The Post-2007 Financial Crisis and Policy Challenges facing Australia

The post-2007 financial crisis had similar roots to many previous crises since the 1970s: moral hazard and easy credit. It had a global impact because it was centred in the USA and UK, and hence triggered a fall in global demand and international trade. The paper argues that financial deregulation and innovation contributed to economic growth in the 1990s and 2000s in the USA and UK, as well as Australia and elsewhere, and with a dynamic risk-taking financial sector crises are the flip side of high growth as some risk-taking institutions end up making bad loans. The policy challenge is to reap the advantages of a dynamic financial sector while ensuring sufficient prudence to offset the inherent moral hazard when depositors are insured by the state. Australia did not experience a serious financial crisis in 2007–9, but active macropolicy was necessary to address the economic crisis. Nevertheless, future bank failures are to be expected and policy-makers need to design appropriate financial sector regulations in preparation.Richard Pomfre