In particular I recall Henry’s telephone call to me as prime minister on Black Friday, October 10 2008, when financial markets around the world went into meltdown. People seem to have forgotten that the stock market crash of 2008 was worse than the one that triggered the Great Depression back in 1929. Henry’s calm and considered advice to me in the midst of market mayhem was that we needed to spend the next two days convening an emergency meeting of the strategic priorities and budget policy committee of the cabinet. I agreed.
When we met in Canberra the following morning, once again it was Henry who calmly explained, based on prior discussions with the Council of Economic Regulators, the impending crisis facing our first and second tier banks when they opened for business the following Monday. The core problem was that international lines of credit had frozen. The normal financing facilities available to the Australian banking system from abroad had simply dried up. We were on a pathway to disaster because of the implosions generated in the US through the subprime crisis, mortgage-backed securities, and a woefully under-regulated US financial services industry. Through no fault of their own, Australian financial institutions were about to bear the brunt of it all as the major American banks retreated from their traditional international lending practices to repair their own balance sheets.
Henry’s advice was clear cut: he said that unless the government provided a sovereign guarantee for the inter-bank lending needs of Australian financial institutions, there was a grave risk they would fail. We then had a long debate in cabinet about the content and scope of the guarantee that would be necessary. At that stage the question of confidence in the system was fundamental. We agreed on providing the most comprehensive guarantee possible so that we could quickly re-open the lines of credit. It worked.
The next item on the agenda that day was what to do about Australian deposit holders. We had already heard rumours of a potential run on the banks and the possibility that queues would start forming outside some financial institutions first thing Monday. ATMs were already starting to run out of cash. Those with inside knowledge had already begun a rush to convert as much of their holdings to cash as quickly as possible. Brambles and Armaguard were doing a roaring trade. Henry’s advice was once again unequivocal: that we would have to provide a sovereign guarantee for the country’s deposit holders. Once again we agreed. I argued successfully that this should be as comprehensive and as generous as possible so that we would not end up with people quibbling about the interpretation of the guarantee.
Then came Sunday. Henry once again presented to Cabinet the impact of the financial crisis on the Australian macro economy, its threat to small business collapse and large scale unemployment. Henry and I then had a long and spirited conversation in the cabinet room in response to my core question: “What do we need to do, Ken if we wish to avoid a recession?” I followed that by asking what he had learnt by having been a senior Treasury official during the last Australian recession in 1991. Henry’s sharp, intelligent response, as the history books now record was “Prime Minister, go early, go hard, go households.” It was based on that discussion, and Henry’s vivid presentation on what the Treasury had got wrong in 1991, that we formed our fiscal stimulus strategy which we announced in three phases over the next three months.
The bottom line was that Henry’s advice was critical to all three sets of decisions by the government. And all three proved to be absolutely right. No amount of revisionism can detract from the fact that this country did not lose a single financial institution; no deposit holder lost their savings; and Australian was the only advanced economy not to go into recession, with the result that we avoided the mass unemployment that became commonplace around the world.
NAB and the rest of the banks deserve everything the royal commission has served up to them. I note, however, that Henry is a relatively recent recruit to the industry, having been chair of NAB for three years, unlike so many others who have grown fat on it over the entire length of their careers. Yes he botched his testimony to the royal commission. But before the national zeitgeist turns Henry into a national scapegoat for the ills of an entire industry, the country should reflect for a moment on where Australia might be today were it not for Henry’s critical role a decade ago.
Kevin Rudd is a former prime minister of Australia.