Australian banks are battening the hatches, nervous about their exposure to the financial crisis.
They think this is like the late-1980s bust when debt defaults meant writing off significant portions of their net assets. At least one of the Australian big four came close to insolvency, and three were badly affected.
In Australia, the current situation is nothing like the late 1980s bust. Sure, we're experiencing a financial shock.
The difference is that we have not seen the real side impact -- that is, the over-investment and excess capacity that pulled the rug from under real asset values.
The property markets, both residential and commercial, which underpin the asset base of much of the banks' loan books, are not oversupplied and asset prices will hold reasonably well.
However, that's not the case in the US, Britain and some European markets.
In the 1980s Australian investment boom, extremely aggressive lending led to overbuilding, which oversupplied both residential and commercial markets.
In the late-1980s bust, property rents and prices fell sharply. Commercial and industrial property prices plunged around 50 per cent and more in real terms.
There was a long, slow haul out of "the recession we had to have".
The extent of bad debts meant that banks had to separate into "good bank" and "bad bank" streams to allow the good bank to fund sound ongoing activity while the bad bank traded out of bad debts.
It's worth remembering that, with little competition, the four banks were able to rebuild their asset base by charging 4 per cent above bank bill rates for housing loans over a number of years. They were refinanced by the mortgage belt.
Certainly, this time around, the banks' exposure to the highly geared financial engineers or direct exposure to overseas mortgage-backed securities will be painful.
But this time the property markets are not oversupplied. Leasing markets are tight, rents strong and property values, while affected in the short-term by softening yields in investment markets, will hold up reasonably well.
The banks won't need to write off significant proportions of their property-based loans.
The strength of the Australian economy will limit damage to business loan books.
Australian banks will come out of this in pretty good shape. For them, this will be nothing like the 1980s.
What we are experiencing in Australia is just the edge of the cyclone affecting the US, British and European financial sectors.
With limited effects on the banks' asset bases, we're seeing the result of two major influences.
Firstly, the credit squeeze. Australia has a current account deficit and has always partly funded it by borrowing offshore, usually in the interbank loan market, which has been so badly affected by the US financial crisis.
In recent years, the major banks have operated as consolidators, financing their lending largely from domestic sources and borrowing the rest offshore. This overseas borrowing requirement has been the mechanism whereby the overseas credit squeeze has been transmitted to Australia.
Interestingly, at the beginning of the year, banks were worried they wouldn't get enough from overseas sources to fund domestic borrowing requirements.
But many Australian companies borrowed directly from overseas, thereby easing the banks' funding requirements.
It is only in the last three months, as the world financial crisis has come to a head, that the credit squeeze has tightened in Australia, adding both to banks' borrowing costs and the interest rates they are charging on commercial loans.
The other major influence has been the tightening of banks' credit criteria, as they switched from greed to fear, focusing on risk, tighter loan to valuation ratios and criteria associated with security of cash flow.
The result has been higher risk margins and interest costs, rationing of funds and difficulty financing new investment.
I am less concerned by the impact on share markets and the shock to property investment markets.
The impact of the financial shock will be transient.
Once the financial crisis recedes, property investment markets will revert to being driven by leasing market conditions.
With property markets, residential and commercial, tightly supplied, the financial shock is just a setback to the upswing. There is another leg to this property cycle.
Australian banks will come out of this with minimum damage. In fact, with much of their competition having been eliminated by the financial crisis, they should emerge stronger than ever.
For Australia, this is nothing like the late-1980s bust. Australian property markets are not oversupplied and will come out relatively well.
Overseas, however, that's not the case. Property markets in the US, Britain and parts of Europe are oversupplied. For them, this will be like the late 1980s bust and 1990s recession.
It was the collapse of the US housing market after a 17-year boom that caused the current financial crisis.
The booms in asset prices and construction were stimulated by low interest rates and aggressive lending underwritten by the relaxation of risk criteria and the growth of innovative financial instruments.
We all know the stories about negative equity and people walking away after the fall in housing prices, in some markets by 30 to 50 per cent.
That's what caused the collapse of the residential mortgage-backed securities market and bad debt write-offs by banks.
Commercial property, too, is oversupplied in many US cities, with similar implications for property prices and bad debts.
Britain is having a similar experience, again driven by oversupply, and parts of Europe have been affected.
Hence the problem of bank solvency and, indeed, recent failures of a number of banks around the world.
In all this, Australian has been relatively insulated. It is the fall in asset prices that damages banks' balance sheets.
Why do asset prices fall? Because of overbuilding in the investment boom, but Australia hasn't had an investment boom big enough to oversupply the markets.
We should thank the Reserve Bank for bursting the housing price bubble in 2003 so that, now, residential markets are underbuilding and understocked, bouncing around at the bottom of the cycle, with an upswing waiting in the wings as the next stage.
At the same time, the commercial property upswing hasn't had time to oversupply most markets.
The current market weakness is an over-reaction, and the market will rebound.
Meanwhile, despite confidence being undermined by past rises in interest rates and the financial crisis, the economy is being sustained by strong investment, recovery from drought and strengthening exports.
Certainly, the financial crisis is dampening investment by delaying projects, and businesses are deferring non-essential expenditures.
Perhaps that's just as well, as the construction sector is running close to capacity.
Remember, we needed to slow growth from last year's unsustainable and inflationary levels of above 4 per cent -- and that's happening.
Now we need to contain precautionary saving by consumers to restore business confidence, and wait for the credit squeeze to ease.
For the US, Britain and parts of Europe, recovery from the damage caused to the financial sector as a result of the current crisis will be long and difficult, as will be the rebuilding phase for their economies.
Australia will be insulated from most of this, with minimal damage to the financial sector, limited damage from the credit squeeze and continued stimulus to the economy from rolling investment cycles.
The main danger is that the weakness will spread to the world economy, in particular to China, and that weaker minerals demand and prices will undercut the next round of minerals investment projects.
But given that projects are committed, any weakening is at least two years away, and far too early to call.
For Australia, this is nothing like the bust of the late 1980s. To the Australian banks, I say -- don't panic. It will be okay.
Frank Gelber is BIS Shrapnel's chief economist
