RBA chief looks to the long term impact of the crisis

Life could be slower and more expensive in future.

Those are two possible long term effects of the global economic crisis.

The Reserve Bank Governor, Glenn Stevens, who spoke of these prospects, said:”…big events echo for many years.”

He is not alone in his worries about the future.

The Nobel prize winning economist, Paul Krugman, has even warned that the crisis could tip the world into a new Depression, like that it experienced in the 1930s.

Mr Stevens stressed that he was speaking of global, not specifically Australian, prospects.

Although technical, his speech was based on ideas that can be expressed fairly simply.

He noted. for example, that  the crisis had forced several governments to back their countries’ banks with capital injections.

And he said capital is usually more expensive than the savings that these banks usually lend to their business clients, in normal times.

As the extra costs have to be covered, expenses for the broader community would rise, as businesses which borrow now would have to charge their customers more.

Mr Stevens warned, too, that business activity throughout the world could be “crimped” as the tighter regulations imposed on the world’s financial systems take effect.

That could reduce business activity throughout the world.

Mr Stevens said these risks, in turn, illustrate the need for “a balanced approach” to these issues.

“… some governments took on bank ownership in order to ensure the replenishment of capital that had been too thin to start with,” Mr Stevens said.

The capital of those banks had also been “depleted by the losses on securities and loans,” he said.

Mr Stevens said some of the money governments had invested in that way had already been restored.

“In fact about 70 per cent of the funds invested by the United States in banks have been repaid,” he said.

“And the US Government expects to make an overall profit from these capital injections,” Mr Stevens added.

“Nonetheless for a period of time governments are carrying a little more debt than otherwise as a result of the provision of support to the banking system,” he said.

Mr Stevens admitted that the recent downturn “was a bad one in many countries.”

“And that is because it was associated with a financial crisis,” he said.

So “the major countries generally are going to have significantly higher public debt relative to GDP after the crisis than before, and the debt ratios will continue to rise for several more years,” he said.

By any reasonable standard, events like the global economic crisis are dangerous.

The last event, of this magnitude, the crash of 1929 – and the Depression which followed it, for example, led directly to
World War II.