Yesterday, in a speech before the Australian Institute of Company Directors, Governor of the Reserve Bank of Australia Glenn Stevens reviewed the current international financial crisis and outlined his policy recommendations for global recovery.

In the speech, Governor Stevens stated that the Australian economy is almost certainly in a recession, noting that the “Australian economy has been contracting, though ... not at a pace seen in a number of other countries.” For the road ahead, Governor Stevens outlined four necessary elements of a recovery.

The first element is addressing problems in the financial systems, especially in the United States, the United Kingdom and Europe. Here, Governor Stevens urged that an honest accounting be made of the situation, “legacy assets” be quarantined and relevant financial institutions be recapitalized.

Governor Stevens’ second element of recovery is macroeconomic support for aggregate demand. Here, he noted, easier monetary and fiscal policy have already begun to work, but the nature of the current crisis, specifically the current impairment of credit systems, has made fiscal policy more effective than monetary policy in many countries.

The third element is the coordination of exit strategies. Governor Stevens proposed that governments, in the medium-term, divest their holdings in banks, phase out the various state guarantees implemented in response to the current crisis, and provide taxpayers, markets and creditors a credible plan for governmental fiscal responsibility.

Finally, he urged that global imbalances of saving over investment be addressed, noting that “for people to misuse abundant capital as they did, there has to be a fair bit of it around to begin with.”