Australia today finds itself confronting extraordinary economic circumstances - a global financial crisis of a magnitude not seen since the Great Depression.
Some of the world's oldest and most revered financial institutions have either collapsed or been bailed out.
In the United States. In the United Kingdom. And in Europe. All within the space of a few months.
Three months ago few would have predicted the scale and ferocity of the dislocation of financial markets that we see today.
And few are willing to predict where we will be three months from now. We are truly in uncharted waters.
And the challenge for policymakers is to navigate those waters, deploying all the possible instruments available: fiscal policy, monetary policy, regulatory policy.
For the Australian Government, we confront three critical challenges.
* To anticipate future events and, where possible, act ahead of the curve.
* To respond to unfolding events with early, decisive, strong action.
* To lay the underlying long term policy framework to build an economy which emerges from the current crisis stronger and more resilient for the future.
And our challenge as leaders is to do all this while building confidence through decisive policy action in the national interest, rather than by undermining confidence through partisan political manoeuvring.
The question many Australians are asking themselves right now as they see the daily avalanche of bad economic news on their TV screens is “how did we get here?”
The alarm bells on this financial crisis started to ring far away in the distressed mortgage belts of American suburbia some fourteen months ago, when we all started to learn about this hitherto obscure financial instrument known as sub-prime mortgages.
What we have seen since then is a series of escalating events overseas - including dramatic contractions of debt markets and significant losses on equities markets.
We had seen the failure or bail out of four major banks: Northern Rock in February, Bear Stearns in March, Countrywide and IndyMac in July.
By the middle of this year, however, markets appeared to be calming.
Some analysts said the worst was behind us.
But then, on September 7 the world changed.
The unprecedented $100 billion bail out of US mortgage giants Fannie Mae and Freddie Mac began a chain reaction which drew the financial crisis into a new and dangerous phase.
Within a week Lehman Brothers - formerly the 4th largest investment bank in the United States - had collapsed - producing the largest bankruptcy in US history.
On the same day, Merrill Lynch - another iconic Wall Street name and the world's largest brokerage firm - was rescued by Bank of America.
Three days later the Federal Reserve announced that it would put US$85 billion on the line to stop the collapse of American International Group (AIG) - the world's largest insurance company.
And by the end of September, seven more major institutions had reached crisis point: Washington Mutual; Fortis Group; Wachovia; Bradford and Bingley; the Icelandic Glitnir Bank; German finance company Hypo Real Estate, and European Dexia Corporation.
The collapse of so many financial institutions caused share markets to fall dramatically in the United States and around the world.
With fear and anxiety paralysing the financial system, the economic crisis had the potential to deteriorate into a full blown catastrophe.
As the head of the IMF, Dominique Strauss-Kahn said on 12 November:
“the global financial system [is on] the brink of systemic meltdown.”
Unprecedented times call for unprecedented measures - and the world's governments swung into action.
On September 21, U.S. Treasury Secretary Henry Paulson proposed a plan under which the U.S. Treasury would acquire up to $700 billion worth of mortgage-backed securities - an action that would amount to more than $4000 per working American.
On October 8, the British Government announced a bank rescue package of around £500 billion - including £50 billion to recapitalise banks.
These actions were followed by Governments around the world - all prepared to take extraordinary measures to deal with these extraordinary events.
As the crisis unfolded, most governments were immersed in the immediate imperative of averting financial disaster.
But in the back of their minds they knew that even if they were successful, they would face a long hangover as the financial turmoil spilled over into the real economy - causing slower global growth and rising unemployment.
Even before the events of late September, the IMF had revised down its estimates of global growth.
The IMF predicted that:
“The world economy is now entering a major downturn ... and the major advanced economies are already in or close to recession.” (IMF WEO)
For the fourth time in 12 months, the IMF revised down their forecasts for growth in the major advanced economies from 0.9 per cent to 0.1 per cent in 2009.
The IMF is now forecasting growth in 2009 of less than 1 per cent in six of the G-7 economies.
This will be the slowest growth in the advanced economies for over a quarter of a century.
And since that forecast was released, the UK economy has recently recorded negative 0.5 per cent growth in the third quarter - the first quarterly contraction since 1992.
We face challenging times in the global economy for the year ahead.
* More than 25 banks around the world have collapsed or been bailed out.
* Liquidity has become scarce with the LIBOR-OIS spread reaching around 300 basis points this month - more than 30 times its average level in early 2007.
* Global stock markets have fallen by as much as 40 per cent.
* Consumer confidence has fallen to its lowest level in three decades across OECD economies, and to the lowest levels in one and a half decades in the US, UK and New Zealand.
Australia has exhibited great resilience in the face of the shockwaves of the global financial crisis.
The fundamentals of the Australian economy are sound.
We have a strong regulatory framework.
Our banking system is profitable and well capitalised.
We have four of the world's 14 AA rated banks.
We are in a stronger fiscal position than almost all other developed countries - with the budget surplus we set aside.
We go into this period ahead with higher growth than most other countries.
And we go into this period ahead with lower unemployment than most other countries.
But we must level with the Australian people: we are not immune from this crisis.
We are feeling its impacts now.
And we will be feeling its impacts long into the future.
Already the ripple effects of the financial meltdown in the United States have affected Australia.
* The ASX200 has lost nearly 40 per cent of its value since the crisis began.
* Business confidence is low - NAB's September quarter business survey released today shows business conditions are at their lowest level in seven years.
* Consumer confidence is also low - the Westpac-Melbourne Institute Index of Consumer Sentiment fell by 11 per cent this month.
* Housing credit growth is now at its weakest level since 1983.
* Building approvals are down by 8.6% from last year to the lowest level since April 2001.
And the crisis is already having an impact on the Australian dollar.
In the past, financial crises including the Asian financial crisis in 1997 and the tech wreck in 2000 both had a very significant impact on the Australian Dollar.
The Reserve Bank has independent authority to operate in the market in relation to the Australian dollar if and when they believe it is appropriate.
In response to the global crisis, the Government has taken decisive action in two critical areas:
* To maintain the stability of Australian financial markets; and
* To underpin growth in the economy.
On 12 October the Government took two unprecedented decisions in the history of the Commonwealth.
The Government provided a guarantee on the deposits of all Australian regulated deposit taking institutions - banks, building societies and credit unions - to maintain confidence in the system.
Second, the Government simultaneously announced a guarantee of banks' term wholesale funding to ensure they could access global credit in the future and therefore continue lending to business.
The first of these guarantees covered $800 billion in deposits, covering more than 15 million Australian deposit accounts.
The second covered an extraordinary $1.2 trillion in bank funding.
These actions covered the core elements of the Australian financial system.
They were necessary in the national interest.
In the weeks preceding the government's announcement, it became clear that events were entering a dangerous spiral.
Globally, confidence in the banking and finance sectors was shattered.
Money market liquidity reached a record low, credit spreads widened and exchange settlement account balances rose to record highs in both Australia and around the world.
On October 7 2008, the main indicator of interbank liquidity in the Australian market (the spread between the 90 day bank bill and the 3 month overnight indexed swap) closed at 141.3 basis points, around 10 times the pre-crisis level.
Exchange settlement account balances at the RBA averaged more than $9 billion in the week preceding the 12 October announcement, after reaching more than $11 billion on 30 September.
This compares with a typical level before the start of the sub-prime crisis in mid-2007 of less than $1 billion.
It was an even worse story in many other markets throughout the world.
In the United States, the comparable credit spread (3 month London Interbank Offer Rate - the LIBOR - and 3 month overnight index swap) reached almost 350 basis points, when the pre-crisis level was typically around 10 basis points.
Equity markets were also collapsing.
The Australian market fell more than 8 per cent on Friday 10 October - the worst day since October 1987.
The US Dow Jones had its worst week ever, even worse than the 1929 stock market crash.
Financial markets in many countries were closed as a result of significant share price falls.
By October 1 more than 25 major banks around the world had failed.
Around the world, people were losing confidence in their banking systems.
And the contagion was spreading - as people watched a nightly stream of negative news on their TV screens.
Despite Australia's internationally strong banking system, the Australian government listened to concerns that the introduction of comprehensive banking guarantees in other parts of the world may accelerate liquidity problems in our system.
We were also listening to the concerns of depositors.
Confidence in our banking system was beginning to be called into question - and banking organisations began communicating their concerns to government.
We knew we had to act to restore confidence in the banking system.
Our guarantee was comprehensive - it was an historic policy decision.
It had to be.
The scheme is available for 100 per cent of the deposits in eligible Authorised Deposit-taking Institutions.
Of this, something like 99.5 per cent of deposit accounts are covered free of charge, with institutions able to choose to seek coverage for their remaining depositors in return for a fee.
The financial regulators supported the measures the government adopted.
APRA Chairman John Laker said:
“The Government's deposit term and funding guarantee, which APRA fully supports, has calmed what was a growing disquiet on the part of some depositors.”
RBA Governor Glenn Stevens said:
“... Steps in these directions, in the context of what other countries were doing, were sensible and the RBA supported them.”
Australia was at risk of large withdrawals by domestic and international depositors if we did not act - despite the strength of our banking system.
A confidence problem was emerging because of the tide of international sentiment and the actions of various foreign governments.
A failure to act could have meant significant difficulties accessing credit, higher loan rates.
This would have in turn affected investment and consumption and ultimately our growth and employment.
If the government had only guaranteed deposits up to $100,000, as some argued, we would be excluding around 40 per cent of all deposits by value and some ¾ of a million deposit accounts.
The consequences of a partial guarantee under the prevailing circumstances would have been destabilising in the extreme.
It would have left those depositors with the largest amounts of cash without a guarantee - and therefore inclined to move their money to the big four banks and away from a range of other financial institutions.
Or even withdraw their cash entirely from the Australian banking system.
The effect of the Government's decisive action on that critical weekend was to maintain confidence and stability in the banking system.
Australian financial institutions are now lending to each other again.
Since the guarantee has started to flow through, exchange settlement balances held at the RBA have fallen from a peak of $11.2 billion on 20 October to $6.3 billion on 24 October.
Importantly for Australian families:
* It has given mums and dads the confidence that their deposits are safe;
* And it has put downward pressure on bank funding costs and therefore on interest rates.
Since the guarantee, several major banks have reduced their rates by around 0.2%.
And in doing so, they noted that the Government's guarantee was part of the reason they were able to do this.
As Ahmed Fahour, NAB Executive Director and CEO Australia, said:
" policy measures announced by the Australian Government earlier this month have started to have a positive impact .... we hope to be in a position where we can pass on further interest rate cuts to our customers."
As the ANZ Chief Executive Officer Australia, Brian Hartzer said:
“We are pleased to deliver on the promise we made in January to pass on reductions in funding costs as we see market conditions easing.
“...policy measures both here in Australia and around the world have restored some confidence to the global investment community and this is resulting in an easing of high wholesale funding rates.”
The Government has acted decisively to protect the economy, protect the banking system and help the countless Australians who are going to benefit from reduced interest rates.
We are making sure that millions of mums and dads know their savings are secure.
And that is critical for confidence.
The Government's guarantee does not extend to market-linked investments.
The Government has an obligation to protect bank deposits as these are held within APRA-regulated authorised deposit taking institutions.
Guaranteeing bank deposits is one thing.
But guaranteeing market-linked investments with pre-advertised risk profiles is another.
All elements of the financial system benefit from the stability given to the core elements of the system (i.e. the deposits and loans of Authorised Deposit-taking Institutions) by the Government's guarantees.
Just as all elements of the system have been directly affected by the global financial crisis.
And that includes market-linked investments - given the extraordinary movements that have occurred on global and Australian equity, property and capital markets as the global crisis has intensified.
The truth is, a number of investors had been shifting out of market-linked investment products for some time as the global financial crisis worsened and it became clearer that the assets underpinning these investments were being buffeted.
It is a matter of public record that before the turmoil of the first two weeks of October, and the Government's guarantee announcement that followed, more than 10 pooled retail mortgage trust funds had already frozen redemptions as there had already been a shift away from various investment products toward banking products.
This has also occurred many times in the past as a consequence of previous global economic downturns.
The Government continues to work with the non-APRA regulated institutions to help find solutions to liquidity problems in these extraordinary times.
Treasury, in consultation with ASIC and APRA, is systematically working through the challenges faced by these institutions in dialogue with them and their peak bodies.
As part of this process, Treasury has taskforces dealing with each category of market-linked investments institutions in what is a complex sector involving highly diverse and risk-differentiated investment products.
For example, the Treasurer announced recently that Treasury and ASIC are investigating the impact of the global financial crisis on cash management trusts to provide advice on what actions might be appropriate to support this sector of the economy.
As the Treasurer also announced, ASIC is specifically examining its powers to provide additional flexibility to funds managers and trustees to allow for redemptions in investor hardship cases, where redemptions have been frozen.
Similarly, Treasury officials are examining (in consultation with industry) the impact of the global financial crisis on mortgage trusts, debenture issuers and other non-prudentially regulated investment entities and to provide advice on what actions might be appropriate to support this sector of the economy.
But in all this, there is a fundamental bottom line for taxpayer supported government guarantees - and that is the difference between prudentially regulated deposit-taking institutions on the one hand, and market-linked investments with higher risks and higher returns on the other.
No Government can, in good conscience, put tax-payers' dollars at risk to support financial institutions which are not open, transparent, and properly accountable to Australian regulators.
That is why the Australian Prudential Regulation Authority (APRA) will accelerate its processing of applications by investment vehicles to become prudentially regulated - if they so apply.
APRA stands ready to respond to applications from entities seeking to become ADIs where they are able to meet Australia's regulatory requirements.
This will not be possible for all institutions which apply, but this opportunity is available to those market-linked investment vehicles which wish to move into the prudentially regulated sector.
Subject to the successful application of these financial institutions (which means meeting the prudential standards), they will of course be covered by the government guarantee.
But only if they meet the prudential standards of deposit taking institutions.
APRA, ASIC and Treasury will be resourced as necessary to deal with this increased work load both in relation to the unprecedented demands on regulators as well as expeditiously handling an increased rate of applications for prudential regulation.
Australia's regulators are first class.
They have consistently outperformed their international counterparts.
They are national institutions.
And they require absolute bipartisan support - in word and in deed.
To do anything other is reckless at a time of global financial crisis.
The Government has drawn on the economic policy machinery in the government and the independent regulators to advise us during these challenging times.
These institutions have performed well.
The Council of Financial Regulators, which comprises Treasury, the Reserve Bank, APRA and ASIC, has been closely monitoring developments and assisting the government to ensure Australia has the best financial policy responses in place at a time of global financial crisis.
Each morning, I meet with the Treasurer, the Secretary of my Department, the Secretary to the Treasury and other senior officials to assess the latest economic and financial market developments, both in Australia and abroad, to get a clear measure of the domestic and international outlook and any necessary policy responses.
The Government has also mobilised the International Economic Policy Group to provide coordinated advice to the government on its international strategy - with particular focus on the G-20 meetings as well as the upcoming APEC Leaders meeting and East Asia Summit leaders meeting.
The group includes senior officials from my department, Treasury, the Reserve Bank, DFAT and the Office of National Assessments.
This is also an important mechanism to ensure consistency in our domestic and international initiatives.
All critical matters are brought before the Strategic Policy and Budget Committee of the Cabinet for decision.
During this unprecedented crisis, with critical events occurring across multiple time zones, often requiring officials to work in shifts, the machinery of government has been working well.
But the challenges ahead remain great and there are many tests that lie before us.
The Government's economic strategy has two fundamental objectives:
* to maintain the stability of the financial system;
* and to support positive economic growth at a time of likely global economic recession.
In acting on the first, the Government enacted on October 12 the double bank guarantees.
In acting on the second the Government announced a $10.4 billion Economic Security Strategy on October 14.
This is equivalent to 1 per cent of GDP.
Through practical support for households and across the economy more broadly, we are supporting continued positive growth.
The elements of the package are:
* a $4.8 billion down payment on long-term pension reform
* single pensioners will receive a lump sum payment in December of $1,400 and pensioner couples will receive $2,100
* carers will receive $1,000 for each person they care for;
* $3.9 billion in payments to eligible children
* this will provide a payment to families of $1,000 per eligible child
* there are about 3.8 million eligible children;
* doubling the first home buyers grant to $14,000 and tripling it to $21,000 for those who buy a newly constructed home;
* doubling the number of productivity training places to 113,000 in this financial year; and
* bringing forward the Government's nation building agenda on infrastructure.
This package will provide a boost to families in need.
It will provide a boost to pensioners and carers.
It will provide a boost for the construction sector as well as helping families realise the dream of owning their own home.
And it will address long-term productivity challenges by boosting training and bringing forward investment in infrastructure.
It is an Economic Security Strategy to see us over the short-term challenges and to position the economy to continue to grow in the long-term.
Another critical element of laying the foundation for long-term economic growth is our nation building agenda.
We kick-started the process by establishing Infrastructure Australia earlier this year.
Infrastructure Australia is an independent statutory council headed by Sir Rod Eddington.
Its first task was to produce an audit of the nation's infrastructure by the end of 2008.
In response to the global financial market crisis, the Commonwealth agreed at the October COAG meeting that they would bring forward an interim report on the National Infrastructure Audit and the Infrastructure Priority List in December.
In just ten months of Government, we have committed to a long-term $76 billion infrastructure investment program for the future including over time:
* We'll invest $26 billion in roads and rail infrastructure through 2008-09 to the end of AusLink II.
* We'll invest $20 billion through the Building Australia Fund in transport and communication priorities.
* And from this, we'll invest almost $5 billion in a National Broadband Network.
* We'll also invest $15 billion in education infrastructure, through the Education Investment Fund, trade training centres in schools, computers in our classrooms, and by investing in our universities.
* We'll invest $11 billion in health and hospitals infrastructure, through the Health and Hospitals Fund and other programs.
Through these investments, we will boost economic activity during a time of global uncertainty and build the foundations of future prosperity.
Remember it is critical that through this global financial crisis, we continue to advance the Government's long-term economic reform agenda - to build long-term productivity growth:
* through a continued quantitative and qualitative investment in the education revolution - in education, skills and training;
* modernising the nation's infrastructure; and
* embarking on comprehensive regulatory and tax reform; and
* reforming the Federation, the last remaining frontier of micro-economic reform in Australia.
Because of the nature of the global financial crisis, we also need to do more than just respond at home.
The global financial crisis has brought home to us all one message very clearly - we live in an interconnected world.
A financial crisis in the United States has reverberated quickly and in devastating fashion around the globe.
The Australian Government has taken rapid action to counter the domestic impacts of the crisis.
But we need coordinated, effective international action as well.
I warmly welcome President Bush's initiative in calling a meeting of leaders of the member of the Group of Twenty nations - the G-20.
This is a first-class initiative.
The G-20 was established after the 1997 Asian Financial Crisis.
It has brought together on a regular basis the finance ministers and central bank governors from the world's major developed and emerging economies.
It includes the United States and Japan; it includes China and India.
It is a group with real economic clout - both for the present and the future.
* Its members represent 85 per cent of the global banking system.
* They represent 90 per cent of global economic activity
* 80 per cent of world trade.
Because of its broadly representative membership, the Group has legitimacy when it comes to dealing with a global crisis.
The meeting called by President Bush for 15 November in Washington will be an important opportunity for the major players to coordinate our responses to the global financial crisis and the economic impact it is having.
At this meeting, the leaders of the G-20 nations must agree on clear, strong, action.
The outcomes must include a framework for the international community to work together to better manage the current financial crisis.
And we must agree to learn from our mistakes and to work towards common solutions that will serve to mitigate the risks of similar crises re-emerging in the future.
And beyond these two important objectives, a third objective must be coordinated action to support the global economy to deal with the emerging reality of a likely global recession.
These outcomes are not assured.
G-20 nations will need to work hard to implement clear, strong, action-orientated outcomes.
Australia has a real national interest at stake in shaping the international response.
A fundamental role of leadership in the midst of a global crisis of the type we are experiencing is to underpin confidence.
Confidence in our financial institutions.
Confidence in our markets.
Confidence in our economy.
Because confidence in the current environment is a fragile commodity; whatever the strength of the fundamentals.
We all saw the huge blow to confidence from the US Congress's initial failure to pass the recent bailout package.
It is incumbent upon all of us in political leadership to be very careful about what we say.
Now is not the time to be questioning the head of the Commonwealth Treasury.
Now is not the time to be attacking the head of the Reserve Bank.
Now is not the time to talk about bipartisanship and then turn around and undermine political support for the guarantee on bank deposits.
John Stewart of the National Australia Bank - a highly respected figure by all sides of politics in this country - said at the weekend that the design of the wholesale funding and deposit guarantees was sensitive, complex and it had been important to take the time to get it right; and furthermore that the politicisation of this process had been unhelpful in the markets.
Mr Stewart is absolutely right.
Confidence is a delicate but necessary commodity at a time of crisis.
It is maintained by concrete actions by governments and private institutions.
It is maintained by support for the independence and integrity of our national institutions.
It is also maintained by being frank with the Australian people about the strengths we have and the problems we face - and not playing or pandering to fear.
There will be difficult times ahead for Australia.
Even when markets do begin to stabilise, the impact of the global financial crisis on the real economy in Australia will be felt into the future.
On jobs.
On growth.
But with the right fiscal policy decisions, and monetary policy playing its role, there are rational grounds to be absolutely optimistic about Australia's future.
Optimistic that we can see through the impacts of the global financial crisis.
Optimistic that we can see the Australian economy emerge in stronger shape in the future.
The path ahead will not be smooth.
There will be difficult decisions along the way.
Decisions that won't be popular.
But decisions which will be taken in the national interest.