Our debt lessons of the past are quickly forgotten
letter published in The Australian Financial Review, 9 August 2011
The seriousness of the international debt crisis, as reflected in the three op-ed articles you published yesterday, brings to mind our very own debt problems in the late 1980s.
When I published then an analysis suggesting that Australia faced the risk of a serious debt crisis because of defective fiscal and monetary policies, this was rejected by academics and the central bank and, in June this year, one of our local financial experts suggested my analysis was flawed and “sank with barely a trace”.
While this is not the place to debate my analysis or the causes of the 1990-91 recession, it is relevant to recall the subsequent progressive tightening in policy stances that have undoubtedly contributed to Australia’s strong economic growth even before China started to have such an important influence.
It is also important to recognise that, as was the case in the 1980s, excessive debt is not only incurred by the public sector.
In the present context there is certainly much of that. But bad monetary policies have also resulted in the creation of excessive private sector debt, although some of that has now been taken over by the public sector, viz taxpayer.
Unfortunately the poor performance of central banks has been largely overlooked in assessing the present crisis.
Reports of the meetings of G7 ministers (what has happened to the G20?) certainly seem to suggest little discussion about monetary policies.
As Harvard economist Kenneth Rogoff’s historical analysis of financial crises (“Right Diagnosis before a cure”, Opinion) suggests, the lessons of the past are quickly forgotten.
Des Moore
Director, Institute for Private Enterprise
South Yarra Vic
Postcript: Since writing this letter the G20 has issued a statement saying it will “take all necessary initiatives in a coordinated way to support financial stability.” Didn’t it say something similar a couple of years ago when the GFC occurred? Why weren’t substantive reforms undertaken then?