There’s an interesting difference of opinion in today’s Crikey on Swan’s reponse to bank moves to up their rates.
What Swan did yesterday – first on AM and then in a later press conference – was far more substantial than any action the Howard Government took against the banks over its 11 years in office.
Making threatening noises when there is nothing he can actually do is a strange course for Labor’s new boy Treasurer Wayne Swan to be taking.
The Mayne and Farmer pieces are free content, by the way, if you want to read the whole articles. In the pay for view section, Christian Kerr comes down on Farmer’s side, and contrasts Swan unfavourably with Tanner. Now, I wouldn’t be at all surprised if Tanner is of the view that he’d have made a better Treasurer than Swan, though I hardly think he’d be telling anyone that. But he’s a deft hand at self-promotion, if the truth be known, and I wonder if some of the Melbourne based commentators haven’t fallen for a line that seems to get a lot of play, and one that was repeated endlessly by the last Melbourne based Treasurer – Swan isn’t up to the job. Those of us from Brisbane know that you underestimate Swan at your peril, and I’m inclined to come down on the Mayne side of this particular argument. I suspect as time goes on Swan’s stocks will rise.
Update: More from Tim Dunlop at Blogocracy.
Further Update: More from Gianna at Surfdom and Gary Sauer-Thompson at Public Opinion.
More: Op/ed on this topic in The Australian today.
Mayne’s statement is idiotic beyond belief. Well, I say “beyond belief”, but it’s par for Mayne. After Swan’s “substantial” action (i.e. empty bluster), the ANZ and NAB will have put their rates up beyond the official ones – something that never happened under 11 years of Howard government.
Swan’s facing his first test as treasurer, and so far his performance looks weak.
You might like to go back and read the article again, Craig. Mayne’s point is that he believes Swan has been able to jawbone the rest of the banks into not following ANZ with an increase bigger than NAB’s. Of course, time will tell, but it does point to Swan having a well thought out strategy to influence the banks’ behaviour rather than Costello’s all purpose bluster.
PETA DONALD: And if you find there has been an excessive rise, what can you do?
WAYNE SWAN: Well, what I can say is that it is excessive. And if it is excessive, customers should be voting with their feet. ……..
Like it’s that simple.
It’s not that simple, but if he can contrive a situation where there is a difference between the different banks, that might be quite a powerful signal.
If Swann’s done nothing but talk at NAB and ANZ after consulting with Treasury, the Reserve Bank and the financial regulators – and that’s the impression I have, he’s done nothing. Obviously the Big Banks are testing Labor and Labor’s come up wanting. This is not necessarily a criticism of the ALP. The banks were bound to try it on. Labor’s perceived vulnerability on interest rates makes this a very tricky situation for the new Government. While it seems they have no alternative but to let the banks get away with it – and if there is an alternative could someone please let me know. If Labor doesn’t come down hard on the banks for this, they will suffer in the next Fed. election. I can just see those few Liberals who aren’t still locked in the Parliamentary loos crying getting together to make plans.
One doesn’t expect a Chifleyan type dummy-spit – “We’ll nationalize the bastards!” – but some legislation put to Parliament that prevents the big banks raising interest rates off their own bat would be good for starters. No matter how much the banks screamed the Libs wouldn’t dare oppose it.
Paul, the system of fixing interest rates broke down in the Howard treasurership because it had become completely impossible to maintain with international financialisation. The consequence of attempting to maintain it, as I understand it, was that the banks just wouldn’t lend money. The only weapon Swan has now is talk and a media strategy, and I think he’s played it well.
I agree that interest rates will be crucial to the government’s chances, but there’s a long time between now and the next election, and I think they’ve made it clear that restraining inflationary pressures will be a priority. I have to agree with Richard Farmer’s closing comment that junking the tax cuts except for the low paid would be a great move, and Rudd was wrong to let himself get boxed in, but I also think he’s right not to go down the “non-core promise” road.
Mark,
Couldn’t agree more with you about junking the tax cuts.That would certainly reduce inflationary pressures. I’d also like to see a lot more of Labor sheeting the blame home to where it belongs on this fiscal chaos – Howard and his cronies, and the banks. Swann and Rudd need to create a climate where the banks don’t dare raise interest rates outside the limits set by the Reserve Bank. Otherwise, stare them down – tell thewm, all right, stuff you, don’t lend money. But they have to do it now. Wonder who would blink first. I reckon the banks.But I’ve always been an optimist. Off to watch B&B now.Brooke’s having a breakdown.
Paul, it seems to me that the NAB and ANZ lifting their rates above the margin all the other mortgage lenders (or at least their major competitors) above the RBA rate is just the system working as it should. Borrowers will have a choice of copping the rate rise or re-financing, albeit with the costs that that brings.
The real issue here is the rate that the RBA sets and given their brief to fight inflation they will screw up interest rates as far a they have to to keep it below 3%, even, I think, at the risk of bringing on a recession.
Meanwhile, quite rightly, the main action for Rudd and Swan is to review the previous government’s financial commitments and promises to cut back spending as much as they can to curb that spending’s inflationary pressure in an overheating economy. I would not be surprised if Rudd scaled back on his promised tax cuts if that is necessary to curb inflation. It would be responsible of him to do so.
Better that than reviving the spectre of inflation as we had it in the 70s and 80s until Keating, much to his credit but also at his great political cost, squeezed the life out of it with his “recesion we had to have” which set the grounds for the economic dream run that Howard and Costello inherited in 1996.
“WAYNE SWAN: Well, what I can say is that it is excessive. And if it is excessive, customers should be voting with their feet. ……..”
The costs involved in switching an existing mortgage from one bank to another will far outweigh the $200 pa extra that .1% represents on a $200,000 loan. There would be establishment fees, valuation fees and legal costs for starters. Thay would surely run into the $thousand(s), and you are relying on the new bank not to then adjust their rates. Does the Treasurer of Australia really expect us to believe we can vote with our feet?
Just out of curiosity, the economics of it suggest the tax cuts need to be junked. Everywhere I read people are calling for them to be junked (though I’ll admit that could have more to do with what I read rather than a community wide consensus). But what is the politics of getting them junked? As Mark@6 said, we don’t want to go down the core/non-core promise path, so how should Rudd handle the politics to junk the tax cuts.
Mark, I believe that was the situation. You can legislate to put caps on interest rates. You can’t force the banks to lend at that rate.
Personally, if I were taking out a home loan, I don’t mind a variable rate, but I’d like one that was fixed against an external benchmark such as the RBA cash rate rather than the whim of the bank.
There is economic rectitude and there is political savvy. Only seldom do these habits of mind recommend the same policy. And this moment of worldwide financial peril is certainly no exception.
Because of Australia’s place in the outer, aspirational suburbs of international finance, Australian banks are always going to pay more for borrowed funds. And given the enormous overhang of private debt, which is higher per capita even than the private debt of the US, it is amazing that the banks can attract funds for the price that they are. As the effects of the coming Made-in-the-USA recession roll around the world, the creditworthiness of millions of over-stretched Australians is going to deteriorate. This is the kind of risk that lenders don’t like. Australian borrowers are going to pay in the form of higher interest rtes.
For government, one short-term fix is more disposable income via tax cuts. That’s popular, but they may stimulate still more consumption and borrowing. And the opportunity for much-needed infrastructure investment will be lost.
The long term fix is to allow the market to impose some pain on borrowers. Rising interest rates are the most direct means. Swan and the ALP would be wise to complain a bit about this, but essentially to do nothing else.
It seems to me that that is pretty much what Swan is doing.
One thing Swan knows he cannot do is to regulate in any material way the cost of money in the Australian financial system.
Fozzy, one thing that could be done is go after some of the sillier tax deductions, for instance, the crazy FBT concession for company cars for private use – the more you drive the car, the bigger the concession gets.
Fozzy, rather than junking the cuts, Rudd does have a few options:
He can defer the cuts, which will still give the electorate early buyer’s remorse. That’s the simplest alternative.
Or he can direct them into superannuation co-contributions. It’s effectively the same thing fiscally because the money doesn’t go to household consumption, but the electorate would recognise that they’re getting money – albeit not in the form they appreciate best. 9% is too low anyway, we should be putting away 15%.
Hawke & Keating more or less did something similar, channelling inflationary wage increases into employer super contributions. However, I doubt that collective submissiveness is alive today.
And now the CBA has followed suit. Here’s to substantial action.
If he could do that Craig, and I’m not sure how easy it would be to make sure that the money got channeled into the right places, that would be an excellent initiative, whatever its political popularity.
How much did the CBA move, Craig?
Most of the Australian banks get at least half their funds for loans from international debt markets (a fact Costello was rightly ridiculed during the election for apparently not understanding) but the CBA gets a higher % from domestic sources.
On the super thing, Keating’s already made that suggestion. Unfortunately, I think it might be politically undoable because it would be highly reminiscent of PJK’s L A W tax cuts (”I paid them later and as super” as you’ll recall). Unfortunately, also, I think Rudd is going to be quite strict in his interpretation of what constitutes a broken election promise. They’ve not really left themselves any wriggle room with the tax cuts as far as I can tell.
How would they do that accurately anyway – given that tax cuts come from the government and superannuation payments are made by the employer. Wouldn’t we end up with rather strange percentage rates of superannuation contributions which are dependent on your income?
Mark and Katz,
You are right that the government should be free to bluster all they want on this – and then they should do nothing at all. Legislation to restrict pricing of loans would be the worst possible signal to lenders, both domestic and international, on the political risk of lending to Australians. The rates we would have to pay for funding would jump overnight to much higher levels, just to cover the lenders for the risk of lending to Australians.
If the ANZ’s cost of funding is higher they should be free to charge higher rates to borrowers and the borrowers should also then be free to walk – or not sign up in the first place.
For those of you advocating regulation of lending rates – like it or not, the globalized market for funds has greatly reduced funding rates in Australia. Silly stunts like that would only cut us off from that funding, causing massive interest rate increases and inflation.
Perversely, it would also greatly increase the profits of the big banks, as they would be the only ones with secure sources of funding (their depositors) and therefore the ones out there lending, just now with little or no competition. Luckily, even Swan is not so inexperienced to think this might be a good move.
Andrew, I was interested to read in the Fin this arvo that Swan took advice from financial market insiders about the “appropriateness” of the quantum of the ANZ’s increase, and was told that 0.15 would have been fair given the access to funds criteria, and that pressures had eased since December. So I think that’s at the heart of what he was up to with his jawboning yesterday.
The difference between 0.15 and 0.20 is not really that much is it? Presumably the ANZ is also in a better position to judge than some “insiders” unless those insiders are on the ANZ’s Asset and Liability Committee (ALCO – gotta love that committee’s name).
On something as sensitive as this the ALCO would have conferred with both marketing and the CEO and possibly the Board.
Swan is free to mouth off, but perhaps with a couple more years under his belt he will understand a bit better.
It’s quite inexpensive to take some options on interest rate futures. That way the punter can hedge against interest rate rises. The upside risk is limited to the cost of the option.
And who knows, if interest rates go up a lot the profits made may even reduce the cost of financing one’s house.
Andrew, I think there’s a broader question here which Laura Tingle alluded to today. No doubt the banks can justify their decisions with regard to commercial imperatives, but if it’s the case that circumstances have shifted such that it will become more likely that there will be shifts in the headline rate more often and irrespective of what the Reserve does, then they kinda get roped into the politics of it all no matter whether they like that or not.
Katz,
A better instrument for a normal borrower would be an interest rate cap. Playing on the futures market is a game best left to people in very funny coloured jackets with loud obnoxious voices.
Oops – floor trading stopped years ago.
There’s a pretty easy way to get most of the tax cuts into superannuation without breaking any election promises.
How? Steal an idea from New Zealand called and increase everybody’s default superannuation contribution. If people want to keep their superannuation contribution as it is, they have to go to the effort of filling out a form to say so, otherwise it gets increased.
Most people won’t bother to fill out the form; hence, their superannuation contributions will go up and the money from tax cuts doesn’t go into fuelling consumption. Everybody’s happy.
Well, yes “how?” is a very good question. Perhaps that’s why governments haven’t done it before. They do make co-contributions already, based on the employee’s contributions. They also fiddled with super tax-rates according to income thresholds, so they might well have most of the information they need to administer such a scheme.
I know the super industry was very unhappy about the cost impost of introducing said tax. I doubt they’d howl about any additional ones if they knew great wads of cash were heading their way.
There’s the futures market and then there’s the options market.
However, it is also possible to be quite conservative and risk averse in the futures market as well, but that takes a little more knowledge than a vanilla call option.
The option strategy is tailor-made to hedge against interest rate risk. It is less risky than mortgage insurance.
Mark,
That is true only while the commentariat regards the headline rate(s) as somehow under the control of the government. The more we see of these non-lockstep moves the less that is likely to be the case.
IMHO a better solution would be for the RBA to simply stop targeting the rates entirely, just going to an inflation target. Interest rates would then be transparently commercial, allowing a proper amount of competition.
Of course (again IMHO) free banking would be even better, but that is another argument altogether. I would not seek to start that one here.
I agree, Andrew, but it’s how the public perceives it that’s just as important. Note that the Libs are already blaming the government for what the banks are doing.
I’d be interested in an expansion of your point about stopping targeting rates… how would they then influence an inflation target or would it be something that would be supposed to be indicative for other actors?
Mark,
The current rates target, as you are probably aware but others may not be, is implemented through the funds the banks have to have on deposit with the RBA. Effectively, the RBA restricts or opens up access to these funds to try to influence the cash rate. Generally it is pretty effective in managing rates – with this being the first real departure for a very long time.
Problems are that it only really works on the big 4 banks (creating at least the impression of privileged access), is periodic, and the announcements are highly political.
IMHO, short of free banking, a better way would be to issue an inflation outlook on a much more regular basis and then conduct OMO or other operations to buy or sell funds, ensuring that all moves were fully published in advance (if possible). This is not a big change from the current practice but it does allow the rates set to be seen as a consequence, not the intention, of the moves of the RBA. Essentially, they say we believe their is upward pressure, therefore we will be doing x, y and z to try to limit the pressure. The market then sets the rates as a consequence of that.
A bit cleaner, in that it is not only 4 players being affected and the politics are reduced to just the inflation announcement, which can be framed much better than a single, headline grabbing number. The way the Bank of England do the forecasts, for example, is much more honest.
Thanks for the clarification, Andrew.
As an economic ignoramus I would like to ask this question. Aren’t the banks doing the work of the Reserve Bank here?
If they raise the rates themselves, wouldn’t this apply the same monetary policy on the economy as a general rate raise from the Reserve Bank?
As someone who was looking forward to the end of the Howard government all this doom and gloom does worry me. It would be a cruel twist of history if the Rudd Labor Government gets blamed for a worse Australian economy basically for events outside its control. I guess many voters just reacts to their own situation and Howard did govern in a very auspicious world economic situation. He took the credit (but then which government wouldn’t).
Just in the Age today we have headlines of doom and gloom while Tim Colebatch states that interests rates may need to raise. In 1992, Australia had 25 unemployed for every job vacancy. Today this ratio is edging down towards 2.5 unemployed for every job offering — increasing pressure on wages and interest rates………
One reason why employers have problems in filling vacant jobs is that Australia invests very little in retraining its unemployed with new skills. Organisation for Economic Co-operation and Development figures show Australia is near the bottom of the rich world in spending on training for the unemployed.
So there you go. The previous Liberal government inaction may cause lots of headeches for the Labor government.
Yes, but they are doing it for different reasons.
Commercial banks are attempting to maximise return on investment and they are attempting maximise market share. A moment’s reflection will indicate that these two ambitions, while not contradictory, set opposite priorities. Thus, if a bank vastly increases the interest it charges on old loan and new loans, their market share will walk out the door.
Central banks have priorities of
1. providing an environment for the orderly transaction of finance
2. handling the financial requirements of government
3. preventing either too much inflation or too much deflation.
Central banks don’t aim to make a profit for themselves. (However, it should be noted that the RBA has in the last several years been a nice little earner for the Treasury by virtue of some quite canny open market operations in foreign currencies.)
Often the priorities of the commercials and the central banks are at odds.
Commercial banks see opportunities for profits but the Central Bank ups official interest rates, suppressing expansion.
And today’s solvency crisis is another case in point. Central banks have flooded the markets with liquidity in order to facilitate the revivification of capital markets. But the big banks are so suspicious of each other because they suspect that their competitors may actually go belly up that they are reluctant to lend money to each other. So these banks are hoarding Central Bank-created credit against the possibility (I’d say likelihood) that their assets are going to be severely written down in value.
Those write-downs will signify the next big stage in the unravelling of the asset bubble that began in the early 1980s.
Guido, I wouldn’t get too worried about it. I think Australians afford a fair amount of goodwill to new governments, there’s lots of scope for sheeting home blame to the Tories and governments have been able to win in the face of adverse economic circumstances if they’re capable of telling a story about what they’re doing to put things on the right footing cf. Hawke and Keating.
More from Tim Dunlop:
http://blogs.news.com.au/news/blogocracy/index.php/news/comments/banks_and_account_portability#26069
Don’t those unemployment stats suggest that we’re just short on people to do the work, rather than a shortage of people skilled to do the work? After all there is no qualification in those statistics about having people capable of doing the work.
Katz,
I think you are greatly over-stating the likelihood of the assets being “severely” written down as a result of the “sub-prime” problems. The total losses in the US sub-prime market (or even the total value of the sub-prime debt) are really small compared to the US economy. Even if all sub-prime loans in the US were completely irrecoverable today total losses would amount to around 1% of US GDP – far less than the S&L mess that took only a few years (and a lot of money) to work through. The real problem here is a temporary, informational, one – people do not know where those losses are going to end up. This is being solved as companies report. Much of these losses are in the hedge funds, so (at least theoretically) these losses will be to investors with over $500,000 to invest – i.e. the rich – who will lose in lending to the poor. From a “social equity” POV this may not be regarded as a bad thing.
The issue of whether this hiccup triggers a US recession (and thus further writedowns) that is largely due to rampant government spending on useless programs and the military, trade restrictions and other stupidity is a different one, and should be separated.
The blame for off-trend growth should always be sheeted home to where it belongs – and that is (IMHO) almost invariably a government.
AR,
The subprime crisis was just the detonator for a series of much larger explosions that haven’t happened yet.
The US real estate market has declined further and quicker than at any time since the onset of the Great Depression.
There is now at least a year’s overhang of surplus housing stock. In other words, the entire construction industry can take a year’s holiday.
The day before yesterday in California more than 5,000 houses were auctioned at foreclosure auctions around the state. This was by far the biggest offering of its kind in California’s history. Virtually none of them sold.
US households have indebted themselves on the collateral of their homes to an unprecedented extent. Now they have negative equity in the properties and the banks, hungry for liquidity, are about to come knocking with a margin call.
Credit card debt and car loan delinquencies are rising rapidly.
This will be much worse than the S&L scandal.
However, there are many ways in which you may profit from your optimistic forecast. And there are plenty of pessimists out there for you to profit from. At the moment it’s a seller’s market for optimism.
Katz,
You may be right on a whole of US basis – but houses and land cannot be transported. The housing affected is localised in certain areas, meaning that a year-long holiday is unlikely.
You are right that housing prices have dropped, but this was from really high levels. The bulk of the housing is just returning to values of 2006 or at worst 2005.
If you look at what happened to the markets in the early 1980s and now the difference shows that optimism about the extent of the problem is not localised to my office.
Note that I am not saying there will not be a recession, but if there is then the sub-prime issue is, if not only a straw, then at most a modestly-sized parcel on the camel’s back.
Further Update: More from Gianna at Surfdom and Gary Sauer-Thompson at Public Opinion.
From The Australian today:
http://www.theaustralian.news.com.au/story/0,25197,23039395-5015025,00.html
If Swan keeps on trying to micromanage house loan interest rates by jaw-boning the banks, he’ll end up looking like a dill.
The alternative to commercial loans is no loans.