Our addiction to cheap money must have an end

Monetary policy Central bankers have contained the giant debt bust of 2008 with very low rates. But the return to normality could be bumpy.

Australia managed to dodge the worst of the global financial crisis largely because we held tightly onto China's coat tails.

China launched two massive stimulus programs, one in 2008, the other in 2012. Both had a major focus on infrastructure projects, where it proposed to spend the equivalent of $US300 billion.

Not only did these projects require vast quantities of Australian iron ore and coal, they also underwrote the largest developmental boom in our history. The Australian government shouldered its share of the burden. But it would have been a much nastier experience had it not been for China.

Will we be so lucky next time . . . and when is that likely to be? Nobody knows, but it could be sooner than we expect.

Although there were many forces involved in creating the GFC, the factors most prominent were excessive and mispriced debt, the globalisation of finance and the unregulated marketing of frequently complex and exotic financial instruments collectively called derivatives.

The emergence of super-banks, institutions which are regarded as too big to fail, the related risk of moral hazard and structural flaws in the euro zone also contributed. This is by no means an exhaustive list, though it does illustrate the spread of potentially explosive risks. And how little has changed.

Read the full article:Our addiction to cheap money must have an end (subscription required)

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Max Walsh

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Max Walsh was for many years one of Australia’s top economic and political commentators, highly regarded as a journalist, author and broadcaster. Throughout his career, Max was involved in all dimensions of the media industry, which has encompassed positions with two of Australia’s largest publishing companies and television networks.

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