Yesterday Reserve Bank governor Glenn Stevens buried the slump, the recession and the impact on his testimony to the Senate Committee looking at the federal government’s financial stimulus.

From now on, the intense global recession is history: it’s all about how we handle the upturn.

October 6 looms as a possible day of destiny with the RBA board meeting, but according to Macquarie’s Rory Robertson, the November and December meetings could see rate rises at each meeting, if the flow of data is upbeat, starting with the August retail sales tomorrow.

But it’s a pity the Senate Committee didn’t question the RBA governor him on just how fraught conditions were at the end of 2008 and how tough it was for our banks, with the RBA trying desperately to maintain liquidity in the economy.

Then we would have had a better understanding of what happened back then and what the country’s senior regulator thought of the situation.

All senators seemed to be interested in was the stimulus and interest rates: it took Robertson to provide the committee, after Stevens had spoken, both context and an appreciation of how desperate times were a year ago in the markets.

Perhaps they should have read the Reserve Bank’s recent annual report for the 2009 year, especially the market operations sections, plus last week’s comments from the governor of the Bank of England about how two banks, RBS and HBOS were within hours of collapse last October; and a couple of reported comments from Fed chairman Ben Bernanke.

If they had, they might have been interested in finding out more about the crunch a year ago, how frightening it was as the world hovered on the brink of collapse. That way they might have gained a better appreciation about why the stimulus was needed and needed so quickly.

The RBA annual report revealed that the central bank created about $100 billion in the final quarter of 2008 by taking $45 billion worth of self-securitised mortgages from financial groups, term deposits of about $18 billion and boosted the currency supply by more than  $10 billion as Australians withdrew cash in unprecedented amounts. There was $28 billion raised by swaps and the central bank provided almost $7 billion to the federal government in foreign exchange from its own reserves because it was too difficult to borrow in the unstable foreign exchange markets for much of the quarter.

But even then Stevens was upbeat, as this quote from a December 9 speech to a dinner for business economists shows:

“Given the global situation, we have a very difficult period to negotiate. But we can negotiate it.

“The long‑run prospects for the Australian economy have not deteriorated to the extent that some people may presently be feeling. We do have reasonable grounds for some quiet confidence about the future, however bad the storm at present may be.”

And he turned out to be spot on, more so than anyone else. Many of those now quibbling about the stimulus were either silent late last year, or calling for Canberra to do something.

Stevens’ confidence was reassuring about Australia, but the September 21 edition of the New Yorker carries one of the best articles so far written on this crisis. Called Eight Days, it looks at the days from Friday September 12. just before the failure of Lehman Brothers, up to the following weekend.

It’s by James Stewart, the Bloomberg Professor of Journalism at the Columbia School of Journalism and an author of several  books including Den of Thieves.

It’s brilliant reporting, with the best access and includes two comments by Bernanke:

Bernanke pointed out that he was a historian and student of the The Great Depression. “The kind of financial collapse that we’re now on the brink of is always followed by a deep, long recession,” he said. “If we aren’t able to head this off, the next generation of economists will be writing not about the ’30s, but about this.”

Someone asked what the scenario looked like:

Bernanke was cautious. He didn’t want to be accused of exaggerating the danger. You could see a 20% decline in the stockmarket, unemployment at 9-10%, the failure of GM, certainly, and other corporate failures. It could be very bad.

The tone of the two most powerful men in the financial world was as frightening as their words.

(The meeting involved Bernanke and US Treasury Secretary Hank Paulson telling the Democratic leadership in Washington the realities of the situation in the US economy and financial system).

That was on Thursday, September 18. The night before, according to the article, Bernanke had told Paulson in a telephone conversation:

“Hank Listen to me,” he interrupted. “We are done.” He went on to explain how the Fed had exhausted all its options in terms of the powers it had and how the next steps needed Congressional approval.

Bernanke’s comments were the most frightening, because despite the bailouts and unconventional funding of the US economy, Citigroup and Bank of America were essentially rescued by the US government; as was AIG, which was the most explosive of all the troubled US groups, as the New Yorker article makes clear. GM in fact did fail and had to be rescued by the US Government, as did Chrysler.

The mighty General Electric trembled, as did other banks (such as Goldman Sachs). Media companies, retailers and a host of suppliers to the auto industry went bust, as did retail property owners in several cases.

In Europe, banks failed, were bailed out or were nationalised, several major companies trembled, or lost so much business that they found themselves adrift (car and truck makers and chemical groups, for instance). For several weeks trade all but stopped as trade finance froze.

The Chinese economy came to a standstill in the last quarter and no one still knows just how much damage was done because the Chinese economic figures for that time and for January and February of this year, remain rubbery.

And that was despite the trillions of dollars in bailouts, funding and guarantees handed out by the Fed and the US Treasury and similar actions in many other countries, including Australia..

Having survived all of this, it now seems a bit distant and a chance to forget in Australia just how close we came to being caught up in a tremendous financial crash that would have shut down the global economy.

That’s why the Senate Committee botched things yesterday. It should have asked the RBA governor detailed questions about the events of September through December, if only to get a feel on why the need for the two stimulus packages and why Canberra felt (with RBA support) that it had to act so quickly.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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