The Australian government understands its role in this crisis.

If the central bank is the 'lender of last resort' for the financial sector, then the government is the 'lender of last resort' for the rest of us.

The Australian government has unloaded unprecedented support and stimulus on Australian households and businesses in response to COVID-19. Combined with actions by the Reserve Bank, it has so far totaled $189 billion, with more likely still to come.

The Australian government understands one of its key roles. If the Reserve Bank is the ‘lender of last’ resort for Australia’s financial sector, then the government is the ‘lender of last resort’ for the rest of us.

During a financial crisis, one of the key roles of a central bank is to ensure there is enough liquidity in the financial system so institutions can continue to meet their day-to-day obligations. When everyone is panicking and withdrawing their deposits, banks can run into problems because they don’t hold all of these deposits on hand at all times. During such a panic, even with responsible capital buffers, banks can run out of money, through no fault of their own. Their temporary illiquidity thereby turns into insolvency and collapse.

Even banks that were reckless with their lending practices and are suddenly getting their comeuppance, may be worth supporting by a central bank if the institution is systemically important. The risk of moral hazard (encouraging future reckless behaviour by bailing them out of their bad decisions today) is manageable and regardless, is less than the risk of financial contagion where the collapse of this one institution risks dragging down the entire financial system with it. This is how the Great Depression played out, causing widespread damage to the broader economy on top of immeasurable human hardship.

This is why central banks support the financial system during a crisis and the same applies to government. The Australian government – or rather, the Australian government bond market – is the ‘lender of last resort’ for Australia’s businesses and households, with the government acting as the ‘middle man’, borrowing and paying back on our behalf.

This pandemic was not our fault, nor does everyone have sufficient savings buffers to tie them over until the pandemic ends. It’s only fair that this temporary illiquidity that many households and businesses are facing should not turn into insolvency. For entire industries and even systemically important businesses, it goes beyond fairness and becomes an issue of preventing a contagion where one industry or entity’s collapse results in mass unemployment, fire sales of assets, defaults on debts and the spread of disaster to the entire economy.

The more households and businesses that are brought across the “bridge” over this crisis to the other side, the swifter and more complete also will be the recovery.

All the additional debt the Australian government is taking on in this process naturally must be paid back and with interest rates lower than they have ever been, this has never been easier. To further reduce the burden we’re placing on future generations, the government has an abundance of economists and industry representatives who can all provide sound advice on the most productive investments for that debt – the specific infrastructure projects, the skills and training that will equip the workforces of tomorrow, the tax reforms that minimise economic distortions.

A government that capitalises on these record low borrowing costs and listens to expert advice will have minimal problems producing an economy that simply grows itself out of its debt burden. There would be no need to cut short Australia’s recovery from this pandemic by skimping on financial support for households and businesses, nor sacrifice social programs for current generations or living standards for future generations.

The Australian government understands its role as ‘lender of last resort’ and is to be commended for its action taken to date. The more it supports this “bridge” to the other side for as many people and businesses as possible and invests productively in our future, the faster and more full the subsequent recovery and the more sustainable their own financial position.