Rather than raise interest rates to try to prevent a falling currency, they viewed a falling currency as the key to navigating the peril — by making Australian exports more competitive in the United States and Europe, for example.
“The government was uncomfortable if the exchange rate went too low, because it looked like a sign of no confidence,” said Malcolm Edey, who was the central bank’s head of economic research at the time. “We had a good monetary framework in place, we stuck to it, and we didn’t panic when the exchange rate moved around along the way.”
Sure enough, New Zealand fell into recession in 1997 and 1998, while Australia endured only a period of subpar growth. Good policy, it turns out, has a way of creating good luck. And it wasn’t the only time.
Boring banking and avoiding the global financial crisis
If you had looked around the world circa 2006, you would have seen a number of countries where housing prices had soared into potential bubble territory, including the United States, Britain and Australia.
But two years later, while the United States and Britain were in a severe recession and financial crisis, Australia experienced only a single quarter of contraction. Why the difference?
The answer seems to be how the financial industries of those countries were structured and regulated. To understand that better, I sought out a tutor, one who turned out to have an unlikely background: David Morgan, a former child actor and professional Australian Rules Football player who later became one of the country’s leading bankers.
After a wave of deregulation in the 1980s, Australian banks took on ever-more-risky lending, especially for commercial real estate, and got into new business lines overseas in which they had no obvious competitive advantage. When that asset bubble popped and a recession arrived, the banks came near failure, and there was a wholesale firing of top bank executives.
