Show Me Then I’ll Believe

I’m in the process of re-writing my autobiography.  I initially wrote it back in the early nineties.  Until now it never seemed like the right time to publish it, but now I believe the time has arri...

Dr. Robert Owens - avatar Dr. Robert Owens

Five aspects of Pentecostalism that shed light on Scott Morrison's politics

Prime Minister Scott Morrison sings during a service at the Horizon Church in Sydney in April.Mick Tsikas/AAPPrime Minister Scott Morrison began his victory speech on Saturday with the words, “I...

Philip Almond, Emeritus Professor in the History of Religious Thought, The University of Queensland - avatar Philip Almond, Emeritus Professor in the History of Religious Thought, The University of Queensland

Why the 2019 election was more like 2004 than 1993 – and Labor has some reason to hope

I recently had cause to look at a large file of material I collected about Mark Latham during 2004. It is full of many of the same columnists who have just campaigned successfully for the return of th...

Frank Bongiorno, Professor of History, ANU College of Arts and Social Sciences, Australian National University - avatar Frank Bongiorno, Professor of History, ANU College of Arts and Social Sciences, Australian National University

Eastern China pinpointed as source of rogue ozone-depleting emissions

Sunset at Australia's Cape Grim observatory, one of the key global background monitoring sites for CFC-11. Paul Krummel/CSIRO, Author providedA mysterious rebound in the emissions of ozone-depleting c...

Paul Krummel, Research Group Leader, CSIRO - avatar Paul Krummel, Research Group Leader, CSIRO

Where to now for unions and 'change the rules'?

Very few people saw the Coalition’s win coming. If it was, as opposition leader Bill Shorten contended, “a referendum on wages” then it follows that Australians were content with slu...

Anthony Forsyth, Professor of Workplace Law, RMIT University - avatar Anthony Forsyth, Professor of Workplace Law, RMIT University

How we solved the mystery of Libyan desert glass

Shutterstock LinnasIn the remote desert of western Egypt, near the Libyan border, lie clues to an ancient cosmic cataclysm. Libyan desert glass is the name given to fragments of canary-yellow glass fo...

Aaron J. Cavosie, Senior research fellow, Curtin University - avatar Aaron J. Cavosie, Senior research fellow, Curtin University

Aboriginal Australians want care after brain injury. But it must consider their cultural needs

Australia's first Aboriginal Brain Injury Coordinator, Rebecca Clinch, with brain injury survivor Justin Kickett.Edith Cowan University, Author providedThis article is the fourth part in a series, Whe...

Beth Armstrong, Foundation Chair in Speech Pathology, Edith Cowan University - avatar Beth Armstrong, Foundation Chair in Speech Pathology, Edith Cowan University

Rethinking tourism so the locals actually benefit from hosting visitors

Tourism today has a problem and needs an entire rethink. Pundits are debating overtourism, peak tourism and tourismphobia. Cities such as Barcelona, Venice and Dubrovnik are witnessing a backlash agai...

Freya Higgins-Desbiolles, Senior Lecturer in Tourism Management, University of South Australia - avatar Freya Higgins-Desbiolles, Senior Lecturer in Tourism Management, University of South Australia

Wind in Albanese's sails as Chalmers weighs options

Shadow treasurer Chris Bowen has pulled out of Labor’s leadership race, increasing the pressure for an uncontested run for Anthony Albanese, which would prevent an extended limbo period for the ...

Michelle Grattan, Professorial Fellow, University of Canberra - avatar Michelle Grattan, Professorial Fellow, University of Canberra

With the LNP returned to power, is there anything left in Adani's way?

After months of “start” and “stop” Adani campaigning, the coalmine is poised to go ahead following the surprise success of the Coalition government at the federal election. So ...

Samantha Hepburn, Director of the Centre for Energy and Natural Resources Law, Deakin Law School, Deakin University - avatar Samantha Hepburn, Director of the Centre for Energy and Natural Resources Law, Deakin Law School, Deakin University

New data shows sex offenders in Victoria are going to prison for longer

There is a common perception in Victoria that courts are too lenient on offenders, but sentences for sex offences are actually increasing.ShutterstockSentences for most sex offences are getting harshe...

Paul McGorrery, PhD Candidate in Criminal Law, Deakin University - avatar Paul McGorrery, PhD Candidate in Criminal Law, Deakin University

Queensland to all those #Quexiteers: don't judge, try to understand us

Progressive voices have lit up social media with memes blaming Queensland for Labor's loss in the federal election. But characterising the state as regressive and redneck is misplaced. ...

Anne Tiernan, Professor of Politics. Dean (Engagement) Griffith Business School, Griffith University - avatar Anne Tiernan, Professor of Politics. Dean (Engagement) Griffith Business School, Griffith University

In a notoriously sexist art form, Australian women composers are making their voices heard

Performers in Speechless, a new opera by composer Cat Hope, co-commissioned by the Perth Festival and Tura New Music. The opera is a response to the Australian Human Rights Commission’s 2014 rep...

Karen Cummings, Lecturer in Singing, University of Wollongong - avatar Karen Cummings, Lecturer in Singing, University of Wollongong

Sex trafficking's tragic paradox: when victims become perpetrators

The victim-offender overlap is disturbingly common in the human trafficking trade, with women once trafficked becoming traffickers.www.shutterstock.comBorn in rural Thailand, Watcharaporn Nantahkhum ...

Alexandra Baxter, Researcher/PhD Candidate, criminology and human trafficking, Flinders University - avatar Alexandra Baxter, Researcher/PhD Candidate, criminology and human trafficking, Flinders University

This is part of a major series called Advancing Australia, in which leading academics examine the key issues facing Australia in the lead-up to the 2019 federal election and beyond. Read the other pieces in the series here.

Australia’s nearly three decades of uninterrupted economic growth won’t last forever.

Sooner or later policymakers will need to respond to a downturn that could come from any number of sources. A severe downturn in our main trading partner, China, a collapse of the local property market, global financial turmoil, or an unfortunate confluence of multiple factors are all possible triggers.

The real question is not whether or even when a recession will come, but how well positioned we will be to respond.

And, unfortunately, the answer right now is “not very”.

To understand what will be required to battle the next Australian recession it’s useful to distinguish between two broad types of economic trouble.

Two types of threat

The first is what one might call a “run-of-the-mill business cycle downturn”. Think Australia, 1990. In this scenario interest rates are raised to ward off inflation but eventually choke off business investment and private spending. Unemployment rises and GDP falls.

The central bank responds by cutting interest rates, and the federal government responds with “Keynesian” economic stimulus (extra government spending and/or tax cuts).

The second type of trouble is different, what might be called “mass financial panic”.

Think the United States in 2008. In this scenario an event (such as massive mortgage defaults) causes financial institutions to fail. If those financial institutions are connected to others then the entire financial system seizes up because everyone stops lending money to each other at once. It’s like a car going from 100km/h to 5km/h in half a second. It hurts.

The Keynesian response is completely insufficient in these circumstances. What’s needed is to get credit moving again.

And this requires people not only believing that they should lend money, but also believing that others will lend money, keeping the economy afloat and making the exercise worthwhile. Coordinating what economists refer to as “higher-order beliefs” requires overwhelming financial force. It’s a kind of Powell doctrine in which the US went in with far more troops than it needed after Iraq’s invasion of Kuwait in the early 1990s in order to overwhelm the enemy.

Read more: Vital Signs: the GFC and me. Ten years on, what have we learned?

It was the thinking behind then US Treasury Under Secretary Larry Summers’ US$50 billion rescue package to head off the Mexican peso crisis in 1994, and what then US Federal Reserve Chairman Ben Bernanke and US Treasury Secretary Hank Paulson did to avoid a repeat of the Great Depression in 2008.

The Reserve Bank is less than prepared

How well is Australia prepared to respond quickly in either of these scenarios?

Scenario 1 requires the Reserve Bank to cut interest rates and the government to spend money fast. With interest rates already at an historically low 1.50% – and perhaps lower by the time trouble arises – there’s little room left to cut further.

Unorthodox measures might be necessary, like so-called “quantitative easing”. This involves large purchases of long-term bonds to flood markets with money. While there is now experience from the US and Europe about how to do this, in Australia the Reserve Bank would be breaking new ground. Getting into such a program is not simple, and getting out might be very complicated.

But of course jacking up interest rates now to give the bank room to cut later isn’t a solution. That could trigger a recession itself. The bank has to grapple with how to respond to even a standard recession in the new age of permanently low real interest rates.

We’ve money to spend, but not the means

The government’s fiscal response requires having the capacity to run large budget deficits, which means being able to borrow. Australia’s capacity to borrow is currently good, with net debt as a proportion of gross domestic product at around 19.2%.

This is low by both international and historical standards. A former chair of President Obama’s Council of Economic Advisers, Christina Romer, and one of the world’s leading macroeconomists, David Romer, have persuasively documented how vital such “fiscal capacity” is. Australia gets an A on that count.

But a cash splash needs to be spent, and fast. That means having “shovel-ready projects” lined up ahead of a recession hitting. Sending cheques to households is easy, but is often used to pay down debt or offset other expenditures rather than on spending.

We need to prepare ahead

A proposal being pursued by the New Economic Equality Initiative at the University of NSW is to prepare in advance of a recession a “green stimulus” plan. It would be a list of significant environmental expenditures — from tree planting to waterway cleanups, to cycle-path construction to dune repair — that would be documented and ready to implement immediately.

Read more: No surplus, no share market growth, no lift in wage growth. Economic survey points to bleaker times post-election

These would be projects that would stimulate demand but also have a high social return. To do them right would take planning ahead of time. It can’t be done well on the fly when a recession has already hit. Otherwise, well, think pink batts.

Preparing for a financial crisis as opposed to a mere recession is harder. Having the budget capacity to provide massive guarantees of bank deposits and other financial obligations is a must.

Last time, we got lucky

Equally important, though, is having regulatory agencies that can see trouble ahead and act swiftly. The Reserve Bank did an outstanding job a decade ago, but next time it won’t have then Treasury Secretary Ken Henry on the board and Kevin Rudd in the prime minister’s chair.

The Australian Securities and Investments Commission has shown itself to be functionally incompetent over an extended period, as the Hayne Royal Commission highlighted all too clearly. Capacity-building is a prerequisite for an effective response to a future crisis.

Regulators need to understand the interconnectedness of different financial institutions, the types of risk they are exposed to, where their funding is coming from and more. To some extent they need to know what they don’t know. It’s a big ask, but it is vital.

In many ways Australia got lucky in 2008. The Reserve Bank had a lot of room to slash interest rates and did it aggressively. The government had close to zero net debt and could spend fast. Ken Henry’s aphorism, “go early, go hard, go households” was heeded by an unusually intellectually curious and adept prime minister. China – our biggest trading partner – enacted an aggressive stimulus plan of its own.

The US Federal Reserve Chair just happened to be the world’s leading expert on the 1929 Great Depression, and the US Treasury Secretary was the former head of Goldman Sachs, an eminence of the banking world. Our response at home was matched by a near-perfect response abroad.

We won’t be that lucky again. Now is the time to plan how to fight the next recession.

Read more: Australia’s populist moment has arrived

Authors: The Conversation

Read more http://theconversation.com/now-is-the-time-to-plan-how-to-fight-the-next-recession-111497