Rise in interest rates creates a lather of blather

Debt Man column – The West Australian (Business news)

For: October 16, 2009

Bruce Brammall

Debt Man

We’re off and racing! It’s that time again. But we’re not talking anything as fun as the horses.

No, ma’am, we’re talking interest rates, bank bashing and politicians speaking bollocks.

When interest rates move, our elected representatives feel compelled to blither, often without believing what they’re saying. Because if they don’t take their chance to say something stupid, they’ll miss valuable airtime to their political opponents, who are always aiming to out-stupid them.

For example: “I think Australians would have taken them on their word and the Australian people and the Government would be quite angry if they moved outside the official Reserve Bank rise,” said Treasurer Wayne Swan this week.

To be clear, Wayne was arguing against banks raising rates by more than the RBA’s 25 basis-point increase in the official cash rate last week. Which they haven’t. Yet.

Either the Treasurer doesn’t know what a bank’s word is, or he was just channelling Lloyd Christmas (Jim Carrey) in Dumb & Dumber.

A bank’s “word” means three, interlinked, promises. It is to keep depositor’s money safe, to lend it out responsibly and profitably to others and to make money for their shareholders.

So who’s going to be “angry”?

Not the depositors whose money has been safe in our banks. Not Australian shareholders, who watched their banks’ share prices walk to the edge last year, but are now among the strongest in the world.

And I don’t think Australian homebuyers, who haven’t been inconvenience by their banks collapsing, will be upset that banks haven’t foreclosed on them.

I know who should be angry. The millions of American and European bank shareholders whose executives were crazy – as in Glenn Close in Fatal Attraction crazy – reckless, lenders. The shareholders of those banks that went bankrupt, or whose quality assets went in fire sales to stronger banks (such as HBOS selling BankWest to Commonwealth Bank).

I’d be jealous if I had been a Lehmann Brothers shareholder.

I know you want to say it, Mr Treasurer, but you can’t because you can’t be seen to give the big bad banks an even break. And if you did say it, the press gallery would slaughter you.

So, let me say it for you.

“Hey, people, if your bank raises their rates too much, take your business to a competitor. If you can’t/won’t take it elsewhere, because (a) no other lender will have you, (b) you don’t trust the dodgy lender your mortgage broker has recommended, (c) the difference is hardly worth worrying about, or (d) you’re too lazy to change your bank, then stop worrying and crack a bottle of chardonnay while interest rates are still just a jot above “panic” level.”

The arrival of “Aussie John” Symonds in the early 90s was the start of serious competition in Australian home loans. Securitisation meant almost anyone could start up a lending business. But then securitisation exploded under sub-prime. Thankfully, most of the mess stayed offshore.

However, few people are prepared to borrow from the small lenders now. The big four banks are doing all the lending. And while the cost of wholesale funds is still high, banks will probably raise rates independent of the RBA.

It might not seem fair that our banks can act alone, but it’s one of the prices we pay for having four safe, stable, secure and profitable pillars.

Also, remember that during the previous two interest rate easing cycles, the lowest RBA rate we got to was 4.25 per cent. That was essentially considered ultra-low. This time around we got to 3 per cent. Anyone who doesn’t realise that this was “panic” level is living in another dimension.

If our economy continues to outperform, the RBA will only be picking up steam as it passes through 4.25 per cent on their way to what they consider to be “normal” rates. It’ll be like a Formula One Ferrari hitting 100kmh in second gear on its way to 300kmh.

If it’s a given that we want our banks to be profitable – and every

Australian who has a super account indirectly owns banks – then a little belief in competitive forces is required.

But sometimes, when you’re a politician, you just gotta say stuff that you don’t necessarily believe.

Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser. bruce@debtman.com.au