Government policy needed to survive financial rehabilitation
Good government policies and focusing monetary policy on price stability is crucial if Australia is to survive the rehabilitation of the financial markets after the turmoil of previous years, according to Ruth Richardson.
Speaking at the PortfolioConstruction Conference in Sydney, Richardson said that while the brunt of the financial turmoil was over, including the housing downturn and the squeezing of incomes from higher energy and food prices, the “tail of the storm” was yet to come.
“It does matter for us to think about what happens in the tail of the storm, because financial markets now constitute between something like 8 and 10 times GDP [gross domestic product],” she said.
Richardson specified asset price drops, credit contraction, and the dangers of economic protectionism in government policy as the consequences of the recent financial volatility.
Richardson said that while governments would become more involved in controlling economic policy, they needed to stand back and let the best of the creative capitalist minds lead the market.
“There are two sides to the engaged government coin. One is the ‘sticky fingers’ [scenario], the other is on setting the scene and allowing the best of capitalism, the best creativity, to unfold.
“We want to make sure that the regulatory response is not to throw more sand in the works,” Richardson said.
Richardson was the New Zealand Minister of Finance from 1990-1993, and instituted the Fiscal Responsibility Act of 1994, a cornerstone of New Zealand’s economic framework. She is a public policy consultant and a director in corporate governance.
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