US bail out plan 'working', says Paulson
Updated
Two days ahead of the G20 meeting in Washington, US Treasury Secretary Henry Paulson, has insisted the $US700 billion bail-out package has already helped stabilise the global financial system. Speaking in Washington, Mr Paulson said there are still many challenges ahead, and that market volatility is likely to continue for some time. In a shift away from the original bail-out plan announced last month, Mr Paulson said the US has decided not to use bail-out funds to purchase bad debts from banks.
Presenter: Sen Lam
Speakers: Dr Peter Brain, director, Australian National Institute of Economic and Industry Research; US Treasury Secretary Henry Paulson
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SEN LAM: First of all what do you make of Secretary Paulson's claim that the US bailout plan has already helped to stabilise the world's financial system?
PETER BRAIN: I think that's probably correct. I mean when they were considering this plan they were looking at, you know, a very large cessation of credit, people who already had loans couldn't roll them over which means businesses would have gone into bankruptcy and they were looking at probably - if they did nothing - at about probably a 20% fall in GDP over the next year. So what they've done is to inject fresh capital into the banking system with the control that that gives in terms of buy-in to ensure that at the very least loans can be - loans will be rolled over and at least a base-level liquidity will be available in the system.
SEN LAM: Do you think part of the value also is that it's also injected a lot of confidence into the financial system?
PETER BRAIN: Well, certainly, to the extent that at least people who were looking at having to roll over their loans in the next 6 to 12 months are now much more confident that that will in fact be the case and they therefore can at least plan around stable operations.
SEN LAM: And Peter Brain, what do you make of the US government's plan to move away from buying up bad debts from the banks and instead towards buying shares?
PETER BRAIN: That was the only sensible option. To buy up bad debts, of course, meant the shareholders got a free kick or a subsidy, if you like. It was completely unjustified. The institutions had got themselves in this mess and the shareholders had to pay a considerable penalty. And by, of course, buying into these banks they inject fresh capital for lending as well as giving them a degree of control to ensure the banks will in fact continue a more normal sort of lending operation.
SEN LAM: And just four weeks ago there was talk of another great depression in the US. Are we moving away from that scenario?
PETER BRAIN: Certainly what the governments have shown is that they can at least put a floor under the decline in economic activity and they will take whatever steps are necessary to ensure at least minimum levels of liquidity are provided to the system. How much - that doesn't mean, obviously, we've avoided a very, very nasty recession indeed - confidence has been hit. There's already recessionary factors in the system before all this happened. This has been a big blow to confidence and to get growth back you need people to be confident and to be willing to go out and take on new lending and invest and spend over and above their minimum requirements and we haven't moved into that stage yet and it might be some time before we do, therefore we're looking, at the very least, at a recessionary period in North America and Europe. How much will output contract is anybody's guess. I guess it will be somewhere in the vicinity between minus 1% or minus 3% probably for next year but, you know, we're still not out of the woods yet.
SEN LAM: And what about here in Australia? How do you think things might pan out here? There are some people suggesting that Australia could be in for a meltdown similar to the one in Iceland?
PETER BRAIN: Well, that's not overnight or right now. I think what people have got to understand is different in Australia is that whereas in the US the approximate cause was over-lending to a certain socio-demographic group, in Australia it's been more general across all our households and the result that that very large increase in debt, even larger than the increase in US debt has flowed over into the current account deficit and of course added to a very high international debt and a lot of that debt is now held by the banking system. So Australia, if you like, is entering into a very dangerous period where any, you know, loss of confidence and sudden reduction in the exchange rate would, like Iceland, obvious, be very bad news for the banking sector and we may yet, though not tomorrow, have to have our own sort of partial bailout procedures if in fact there is a loss of confidence in the Australian economy. And that means, of course, we've got to, you know, think up something different except going on in the way we have before of just growing the economy by just amassing massive levels of international and domestic debt.
