, the capital position of the banks will continue to deteriorate. so while the uk solution has emphasised new capital and the initial us approach emphasised excising the “ troubled ” assets, the swiss solution has been to do both : to recapitalise the banks, while getting the worst of the bad assets off their balance sheets. the united states has moved in this direction also more recently. continued efforts to provide clarity on the state of balance sheets is also important. surely the lingering counterparty risk aversion reflects uncertainty on this score. longer term, some of the implications of the past year ’ s events will be seen in the regulatory environment. in those countries where the public purse has had to be used to support bank solvency, it can be expected that there will be significant regulatory reform – and rightly so. the real trick, however, will be to make sure that the reforms are not just knee jerk reactions to the symptoms of financial excess – as clear as they are – but well considered, durable and tractable changes that appropriately contain, but do not crush, the financial system ’ s capacity and appetite to take risk. certainly, over the past five or so years, too much risk was taken, of the wrong sort. the danger in the next several years, however, will not be too much risk taking, but too little. regulators will want to avoid compounding that. while the prominence of financial events has been clear, there has also been a set of “ interesting ” events in the real economy unfolding at the same time. the fortunes of the chinese economy are increasingly important, particularly for australia and other countries in our time zone. the most striking real economic fact of the past several months is not continued us economic weakness, but that china ’ s economy has slowed much more quickly than anyone had forecast. our own estimates suggest that chinese industrial production probably declined over the four months to october. some of this might be attributable to the effects of the olympics but surely not much. some of it reflects the weakening in chinese exports to major countries. but more than that seems to have been occurring. i am not sure that many economic forecasters have fully appreciated this yet. there is every chance that the rate of growth of china ’ s gdp is currently noticeably below the 8 per cent pace that is embodied in various forecasts for 2009. the chinese authorities, having sought a slowing of their economy after it was clearly overheating, are now

glenn stevens : interesting times address by mr glenn stevens, governor of the reserve bank of australia, to the australian business economists annual dinner, sydney, 9 december 2008. * * * it is a pleasure once again to address the australian business economists. it was to this group that i gave my first speech as governor, in october 2006. tonight is my 23rd speech since then. between the two occasions, quite a lot has changed, globally and domestically ( though i doubt the speeches have become any more exciting ). many people have said to me recently that the times are “ interesting ”. my response has been that they are, perhaps, a little too interesting. i need not remind this audience of the international financial turmoil through which we have lived over the past almost year and a half, nor of the intensity of the events since mid september this year, in particular. i do not know anyone who predicted this course of events. this should give us cause to reflect on how hard a job it is to make genuinely useful forecasts. what we have seen is truly a “ tail ” outcome – the kind of outcome that the routine forecasting process never predicts. but it has occurred, it has implications, and so we must reflect on it. in that spirit, i shall set out a few features of this episode that make it “ interesting ”. the most obvious one is the prominence of financial events and particularly financial sector impairment in key countries. there have been other episodes where individual financial institutions or sectors, or even the whole banking systems of small countries, have needed recapitalisation. but the scale of capital needed, the number of countries where it is needed and the extent of counterparty risk aversion because of concerns over solvency have been outside the range of experience of the past half century. in the near term, financial stress brings the obvious concern about the ability of the financial system to provide credit to the economies in question. as one measure of this concern, the number of loans approved for housing in the united kingdom in october was 65 per cent lower than a year earlier, and about 50 per cent lower than during the downturn of the early 1990s. the immediate need is to keep ample liquidity, strengthen banks ’ balance sheets by adding capital and to help confidence, including by lending the strength of the sovereign ’ s credit rating where necessary. all this has been occurring. what may still be needed internationally is attention to the remaining problem assets, since if their prices continue to decline