KEY POINTS:
To look back on the year ending tonight is to see a time that already feels like another age. When 2008 dawned, recession was a mild prospect, financial problems in the United States a distant concern. Losses on "sub-prime" mortgage lending seemed to be nothing that sound astute central banking policy could not handle. In New Zealand, finance companies were toppling like dominoes, the risk of their limited investment purpose exposed by the collapse of the property boom.
The New Zealand economy was slipping into recession but most of us had little more to worry about than a glorious summer that was leaving farmland parched. We were more anxious about a summer crime wave and for the state of our national game after the Rugby Union had reappointed Graham Henry, handing Robbie Deans to Australia.
Like the United States, New Zealand was looking forward to a change of leadership but November seemed a long way off. Unlike the Americans, our change was predictable. Polls already had John Key's National Party in a sustained lead. The United States was preparing for party primaries and both races were closing. Hillary Clinton, seemingly assured of the Democrats' nomination through 2007, had a young black senator challenging her for the mantle of change.
By mid-year our concerns had switched to the price of food and fuel. Petrol prices were soaring to levels which had Aucklanders leaving their cars at home at last and public transport was coming into its own. A dedicated busway built alongside the Northern Motorway had opened in February. The national railway was returning to state ownership at a fearful price. High oil prices gave the Government an excuse to postpone the introduction of carbon emissions controls and tradeable rights.
That was the first half of 2008 - the second was a different story. By September, the sub-prime contagion of Wall St was threatening the survival of its big-name investment banks. Bear Sterns had been sold much earlier, helped by the Federal Reserve. Merrill Lynch followed in September. When the giant Government-backed mortgage guarantee corporations Freddie Mac and Fannie Mae had to be rescued, even Federal Reserve chairman Ben Bernanke thought it time to get tough.
The next of Wall St's big five, Lehman Brothers, was not bailed out. Within days, the implications were dire. The financial system in the US began to seize up and the banking system elsewhere took fright. By October, a full-blown global crisis was taking hold and governments were ready to write cheques on the taxpayer to relieve banks of bad loans, indemnify their borrowing and buy equity stakes if need be.
Meanwhile, oil was back to half the US$147 it had reached in July. Inflation was dead, deflation was the new worry. The credit squeeze and declining consumer confidence were hitting business and threatening jobs. The year ends with the long boom since the millennium already a fading memory. The new governments elected here and in the US are facing challenges they never imagined until a few months ago.
In the new year they will need to spend prodigiously to maintain activity but spend wisely too. They need to let some industries fail and build infrastructure suitable for a future that will be highly electrified and more energy efficient. They must also reconstruct financial services and remove their ability to create illusions of low risk.
We will look back on 2008 as the year in which the era of free-market prosperity came to a shuddering halt, a victim of cheap money, asset bubbles and deregulated excess. We face a new year poorer, wiser and worried. May it end happier than it begins.
