glenn stevens : some longer - run consequences of the financial crisis address by mr glenn stevens, governor of the reserve bank of australia, to the anika foundation luncheon, supported by australian business economists and macquarie bank, sydney, 20 july 2010. * * * i thank george gardner for assistance in preparing this address. thank you for coming along today in support of the anika foundation ’ s work supporting research into adolescent depression. this is the fifth such occasion and it is very gratifying indeed to see such a strong response from the financial community. i want also to record my thanks to the australian business economists for their support and to macquarie bank for their sponsorship of today ’ s event. my subject is the consequences of the financial crisis. we are all aware of the immediate and short - term impacts the crisis had on the international financial system and the world economy. i won ’ t repeat them. the initial phase of the recovery has been underway for over a year now. global gdp started rising in mid 2009. when all the figures are in we will probably find that it rose by close to 5 per cent over the year to june 2010, though the pace has been uneven between regions and with some of the leading asian economies seeking to slow down to a more sustainable pace, and european nations tightening fiscal policy, there is a bit more uncertainty just now about prospects for 2011. the bulk of financial institutions most affected by the crisis have returned to profit, while estimates of the total losses to be absorbed from the whole episode have tended to decline somewhat lately ( though they are still very large ). financial market dislocation has gradually eased, albeit with sporadic episodes of renewed doubts and instability. but what of the longer - run consequences of the crisis? i want to offer some remarks under three headings, though with no claim this is an exhaustive list. these remarks are about the general international situation, not australia in particular, unless otherwise noted. fiscal issues the first lasting consequence is the fiscal burden taken on by countries at the centre of, or close to, the crisis. there are three components to this. first, some governments took on bank ownership in order to ensure the replenishment of capital that had been too thin to start with and that was depleted by the losses on securities and loans. table 1 shows public capital injections to the financial sector for several key economies. the amounts in mainland europe could quite possibly grow soon as a result of the forthcoming stress tests. note that this is not

policy rate to respond to adverse developments, recognizing that we could also use forward guidance and balance sheet policies to provide additional accommodation if that proved warranted. of course, the trajectory of short - term interest rates and the timing of future monetary policy adjustments will continue to be informed by the incoming data – both economic and financial – and how that data influences the outlook. the problem of long - term unemployment before turning to the outlook for the local economy, i would like to spend a few minutes talking about the problem of long - term unemployment. the great recession was very severe, resulting in a large decline in output and damage to the labor market. from peak to trough, non - farm payroll employment declined by 8. 7 million. the unemployment rate peaked at 10 percent. at the same time, the average duration of unemployment increased significantly. the number of individuals classified as long - term unemployed – that is, those who were unemployed for at least 27 weeks – peaked in december 2010 at 6. 4 million, an increase of 5. 3 million from the cyclical low in may 2007. long - term unemployment as a fraction of total unemployment increased from 16. 7 percent to 44. 8 percent. the hardships of prolonged unemployment touched many families around the country and this is tragic. the very accommodative monetary policy that we implemented in response was aimed at helping to heal the labor market and promote price stability. slowly, the economy began to respond and to recover. in october 2014, the fomc announced the end of its latest asset purchase program citing that “ there has been substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. ” in march 2015, the bis central bankers ’ speeches fomc set out conditions for the decision to begin to normalize monetary policy, stating “ the committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. ” the fomc judged at its december 2015 meeting that those conditions had been met. the improvement that we have seen in the labor market is very welcome. it took until may 2014 for the labor market to recover the jobs lost in the recession, but now there are 5. 3 million jobs beyond the prior cyclical peak. the unemployment rate has declined to 5. 0 percent. with this improvement, the number of