12 / 6 / 2018 lessons and questions from the gfc | speeches | rba speech lessons and questions from the gfc guy debelle [ * ] deputy governor address to the australian business economists annual dinner sydney – 6 december 2018 it is now just over 10 years since the date that people most associate with the global financial crisis ( gfc ), namely 15 september, the day that lehman brothers filed for bankruptcy. [ 1 ] there have been quite a number of articles written in recent months looking back at that time and the period leading up to it. [ 2 ] it is interesting to read the differing perspectives on the same set of events, especially those that recount events that i had a ringside seat at, or was even in the ring itself. as i have said recently, it's a bit like the standard line about the sixties, those who can remember the gfc probably weren't there. the sleep - deprived haze that was pervasive at the time affects the memory. critical decisions were made under extreme duress and fatigue, particularly in the us, which by and large stack up well with the passage of time. today i am not going to give another detailed account of what happened. i will talk about some of the events, but the main thing i intend to do is to talk about some of the lessons learned and relearned from the crisis. this list of lessons is by no means comprehensive. i will also discuss some questions that arise from the crisis that remain unresolved, at least in my mind. they are questions which i think should be a focus of the economics profession. answering them will help guide policymakers should they be faced with similar situations to the one we confronted in 2008. i am going to talk about both macro and finance today. some events can be seen through mostly a macro lens with finance playing a lesser role ( the seventies in australia is an example ), some events can be seen with the spotlight on finance with macro as a sideshow ( e. g., the dotcom bubble ). i don't think it is possible to look at the gfc and talk about one without the other. it is clearly important to integrate finance into macroeconomic analysis. indeed, the failure to do that is a criticism that is often levelled at central banks and the macroeconomic profession in the aftermath of the crisis. i think this criticism is overstated. one obvious counter example is the work https : / / www. rb

of the year, but suggest that it has neither been particularly pronounced, nor showed signs of being long - lived. risks and policy considerations it has become much better understood in recent years that once a coherent framework for monetary policy is in place, the regular policy decision is essentially a matter of responding to the changing balance of risks to the outlook. the rba ’ s board certainly has had a busy time over the past year or more evaluating and deciding how to respond to the evolving balance of international and domestic risks. it takes a lot more work than you might think to leave rates unchanged for fifteen consecutive months! in the middle of last year, it looked as though the international economy was returning to stronger conditions, and australian domestic demand was growing very strongly indeed. to foster an inflation outcome consistent with our medium - term target, we believed that it would be prudent under such conditions to return interest rates to normal, or ‘ neutral ’, from a relatively expansionary setting. two initial steps were taken, and the likelihood of further steps clearly signalled. but in the event, the process did not continue, because the world economy began turning out differently to what we had assumed. by the end of 2002, it was clear that any thought of near - term tightening could go off the agenda for a while. the world economy had clearly lost some momentum, and for the time being, this meant that a steady interest rate structure would probably be associated with achieving our policy objectives. that remained the story through to the middle of 2003, as the iraq war came and went, most international data looked on the soft side, the drought continued, and financial market sentiment waxed and waned. the outlook for australia was for moderate growth - quite a good outcome in the circumstances - but our feeling was that the risks stemming from international developments were tilted to the downside. inflation, if anything, looked a little higher than had been expected, although our judgement was that in the medium term, it would still turn out to be consistent with the target. that was a macroeconomic outlook which certainly did not, in my view at least, amount to an obvious case for monetary policy to be noticeably easier than was already in place. a reasonable case could be made that policy should be easier than neutral - but it already was, and had been for some time. our conviction that the level of interest rates was exerting stimulus to the economy - a conviction strengthened when we looked at the demand for credit and the behaviour