. a second example of the public sector playing a stabilising role was provided during the 2008 – 09 financial crisis, when governments issued bank funding guarantees. during that period, risk aversion soared, capital markets shut down, and even the well - rated financial institutions found that they could not raise funding and provide critical financial intermediation services to the broader economy. bis central bankers ’ speeches these types of temporary surges in risk aversion can be very costly for society. at least in principle they can be ameliorated if there is an entity that has a stable risk appetite and that is prepared, and financially able, to play a stabilising role. this was what happened in australia during the crisis, where the australian government was prepared to insure bank debt for a fee. the fee was considerably higher than what the market would have normally demanded for providing such insurance, but was substantially less than the near infinite fee that the market was then implicitly charging. there is a strong argument that the australian taxpayer was well compensated for the risk that it undertook, with insurance premiums paid to date by financial institutions exceeding $ 4 billion, and no money has had to be paid out under the guarantee. a third example in which the public sector can play a stabilising role is through the government underwriting a capital injection for a troubled bank when a very risk - averse private sector is not prepared to do so. this example is of a distinctly different character than the other two and the threshold of action is higher. there may, however, be some very limited circumstances where it does make sense for the government to take an institution under public ownership before selling it again when the risk appetite of the private sector has returned to more normal levels. as the scandinavian experience from a couple of decades ago illustrates, this type of policy can work. i want to emphasise, though, that i am not saying the australian authorities would or should behave in a similar way, but rather that such a response should not be excluded from the potential toolkit. importantly, if such a policy were to be used, then private shareholders of the troubled institution as well as its managers would need to be held to full account. the common element in each of these three examples is that the private sector has swung from relatively normal risk preferences to being temporarily very risk averse. in modern financial systems, these swings in risk aversion can be very costly. high levels of risk aversion mean that good

ric battellino : economic developments address by mr ric battellino, deputy governor of the reserve bank of australia, to the committee for economic development of australia ( western australia ), perth, 18 november 2010. * * * introduction after having held official interest rates steady for five months, the reserve bank earlier this month tightened monetary policy a little further. the background to that decision and the reasons for it are set out in the quarterly statement on monetary policy and the monetary policy minutes of the board meeting that have subsequently been released. my talk today will focus on that material and outline some of the issues that are likely to shape economic developments over the next few years. global economy i will start with the global economy because, as always, this forms an important backdrop to understanding developments here in australia. the world economy is quite divided at present. the united states, europe and japan are struggling to recover from the effects of the financial crisis, while emerging asian economies, and to a lesser extent latin america, are growing strongly ( graph 1 ). graph 1 the us economy clearly lost momentum around the middle of the year, with gdp growth slowing to an annual rate of about 2 per cent over the june and september quarters. this is below potential. our reading of more recent data is that they have been a bit stronger, but nonetheless consumer confidence remains low, the housing and labour markets remain weak, and the repair of household balance sheets still has quite a way to run. basically, the us household sector is in very poor shape. one of the features of the us economy that has changed over the past 50 years or so is that households are now bearing more of the brunt of recessions than used to be the case, and businesses are bearing less. after each downturn, it has taken progressively longer for employment to regain its peak ( graph 2 ). graph 2 even after the 2001 downturn, which was relatively mild in terms of gdp, it took about four years for employment to recover to its earlier peak. the current downturn has been much more severe, with employment falling by 6 per cent from peak to trough and the recovery in jobs so far being quite tepid. it is therefore clearly going to be some time yet before employment regains its pre - crisis levels. weak labour market outcomes, of course, mean subdued growth in household income, and the combination of job losses and low income growth has led to a big rise in mortgage foreclosures. almost one in twenty houses that