Comments on: More Christmas presents from the Reserve Bank

By: Chris (a different one)

Chris (a different one) — Wed, 19 Nov 2008 03:54:36 +0000

dd @ 16 – I suspect they’re worried that if they suddenly drop rates by say 3% people will panic that things must be really really bad, rather than be encouraged to spend with lower interest rates.

dd @ 19 – reports are that some of banks are no longer offering products like zero deposit loans. IMO a good thing, but its a sign they are removing the riskier products they offer.

Fozzy @ 15 – that may be true, but it would also mean making the banks take higher risks than they otherwise would, increasing the chances that one of them would fall over. In the case of the CBA if it was fully government owned that would mean the tax payers would be up to cover all the losses like has happened in the past with failed government owned state banks. Probably would happen to a certain extent with private banks too with deposit guarantees.

By: Desipis

Desipis — Wed, 19 Nov 2008 03:21:41 +0000

(you don’t need to loudly tell everybody that our banks are better off than other banks if in fact they are)

You do if you want to reduce the impact of an unnecessary run on the bank.

the crisis has saved the RBA from embarrassment at how dumb their policies were in the last two years.

I don’t think their policies were dumb at all. In a time where credit was being recklessly handed out to anyone and everyone, they moved to reduce this flow and limit the damage it was going to cause the Australian economy. Can you imagine how much higher housing prices would be, and how much bigger the bubble to burst, if interest rates had stayed as low as they are going to be?

By: derrida derider

derrida derider — Wed, 19 Nov 2008 03:10:59 +0000

On the banks, you need to watch what they do, not what they say. And what they’re doing (including not passing on big interest rate cuts) says they’re hurting more than they’re letting on. That’s an observation strengthened by the the government’s firm support for what they’re doing and saying (you don’t need to loudly tell everybody that our banks are better off than other banks if in fact they are).

I reckon getting a new loan out of them in the next year will be tough.

By: Razor

Razor — Wed, 19 Nov 2008 03:09:22 +0000

dd @ 16 – RBA is playing balancing game between keeping the powder dry for the future, avoidng the liquidity trap discussed above, not spooking the horses by over-reacting, not letting the inflation genie out, avoiding wild swings in the AUD, etc etc.

The key however is market expectations. Despite what the majority of posters here would liketo think, the market is king. If the RBA strays too far from what the market expects then the unintended consequences can be severe. That said, acting outside of market expectations is also the best way to achieve some desired outcomes, occaisonally.

There is no “cookie-cutter” solution.

By: Craig Mc

Craig Mc — Wed, 19 Nov 2008 03:03:09 +0000

Andrew, agreed. Treasury did the same thing, but worse, in the early 90s. At least this time they stopped before the retail sector crashed.

By: derrida derider

derrida derider — Wed, 19 Nov 2008 02:57:41 +0000

They need to try for a competitive devaluation. That’s a game that everybody loses once everybody’s playing (as happened in the 30s) but the first to start gets a big advantage in the meanwhile. As in the Asian financial crisis of 1998, if the Aussie dollar drops low enough fast enough people will keep buying our dirt (and package holidays, and food) because it will become dirt cheap (sorry) in their own currency.

Andrew’s right – the crisis has saved the RBA from embarrassment at how dumb their policies were in the last two years. All the high interest rates did was suck in hot money through the carry trade, which of course has promptly fled (causing maximum disruption to our own money markets) as overseas’ investors fear overtook their greed.

And I really can’t understand why the RBA is dropping rates in tranches like this. They must know that rates will have to be way, way down next year, so why not do it right now in one hit and get any stimulatory effect out there as soon as possible?

By: Fozzy

Fozzy — Wed, 19 Nov 2008 02:27:34 +0000

One question I’ve been wondering with regards to passing on the full amount of interest rate cuts, what would be happening if the Commonwealth Bank hadn’t been privatised? My suspicion is that there would be greater political pressure on Commbank to pass on the full cut and thus force other banks to do likewise.

By: Mark

Mark — Wed, 19 Nov 2008 02:09:46 +0000

Thanks for the info, carbonsink.

By: carbonsink

carbonsink — Wed, 19 Nov 2008 01:51:02 +0000

Mark @ 11: BHP is already selling ~30% of its iron ore on the spot market, which is a 40% discount to the contract price.

By: Francis Xavier Holden

Francis Xavier Holden — Wed, 19 Nov 2008 01:45:34 +0000

Its a another bail out of the high risk takers.

Those who have a high mortgage get bailed out with a interest rate so low it looks like free money. As joe2 said, its with a transfer of money from those who played it sensible and saved cash to those who played fast and loose.