SYDNEY -- When Lehman Brothers failed in September 2008, Australians felt dangerously exposed to what was locally dubbed the global financial crisis, or the GFC." Government debt was low and its banks had not indulged in much American-style sub-prime housing lending or dubious financial engineering. But as a capital-importing and commodity-exporting economy, Australia would be highly vulnerable to a seizure in global financial markets and a collapse in world trade. And Australian families had borrowed too much, largely to finance what suddenly looked like a bubble in housing prices. This ultimately showed up in heavy foreign debt channelled through the banking system. Cracks appeared in the second-tier banks, sending a flood of cash into the big banks and under family mattresses.
For the past few years, China's voracious appetite for raw materials had created a boom in Australia's export sector, as Chinese blast furnaces devoured ton after ton of Australian iron ore and coal. Now, though, Australians feared a collapse of the American consumer market--tightly coupled with Australia's China boom. In the last quarter of 2008, the economy had contracted modestly. Dark clouds were gathering from every direction, and the specter of another Great Depression rattled the nation's confidence. Prime Minister Kevin Rudd hadn't helped matters by talking up the peril, describing it as a rolling economic security crisis. To prevent this nightmare, the Australian government had launched a massive stimulus--public-works spending ramped up, interest rates slashed, house-buying subsidies increased and cash handouts provided to lower-income citizens. In an appearance on national television in March 2009, Rudd presciently suggested his government's stimulus response would provoke "the usual political shit storm."
By early June 2009, just about everyone had expected the national accounts for the first three months of the year to confirm a second consecutive quarter of contraction--the popular definition of recession. The governor of Australia's central bank predicted "a significant contraction" for the first half of 2009. The Treasury minister agreed. "The worst global recession in 75 years means it is inevitable that Australia will be dragged into recession," Rudd declared in late April. It was the first time any Australian government had officially provided such a forecast.
On June 3, Rudd waited in the office of a senior cabinet colleague for the tidings from the Australian Bureau of Statistics. It was delivered by Rudd's senior economic adviser, Andrew Charlton, a protege of American economist Joseph Stiglitz. As soon as Charlton finished, Rudd reportedly let out an expletive of excitement and high-rived one of his colleagues. He would not have to deliver the "inevitable" bad news he had warned Australians to strap themselves in for. Instead of being dragged into the worst global economic crisis since the Great Depression of the 1930s, Australia somehow had increased its production of goods and services in the first few months of 2009. The economy had quickly rebounded from the worst global financial crisis since the 1930s. Alone among the developed nations that belong to G-20, it was not being sucked into a...