By Jill Fraser for Lending Central

The deputy governor of the Reserve Bank, Guy Debelle pre-empted an address on global risk and uncertainty with a quote from late rock star Jim Morrison from the Doors in the song ‘Roadhouse Blues’: “The future’s uncertain and the end is always near”.

The line was an apt introduction to a discussion that included a warning that a global double dip recession is a genuine risk.

Speaking at the Risk Australia Conference in Sydney Debelle admitted that the world succumbing to a double dip recession is definitely on the cards.

“It’s a risk, it’s actually a somewhat unquantifiable risk,” he said.

“It’s difficult to take into account risk and uncertainty in structuring balance sheets and the like; it’s difficult to take risk and uncertainty into account in conducting policy. At the moment uncertainty is probably elevated, it has been for the last few years, which just makes all decision-making a lot more difficult.”

Debelle’s comments reflect statements by US Federal Reserve Chairman Ben Bernanke that the Federal Reserve board is considering “further unconventional policy measures” to boost the US economy and bolster the country’s significantly slower than anticipated economic recovery.

Debelle went on to say: “Risk was mis-assessed by financial institutions, by risk managers, by investors and by regulators. There was a false comfort taken from a misplaced belief that risk was being accurately and appropriately measured. To some extent the technology provided risk managers with a false sense of security.”

Debelle told the conference that he believes that risk mis-assessment was a key element of the global financial crisis.

He raised the issue of model-based risk management and questioned whether the correct model was used “when the future unfolded in a way that was no longer consistent with the history used to develop these models”.

He cited the way US financial institutions and credit rating stress tested their mortgage portfolios and mortgage-backed securities.

“However, the stress test was derived from the history of house prices in the US,” he said.

“That history suggested that cities in the US had their own price cycles and that the correlations across markets were not particularly strong.

“Periods of large house price decline were confined to a few idiosyncratic events in a few cities. One could obviously have stressed the mortgages assuming some moderate nationwide house price decline. And indeed a number of the AAA-rated securities would not have maintained their rating under that scenario.

“But given the history prior to 2007, would a stress test of a nation wide 20 per cent decline in house prices have been considered plausible?”

NAB Chief Economist, Alan Oster, to whom Lending Central spoke prior to Debelle’s address, gives an emphatic “no” when asked if he thinks that we are in for a double dip.

LC: Are we heading towards a double dip recession?

AO: The answer is no.

LC: The world isn’t in great shape at the moment.

AO: It depends on what part of the world you’re looking at.

LC: I’m looking at the US and glancing across to Greece and the UK.

AO: But not at China, Brazil or Asia.

Let’s start off in the US.

The big issue in the US is that their economy was down minus 3 per cent last year. It grew really strongly towards the backend of December and March then slowed a lot in the June quarter. But slowing does not equal stopping.

When you look at some of the partials you see that business surveys are still consistent with what I will call moderate growth.

But everywhere consumers are worried. They see the end of stimulus and they’re concerned about whether growth will keep going, they’re worried about Greece and they keep hearing that the world is in danger of double dipping.

US consumers are particularly nervous.

LC: Cautionary comments from Fed Chairman Ben Bernanke and his reassurance that he will step in and boost growth if the economy slides any further can’t be helping consumer confidence.

AO: Ben Bernanke didn’t actually say that the US is going into recession. What he said is that economic growth is disappointing.

Normally when an economy goes backwards the degree it has in the US it normally bounces big time. This is not happening. There was a bit of bounce thanks to the stimulus but now it’s petering out.

Clearly the economy is growing (a 1.6 percent annual rate in the second quarter, less than previously calculated). The bad news is that unemployment is also on the rise.

LC: In summary, is the US economy in trouble?

AO: It’s got a long hard slog ahead, with high levels of unemployment. The same applies in Europe.

LC: Yet you don’t think we’re in for a double dip.

AO: I see three factors potentially triggering a double dip.

One would be the US coming down and I don’t believe that’s going to happen.

Another would be that China is in a bubble and I certainly don’t believe that.

The other is Europe’s sovereign debt crisis. I feel nervous about this one. Economies are still down, unemployment is very high and there are a lot of fiscal deficits out there.

Are countries such as Greece broke? The answer is yes. Will they default? Probably not in the next 12 to 18 months because the Europeans have put up 850 million euros. Will it default in three or four year’s time? Probably.

LC: How will that impact Australia?

AO: Not a lot because Australia trades in Asia and even Japan is going to grow this year.

If you weight the globe based on our major trading partners we think the growth rate this year will be 5.5 per cent in comparison to about minus 0.1 per cent last year, which includes China growing at around 9 per cent. This growth is as fast as any time leading into the GRC. So the world we deal with is looking very healthy.

LC: How do you see growth in Australia?

AO: We see it around 2.75 per cent. As we go into next year it looks more like 3 per cent and the further out we go the stronger we’ll get regardless of who is in government in Canberra. They’re both talking about fiscal conservatism and despite all the talk about being different I don’t think they are.

LC: What about all the concern about government debt?

AO: Talk of Australian government debt is rubbish.

On the record Japanese debt to GDP is around 200 per cent. Most of Europe and the US are sitting somewhere between 80 to 100 per cent. Australia is currently around 6 per cent.