Australia and the Financial Crisis
The global financial crisis begun in July of 2007, and was caused by two main reasons The credit crunch and the sub-prime crisis. The global financial crisis began with credit crunch when the US investors begun to lose confidence within the share market, and the banks begun a reduction in the availability of loans, so many people turned to subprime lenders. Banks usually stop lending activity because of the anticipation of a decline in the value of collateral, being used by the banks. A credit crunch is often caused by a couple of reasons, such as careless and often inappropriate lending which results in losses. Or by a price collapse, when there is a decrease in market prices after a period of over inflated assets. They were the major causes of the global financial crisiss credit crunch as house prices begun to rise with inflation, banks begin to hand out careless loans, and when the market price lowered and people couldnt repay the loans. The bank began losing money in the form of assets and collateral, as the house or collateral is worth less than the original loan.
Subprime Lending is a financial term and refers to when a lending organization or business gives loans to people, who dont have the equity to get a loan from a bank because they may not have means of repayment or are in unstable jobs. The sub-prime crisis occurred when the housing market in the U.S suffered greatly and begin a downfall as many home owners who took out loans from sub primes, could not repay their mortgage. The value of homes fell and many home loan borrowers now have a negative equity. The credit crunch is now a part of the subprime crisis, as banks that now repossessed houses and assets were losing money as they were worth less on todays market. Now giving and holding loans became increasingly difficult because the banks now have a liquidity crisis.
After the Subprime crisis and the credit crunch, the global financial crisis began to worsen. The two main indicators that represented this is unemployment and economic growth. Unemployment began to increase and hit 6.1%, after the subprime crisis, this is due to so many business going bankrupt and firing thousands of employees. over 18 million people became unemployed during the GFC. Economic growth also experienced a decrease from its annual Vernon report goal, as many companies shut down creating more unemployment, meaning less resources will be used efficiently moving the ppc away from the maximum production level.
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The Global Financial Crisis greatly affected and changed almost every country in the worlds economic stability. Australia was affected like every other country but managed to leave the Global Financial Crisis better off than any other country in the world. The Financial crisis that affected Australia was more or less an economic rough patch were everything slowed down, where as the rest of the world fell into a recession. A recession is considered to be a continual decrease of GDP growth for 2 or more terms, and because Australia recovered before then, it has come out better than any other country. Although Australia did have a better outcome than any other country it still did have some problems. Australias stock exchange the ASX halved temporarily during the GFC, Australia also suffered a decrease in consumer and business confidence and an increase in unemployment. 18-24 year olds suffered the most when the GFC begun to affect the households with the highest levels of unemployment, which led to an increased dependence of government benefits and welfare. During 2007 Australia had a natural unemployment rate of 4.2% after the GFC hit in 2008 Australia suffered its highest rate of unemployment since the great depression in 1930, the rate jumped to 5.7% which is still within the government goal of 5-6%, compared to other western economies Australia did well to be able to keep that low of a rate of unemployment. Australia was one of the few countries lucky enough to keep a positive rate of economic growth as it fell to its minimum of 0.5% in the December quarter of 2008. compared to other countries suffering from the GFC Australia came out very well, Japan -3.3%, U.S -1.1%, Korea -5.6%, Thailand -6.1%, Singapore -4.2%, Britain -1.9% as you can see Australias economy was least affect by the GFC.
After the Global Financial Crisis the Australian prime minister Kevin Rudd and the treasurer Wayne Swan had a meeting, where they came up with and proposed there first budget in response to the Global Financial Crisis, with the main objective to fight inflation which was a growing problem due to the crisis currently effecting Australia.
The Australian economy follows Keynesian economics theory, and so the first theory Kevin Rudd thought of was to enact a stimulus package which worked as an injection to stimulate the economy. Following Keynes theory, when an economy is in a boom, the government should enact a budget surplus so that the government doesnt over spend and stimulate the economy, as it will create economic growth, if EG rises above the government goal it will also create an increase in inflation which leads to an increase in interest rates to counter balance the amount of spending, so that the economy doesnt expand too fast. The stimulus Package provided by Kevin Rudd acted much the same but to inject and stimulate the economy when it was in a downfall, This is called a budget deficit and occurs when the government or entity spends more than the total amount of money coming in. The stimulus package is a budget deficit costing $56 billion dollars, were all Australian families are provided with a tax free $900 dollars. Australias MPC is currently 9/10 meaning 90% of the average Australians income will be spent. This would provide a huge injection into the economy and circular flow. As a result of such a large budget deficit, the government and consumer spending was greater than the total revenue coming in and so Y=E=O and the economy begin to expand and achieve a higher rate of economic growth.
Kevin Rudd didnt just have the fiscal policy, he also brought forward the monetary policy, where the reserve bank of Australia or the financial Authority with in a country controls its supply of money. This means the current interest rates, keeping stable inflation, cash flow and various other jobs that deal with the economies well being and cash flow. By enacting this policy the reserve bank of Australia can now use a key Keynesian theory of government steersmen ship, were it can control rates so that Australia can achieve its optimum economic growth while keeping a lid on inflation. After the GFC inflation was the largest problem facing Australia by Kevin Rudd Proposing these two policies he managed to keep Australia from falling into a recession and combating the largest economical problem the world has faced yet.
Australia was the most well off country after GFC, it had the fastest recovery and suffered minimal damage. Australias fiscal policy and budget deficit was a very appropriate strategy in response to the GFC, as you can see Australia was the first country back on track, with economic growth. The strategy was very well planned and thought out and lead to Australias economy becoming even stronger.