Economic Policy in the

Post-Crisis Era
Joshua Gans
Melbourne Business School

PerCapita Policy Exchange Conference

October 2009

Tuesday, 10 November 2009

 The Crisis

Tuesday, 10 November 2009

 Back to the Future

Tuesday, 10 November 2009

 Back to the Future

Tuesday, 10 November 2009

 Back to the Future

Tuesday, 10 November 2009

 Counterfactual

Tuesday, 10 November 2009

 Counterfactual
If the GFC had not occurred, what would be
different in government policy?

Tuesday, 10 November 2009

 Counterfactual
If the GFC had not occurred, what would be
different in government policy?
No stimulus checks

Tuesday, 10 November 2009

 Counterfactual
If the GFC had not occurred, what would be
different in government policy?
No stimulus checks
More generous social security

Tuesday, 10 November 2009

 Counterfactual
If the GFC had not occurred, what would be
different in government policy?
No stimulus checks
More generous social security
Parental leave

Tuesday, 10 November 2009

 Counterfactual
If the GFC had not occurred, what would be
different in government policy?
No stimulus checks
More generous social security
Parental leave
Infrastructure less construction focussed

Tuesday, 10 November 2009

 Counterfactual
If the GFC had not occurred, what would be
different in government policy?
No stimulus checks
More generous social security
Parental leave
Infrastructure less construction focussed
No delay in CPRS

Tuesday, 10 November 2009

 Counterfactual (cont.)

Tuesday, 10 November 2009

 Counterfactual (cont.)
No government guarantee of deposits

Tuesday, 10 November 2009

 Counterfactual (cont.)
No government guarantee of deposits
No intervention in RMBS

Tuesday, 10 November 2009

 Counterfactual (cont.)
No government guarantee of deposits
No intervention in RMBS
Tighter monetary policy

Tuesday, 10 November 2009

 Counterfactual (cont.)
No government guarantee of deposits
No intervention in RMBS
Tighter monetary policy

The economy would be different

but government economic policy
would be largely the same.

Tuesday, 10 November 2009

 Luck or Structure?

Tuesday, 10 November 2009

 Luck or Structure?
Preemptive monetary & fiscal policy

Tuesday, 10 November 2009

 Luck or Structure?
Preemptive monetary & fiscal policy
Dual system of financial regulation

Tuesday, 10 November 2009

 Luck or Structure?
Preemptive monetary & fiscal policy
Dual system of financial regulation
No major corporate failures

Tuesday, 10 November 2009

 Luck or Structure?
Preemptive monetary & fiscal policy
Dual system of financial regulation
No major corporate failures
Lack of banking competition

Tuesday, 10 November 2009

 Luck or Structure?
Preemptive monetary & fiscal policy
Dual system of financial regulation
No major corporate failures
Lack of banking competition
No major regional government failures

Tuesday, 10 November 2009

 Luck or Structure?
Preemptive monetary & fiscal policy
Dual system of financial regulation
No major corporate failures
Lack of banking competition
No major regional government failures
China

Tuesday, 10 November 2009

 Luck or Structure?
Preemptive monetary & fiscal policy
Dual system of financial regulation
No major corporate failures
Lack of banking competition
No major regional government failures
China
Privatised social security?

Tuesday, 10 November 2009

 Keating’s Legacy

Tuesday, 10 November 2009

 Keating’s Legacy

US$1,200bn

Tuesday, 10 November 2009

 Superannuation

Tuesday, 10 November 2009

 Superannuation

Household savings took a large hit: wealth

effect

Tuesday, 10 November 2009

 Superannuation

Household savings took a large hit: wealth

effect
Theory: would translate into lower
consumption

Tuesday, 10 November 2009

 Superannuation

Household savings took a large hit: wealth

effect
Theory: would translate into lower
consumption
Reality: appears to have had no effect

Tuesday, 10 November 2009

 Back to the Future II

Tuesday, 10 November 2009

 Back to the Future II

Tuesday, 10 November 2009

 Back to the Future II

Tuesday, 10 November 2009

 Role of Economists

Tuesday, 10 November 2009

 Role of Economists

Prediction

Tuesday, 10 November 2009

 Role of Economists

Prediction
Institutions

Tuesday, 10 November 2009

 Can we predict?

Tuesday, 10 November 2009

 Can we predict?

Tuesday, 10 November 2009

 Can we predict?

Tuesday, 10 November 2009

 Can we predict?

Answer: no

Tuesday, 10 November 2009

 Can we predict?

Answer: no
... but it is the wrong question.

Tuesday, 10 November 2009

 Can we predict?

Answer: no
... but it is the wrong question.
Earthquakes, severe weather are unpredictable

Tuesday, 10 November 2009

 Can we predict?

Answer: no
... but it is the wrong question.
Earthquakes, severe weather are unpredictable
Doesn’t prevent us building in expectation of
them

Tuesday, 10 November 2009

 The Two Keynesians

Tuesday, 10 November 2009

 The Two Keynesians

Milton Friedman

Tuesday, 10 November 2009

 The Two Keynesians

Milton Friedman Hyman Minsky

Tuesday, 10 November 2009

 The Two Keynesians

Milton Friedman Hyman Minsky

Normal Times

Tuesday, 10 November 2009

 The Two Keynesians

Milton Friedman Hyman Minsky

Normal Times Liquidity Trap

Tuesday, 10 November 2009

 Can ‘It’ Happen?

Tuesday, 10 November 2009

 Can ‘It’ Happen?

If we look some decades into the future

Tuesday, 10 November 2009

 Can ‘It’ Happen?

If we look some decades into the future

Answer: yes

Tuesday, 10 November 2009

 Preventing ‘It’

• Liquidity traps arise when there is a failure

in the provision of liquidity
• Solution: backstop liquidity provided by the
long-term agent -- usually, the government

Tuesday, 10 November 2009

 Back to the Future III

Tuesday, 10 November 2009

 Back to the Future III

Tuesday, 10 November 2009

 Back to the Future III

Tuesday, 10 November 2009

 Post-Depression

Tuesday, 10 November 2009

 Post-Depression

What institutions did the US set-up in the post-

Depression Era?

Tuesday, 10 November 2009

 Post-Depression

What institutions did the US set-up in the post-

Depression Era?
Federal Reserve System

Tuesday, 10 November 2009

 Post-Depression

What institutions did the US set-up in the post-

Depression Era?
Federal Reserve System
Federal Deposit Insurance Corporation

Tuesday, 10 November 2009

 Post-Depression

What institutions did the US set-up in the post-

Depression Era?
Federal Reserve System
Federal Deposit Insurance Corporation
Fannie Mae and Freddie Mac

Tuesday, 10 November 2009

 Post-Depression

What institutions did the US set-up in the post-

Depression Era?
Federal Reserve System
Federal Deposit Insurance Corporation
Fannie Mae and Freddie Mac

Tuesday, 10 November 2009

 Post-Depression

What institutions did the US set-up in the post-

Depression Era?
Federal Reserve System
Federal Deposit Insurance Corporation
Fannie Mae and Freddie Mac

Tuesday, 10 November 2009

 Institution Creation

Tuesday, 10 November 2009

 Institution Creation

Insurance for future crises

Tuesday, 10 November 2009

 Institution Creation

Insurance for future crises

Currently subject to central banker’s put

Tuesday, 10 November 2009

 Institution Creation

Insurance for future crises

Currently subject to central banker’s put
Trade off between premium and incentives

Tuesday, 10 November 2009

 Institution Creation

Insurance for future crises

Currently subject to central banker’s put
Trade off between premium and incentives
Committed institutions prevent rather than
cure -- prevent self-fulfilling outcomes

Tuesday, 10 November 2009

 Emerging Issues

Tuesday, 10 November 2009

 Emerging Issues
• Reduction in bank competition

Tuesday, 10 November 2009

 Emerging Issues
• Reduction in bank competition
• About $5 billion in extra loan costs since
November 2007

Tuesday, 10 November 2009

 Emerging Issues
• Reduction in bank competition
• About $5 billion in extra loan costs since
November 2007
• Exposure to China and East Asia

Tuesday, 10 November 2009

 Emerging Issues
• Reduction in bank competition
• About $5 billion in extra loan costs since
November 2007
• Exposure to China and East Asia
This is not the time for Howard-
era economic complacency

Tuesday, 10 November 2009

 Agenda for Inquiry

Tuesday, 10 November 2009

 Agenda for Inquiry
Public exchange for derivatives

Tuesday, 10 November 2009

 Agenda for Inquiry
Public exchange for derivatives
Systemic risk charge for banks

Tuesday, 10 November 2009

 Agenda for Inquiry
Public exchange for derivatives
Systemic risk charge for banks
Explicit deposit insurance

Tuesday, 10 November 2009

 Agenda for Inquiry
Public exchange for derivatives
Systemic risk charge for banks
Explicit deposit insurance
Reduce bank switching costs

Tuesday, 10 November 2009

 Agenda for Inquiry
Public exchange for derivatives
Systemic risk charge for banks
Explicit deposit insurance
Reduce bank switching costs
Establish government-owned banking assets

Tuesday, 10 November 2009

 Agenda for Inquiry
Public exchange for derivatives
Systemic risk charge for banks
Explicit deposit insurance
Reduce bank switching costs
Establish government-owned banking assets
Government-assessed fund quality

Tuesday, 10 November 2009

 Today

Tuesday, 10 November 2009

 Today
Australia has fared well in the GFC

Tuesday, 10 November 2009

 Today
Australia has fared well in the GFC
... but the assumptions of current regulatory
institutions have been challenged

Tuesday, 10 November 2009

 Today
Australia has fared well in the GFC
... but the assumptions of current regulatory
institutions have been challenged
... and our current policies are band-aids.

Tuesday, 10 November 2009

 Today
Australia has fared well in the GFC
... but the assumptions of current regulatory
institutions have been challenged
... and our current policies are band-aids.
We need a new evaluation of our institutions to
match the new views of our financial markets.

Tuesday, 10 November 2009