Monetary policy can't do it all.
That's the message from Reserve Bank governor Glenn Stevens.
There was a "global panic" in 2008, but the world economy avoided a repeat of the 1930s depression, he said in a speech in Sydney on Tuesday.
That was thanks to a combination of quick actions by central banks to keep the private banks cashed up, aggressive use of monetary and fiscal policy, avoidance of projectionist trade polices, and policy actions designed to promote confidence, he said.
"The accounts of some of the key decision makers that have been published give even more sense of how desperately close to the edge they thought the system came, and how difficult the task was of stopping it going over," Mr Stevens said.
Macroeconomic policy has a big role to play in getting the world economy back on track, but the rise in government debt is a difficulty, he said.
Public debt has risen in part because of stimulus measures, but mainly because of the depth of the downturn in economic activity.
"A financial crisis and deep recession can easily add 20 or 30 percentage points to the ratio of debt to GDP, and did so in a number of cases," he said.
And some countries had gone into the crisis in bad shape after neglecting serious efforts to get their budgets in order.
"So fiscal policy has not had as much scope to continue supporting recovery as might have been hoped," Mr Stevens said.
"Policymakers in some instances have felt they had little choice but to move into consolidation mode early in the recovery."
And that leaves monetary policy to do the work.
But monetary policy has its own difficulties.
Interest rates can be pushed down, even to the "zero lower bound" reached by the US and Japan he said.
"But if people simply don't wish to take on new business risks, monetary policy can't make them," Mr Stevens said.
He rejected the notion that low population growth or slower growth in productivity had caused the expected rate of profit available to entrepreneurs to fall too far for low interest rates to work.
He also dismissed the idea that there was a legacy of unproductive investment depressing expectations of profit, the view of the so-called "Austrian" tradition in economics.
"Visitors to the US would not readily conclude that America had over-invested in infrastructure, nor would they when visiting the UK or, for that matter, Australia," he said.
"Perhaps the answer is simply subdued animal spirits - low levels of confidence."
But he warned that low investment caused by depressed confidence "could be a self-reinforcing equilibrium", and that monetary policy by itself might not be able to snap the economy out of it.
He recommended the G20 agenda for growth, including supply-side reforms, innovative ways of investing in infrastructure, better financial regulation and genuine free trade.
"The highly accommodative financial conditions will then have a more powerful effect in engendering real growth," he said.
"A rising confidence dynamic could unfold."
Share
