economic outcomes that could be categorized as surprisingly good.
One of the features differentiating contemporary Australian and Asian economies from those of the USA and Europe has been the relative stability in the financial systems of the first group in the past year. The similarity is not simply about geographic proximity.
Australian banks went through their own near death experiences around the time of Australia's 1990 recession. Several financial institutions failed and others were absorbed to protect the system. Westpac famously went to the edge and experimented with Kerry Packer and Al "Chainsaw" Dunlap as white knights, so parlous was its condition.
That pact with the devil eventually gave way to more traditional banking types but, a dozen years on, Westpac was still recovering according to its chief executive. National Mutual which had to be bailed out by Axa and AMP were two other pillars of the Australian financial system that went to the brink in the 1990s.
Asia had a financial crisis named specifically after it. The Asian financial crisis of 1997- 98 resulted in economic growth among the developing regional economies slumping from a five year average of 8.9% per annum between 1992 and 1996 to 3.5% in 1998. Japan, too, had its own banking crisis which began in 1989 and which has constrained growth ever since.
The impact on corporate psyches lingers far longer than the macroeconomic statistics might suggest. Changing executives, modifying short term business plans, discarding failed and underperforming assets, setting up new risk templates, rebuilding damaged consumer brands, finding new sources of longer term earnings growth and regaining enough confidence to reinvest has been a sequence easily needing two or three generations of banking executives to implement.
Memories linger. Even after such a restructuring is completed, managers will be reluctant to put at risk the restored financial viability of their institutions. An appropriately conservative management style intent on rebuilding balance sheets might typify another eight or ten years.
This lengthy adjustment has left the Asian and Australian financial systems immunized against the most virulent features of the 2008 financial pandemic. When its seeds were being sown in the USA and Europe, Australian and Asian banks had a markedly different mindset.
For that, we can be thankful. But this potted history of the financial system prompts one worrying thought: banking crises may be just a matter of time. There may be nothing inherently safer about the Australian or Asian financial systems. Australia and Asia might have simply been lucky that their vaccines were still effective.
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