The long era of unchecked household borrowing which began in the early 1990s might be over, Reserve Bank governor Glenn Stevens predicted yesterday.
The governor also flagged a potentially greater role for future government intervention on the same day the United States Federal Reserve announced a record $US85billion ($107billion) rescue loan to prop up the world's biggest insurance company, the American Insurance Group.
The unprecedented action by US authorities calmed markets after dramatic developments in recent days, including the collapse of US investment bank Lehman Brothers, the takeover of Merrill Lynch, and the US government bail-out of mortgage finance companies Fannie May and Freddie Mac.
The global finance storm may also have swept up a new victim last night: Britain's biggest mortgage lender, HBOS, was reportedly forced into takeover talks.
The Australian sharemarket closed down 0.6 per cent yesterday, reversing gains made earlier in the day on the back of an overnight Wall Street rally.
The Reserve Bank governor said our financial system was ''weathering the storm well''.
''For the vast corporate sector their balance sheets are in very good shape,'' Mr Stevens said.
''There are some entities with high leverage and complexity and those entities are under pressure at the moment.''
Prime Minister Kevin Rudd told Parliament, ''We are living in exceptionally difficult economic times, and we in Australia are not immune from these developments.''
It was important to keep the challenges presented to Australia from the global economy and financial markets in perspective.
''We are also in this country better prepared than most to deal with the buffeting which is being presented to other national economies by recent developments in global financial markets.'' Treasurer Wayne Swan warned that while the direct exposure of Australian banks to the Lehman Brothers collapse was minor, the turmoil on financial markets would hit the Australian economy. ''It will slow growth here and that will have a flow-on effect on the budget surplus and so would any reduction in commodity prices,'' Mr Swan said yesterday.
Finance Minister Lindsay Tanner sought to reassure people.
He said in the ''very unlikely event'' any Australian bank collapsed, Australians would be covered by the Government's $20,000 deposit insurance.
In a wide-ranging, big-picture speech to the Australian Institute of Company Directors yesterday, Mr Stevens asked whether ''the long period of gearing up by households might now be approaching an end?''. He asked if this would usher in a new era of more modest household spending coupled with greater saving.
The governor pointed to the rapid growth in household debt from a level of 50 per cent in the early 1990s to the current 160 per cent of household income.
He said this growth had eased recently and that ''there is also a good chance that households will for some time seek to consolidate their debt, grow their consumption spending at a pace closer to income, and perhaps look to save more of their income than in the recent past''.
The governor said that while household borrowings had been the big financial story of the past 15 years, ''there are some developments that suggest the balance sheets of governments might well be expected to expand a good deal''.The governor cited the recent US government interventions in financial markets as well as possible Australian infrastructure spending as examples where the higher cost of capital might lead to a greater government role.
The Westpac-Melbourne Institute leading index, which forecasts economic growth levels six to nine months ahead, indicated a level of 3.7 per cent in July.
That growth prediction is well below the long-term trend of 4.2 per cent.