Kevin Rudd (Griffith, Australian Labor Party, Prime Minister) Share this | Hansard source

I thank the honourable member for Oxley for his question. One year ago today the bankruptcy of Lehman Brothers triggered the gravest financial and economic crisis the world had seen since the great crash of 1929. Within days, Merrill Lynch was absorbed by the Bank of America in a deal brokered by and financed by the US government. The world’s largest insurance company, AIG, was then nationalised by the US government under a public administration. Thirdly, the mortgage lender Washington Mutual was shut down. And in time we saw some 50 of the world’s major banks either declared bankrupt or bailed out by their respective government or by other mechanisms.

The total losses and write-downs across the global financial system and the private institutions within it should provide us all with pause for reflection—a staggering $1.9 trillion plus, and the bill is rising. The head of the IMF said at the time—and it is worth while that honourable members reflect on this because we did stand at the abyss of the implosion of the world’s financial system—‘The global financial system is on the brink of systemic meltdown.’ No other statement has been made by the head of the IMF to that effect. That is where we stood in the critical week following the Lehman Brothers collapse last year.

The fact that we all stood at the abyss was underlined by the fact that global financial markets then subsequently froze. Global private credit flows to Australian banks collapsed to zero in the months of October and November last year. For the information of honourable members, normal capital inflows into private financial institutions in this economy would run at about $10 billion a month—up or down depending on the month in question. They collapsed to zero. Furthermore, domestic raisings by Australian banks also froze. As a further indication of that, the interbank spreads, which normally run at around 10 basis points, elevated to 350 basis points—itself a market indication that the financial flows across the private financial system of the global economy had frozen. And in the absence of capital flows, the real economy in turn then freezes. In short, global financial markets had panicked—and panicked comprehensively—and credit was denied to institutions even with the most impeccable of balance sheets. Again to quote the IMF at the time—to place the events of the last 12 months into context—they said: ‘This is the most dangerous shock in mature financial markets since the 1930s.’

As financial markets teetered at the abyss, equity markets for a time went over the abyss. Some US$30 trillion was wiped off the value of global stock markets. That is an amount equal almost to half of the total value of global GDP—to place it into its context. The US stock market fell from peak to trough by 55 per cent. Compare that with the stock market crash of 1987, where the stock market collapsed by 33 per cent. In Australia we had a 55 per cent collapse in the stock market from peak to trough. That contrasted with a 50 per cent collapse back in 1987. The implications for Australian households, through the superannuation earnings of Australian families, have been huge. Last November, Alan Greenspan described the crisis as a ‘once-in-a-century event’.

The freezing of financial markets and the collapse of stock markets, of course, in turn impacted on the real economy. These are the challenges we have been wrestling with here as well. Twenty-nine out of the 33 advanced economies fell into recession. Thirty-two of the 33 advanced economies over the last 12 months have contracted. All of the major advanced economies have gone into recession. This has been the worst global economic collapse in three-quarters of a century. The IMF began collecting data back in 1950. Again, if you go back to the data, you can see that at no time since 1950 has the global economy actually shrunk—until the IMF’s projection for 2009, when it projected it shrinking by 1.3 per cent.

Again, it is worth putting this into context: in the recession of the early 1980s the global economy was still growing, albeit marginally, at 0.9 per cent; in the recession of the early nineties the global economy was still growing, at 1.5 per cent; in the Asian financial crisis the global economy was still growing at plus 3.2 per cent; and even with the tech wreck of the early 2000s the global economy was still growing at 2.1 per cent. Of course, all this flows from financial markets through equity markets through the real economies on to employment. What we have seen, of course, is the real impact for working people across the world. The G7 average unemployment rate has gone up to 8.2 per cent—across the OECD, to 8.3 per cent. The US unemployment level is, as we know, 9.7 per cent. In Europe, I notice in particular Spain, with 15-plus per cent, it seems, on some of the most recent reporting that I have seen. Some 12 billion jobs have been lost across the advanced economies alone. When we say the global economy has faced its worst crisis in 75 years, this is the data that underpins that proposition, and the data is unassailable. This has been a crisis of extraordinary dimensions by any measure; therefore, the response to it by governments both globally and nationally has had to be equally extraordinary to avoid a repeat of the Great Depression. Thanks to the leadership demonstrated by the United States under President Bush and continued under President Obama, through the agency of the G20, the global economy so far has avoided that outcome.

The Washington summit, convened by President Bush, set an unprecedented agenda for global cooperation. The London summit which followed took four or five specific decisions which have turned back so much of the global economic tide: firstly, some $5 trillion worth of stimulus agreed across the 20 largest economies in the world, including our own; secondly, an international framework for managing toxic assets within impaired bank balance sheets, caused by the problems I referred to before; thirdly, a resourcing by $1 trillion of the IMF to deal with further emergencies arising with private banks in many of the distressed regions of the world, most particularly Central and Eastern Europe; fourthly, a comprehensive reform agenda going to the heart of the financial regulations which so demonstrably failed in the time leading up to the crisis in the first place; and fifthly, most critically, a resolve across governments not to indulge, as they did in the 1930s, in a breakout of protectionist measures one against the other. This was the resolve of those governments, a resolve which has been in the main adhered to.

This points ahead to the third G20 summit, which will occur in Pittsburgh next week. The agenda for the G20 summit at Pittsburgh goes to a range of specific policy measures again aimed at bringing back the global economy from the brink through recovery and on to long-term reconstruction. The IMF has pointed to the impact of the London summit, in a study it has done, as having ‘broken the fall’ in the global economic collapse which occurred after the implosion of Lehman Brothers one year ago. That summit in London, chaired by Prime Minister Brown, convened by the United States through the overall agency of the G20, brought about a series of outcomes which effectively broke the fall.

See this speech in context