energetics draft presentation
TRANSCRIPT
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Monetary policy of Australia under crisis
FINM 7006 Financial Markets andSystems Presentation
Group W7 Energetics
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Presentation outline1. Introduction to GFC
2. Effects and policy responses in Australia3. Comparison with US
4. Comparison with China
5. Conclusion
6. Recommendations
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Introduction
GFC and topic Housing bubble and Credit card defaults
Over consumption, poor investment
Banks aspiring higher returns Liquidity crisis
GFC in globe and Australia
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Early stage of the crisis: Global economy growing strongly - 5% GDP growth in 2007 and
4% for first quarter of 2008
Commodity prices rising oil reaches $147/barrel in July-08
Australian economy at full capacity (labour shortages, strongcredit demand, CPI inflation close to 5%)
Financial meltdown: Failure of Lehman Brothers in Sept-08 usually taken as the signal
event Crashing equity markets, freezing of credit markets, demand
slumped, most economies went into recession
In Oct 2008 RBA began aggressive lowering of interest rates
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RBA took a risk-managementapproach
Essentially, in the environment of
acute global financial strain, therewas a risk that economic activitycould turn out far worse thanpredicted in their forecasts
Accordingly cash rate was
lowered by 450 basis points in 15months
Floating mortgage rates reachedthe lowest levels since 1964
Australia
lending rates
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Impact on Australia Australia has withstood shocks from overseas better than many others
Goldilocks Economy
Have avoided recession according to the official definition
Why? Entered the GFC better positioned than most
Close links to Asian region
Strength of our banks and financial sector Scope to change macroeconomic policy
Careful regulation of financial sector by the prudential supervisor
Corporate sector conservatively geared on the whole
Housing & mortgage markets well regulated & conservatively geared
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Australian banking sectorremained profitable
Aus banks were focussed onprofitable domestic lendingoperations
Had limited exposure to securitiesthat led to major losses for US andEuropean banks (US mortgage-backed securities, collateralised
debt obligations, etc) Banks housing loan portfolio
remained relatively resilient
Able to raise additional capital atonly modest discounts
Australia - Banking Sector
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Conduct of Monetary Policy - Recovery Financial sector in good shape
Public finances/debt in good shape budget to return to surplus in 3years
Continued exposure to high growth Asian region
Continued demand for Australian mineral and energy commodities
Still uncertainty around global recovery
Challenge for the RBA is to manage the new expansion
Have already raised rates 150 basis points since 2009
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US Economy Outlook
Stock index (the S&P 500 ) was down 45%
Housing prices had dropped 20% .
Total home equity dropped from $13 trillion to $8.8
trillion . Total retirement assets dropped by 22%.
savings and investment assets lost $1.2 trillion andpension assets lost $1.3 trillion.
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Government Response
Nationalization of financial institutions
Reduction of interest
900 billion dollars to purchase the non-performing
assets of financial institutions Injecting capitals to the financial market
Forbidding the short selling of stocks
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Effectiveness of Monetary Policy
Expansionary Monetary Policy:
lower short-term interest rates
Increased loans to commercial banks
Traditional policies have not been effective:
Banks unwilling to increase their lending because:
Do not trust the creditworthiness of the borrowers
Loss of capital that they have suffered
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ChinaPre-Crisis Economic Strategy Annual GDP growth rate was 9.8%;
Kept Inflation rate under 2%;
Impact of GFC in China
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ChinaPolicy Responses to GFC The Stimulus Package-4 trillion RMB
Monetary Expansion;
Short-Term & Long-Term Effects
Short-Term: work well because of low budgetdeficit;
Long-Term: are concerned
Investment overdrive: overcapacity;
Investment efficiency is falling;
Too loose of monetary policy;
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China Vs AustraliaGFC made a smaller crack on Australias economy
1. The fundamentals of the Australian economy are sound.
2. strong regulatory framework.
3. four of the world's strongest banks.
4. Government acted quickly.
Policy Responses to GFC
1. Put in place a 100% guarantee of bank deposits;
2. Legislated for a financial claims scheme3. Developed the Australian Business Investment Partnership (ABIP)
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Conclusion loopholes in the financial system
Interdependency of economies
Liquidity Bailout packages
4 Recommendations to prevent crisis
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Thank you!From
Energetics