Ten years on from the GFC
We appear doomed to repeat history,
The Global Financial Crisis (GFC) was a decade ago. The recession was painful, the financial market dislocations disruptive and damaging, but we are well past that now.
So much so, we are back to where we were before the GFC: too much debt and over-priced stocks, houses and other assets.
The GFC was preceded by a massive amount of borrowing, very high asset prices and loads of ‘innovative’ financial products to manage risk to the financial system.
Then those innovations soured. The flaws in too much debt and over-valuation of asset prices relative to fundamentals became obvious.
The recession that followed was deep and the recovery long and shallow. Central banks around the world cut interest rates sharply and essentially pumped huge amounts of money into banks and the financial system.
The idea was to prevent largescale collapse of banks and the financial system that facilitates transactions, so that the real purpose of money is realised: allowing us to buy and sell things we want.
It worked - to an extent. There is more money in the system, but it has gone disproportionately into financial assets, bidding up their prices to very high levels, rather than consumption.
The excesses of the financial system have returned, with the business of trading money gaining ascendance, rather than facilitating transactions for the benefit of society.
It seems inevitable that there will be yet another crisis in the global financial system in the coming decade.
There have been few lessons from the GFC. There is more debt now than ever before and asset prices are super expensive. The next crisis will hopefully lead to much tighter regulation of the financial sector that will force it to change from its current cancerous form, to one that does what it’s meant to.
It is dangerous to adopt this international narrative to New Zealand. We went into recession well before the GFC. We had finance company failures, followed by a housing bust.
We were well into a recession when the GFC hit. So, when global money supplies dried up, it didn’t matter too much because there was so little demand to borrow money in New Zealand anyway.
The recovery after the GFC was led surging demand for dairy, meat and forestry products from China. The Canterbury rebuild soon joined the recovery drive, mainly because economic growth does not measure what is lost.
The GFC highlighted that our central bank is slow to recognise big international challenges. They were too slow to cut rates aggressively. They were not part of the large economies that clubbed together to co-ordinate rate cuts and share understanding of the crisis.
This lack of understanding led them to raise interest rates in 2010 and in 2014. Both were mistakes. The New Zealand economy was in a shallow and uneven recovery across regions and sectors. It could not cope with those higher interest rates.
What was needed was a brake on the housing market, fuelled by a massive amount of bank lending. We needed low interest rates and strong fiscal stimulus for the rest of the economy.
Instead, banks loaned recklessly to the buying and selling of second-hand houses. There has been little progress in bringing banks to heel and avert the perpetual cycle of excess amounts of credit chasing a limited pool of houses.
The government bizarrely embarked on two terms of fiscal contraction at a time of historically low-cost money, and a long list of worthy infrastructure projects in housing and transport.
Projects that would have created long-term economic growth and made our future economy much more productive, tax revenue higher, and debt position better.
Our own experience following the GFC has some parallels to the global narrative, but is simpler.
Our central bank needs to own up to regulate our banks much better: they have allowed mortgage borrowing to reach new and more dangerous highs.
Our fiscal policy is economically illiterate: fiscal tightening at a time when the economy needed more spending, and that spending made financial sense.
One pathetic theme is common. A decade after the GFC, we are still making the same mistakes. It would be funny, if it wasn’t so tragic.