Wednesday, 20 February 2008

"better banks"

tonight was the AGM of the waikato interfaith council. we had a guest speaker in crystal mann who organised the "keeping faith" exhibition at the waikato museum. it was fascinating listening to her describe the exhibition from conception to execution. it is a difficult topic, and she did very well in shaping it to be a positive and interesting one. the exhibition is on until easter monday.

this press release from finsec came out today, asking for greater regulation of the finance sector. the union is starting a campaign this year, aimed at improving employment and customer service in the finance sector. i remember a couple of years ago, workers in the finance industry were complaining about how hard they were required to push credit on to customers they knew couldn't afford it. because of the way their pay systems were structured, staff were disadvantaged if they failed to "sell" the required amount of credit.

as an accountant, i've had clients tell me that their bank manager is pushing them to buy a rental property, with a 100% mortgage. they tell clients that the tax losses from the rental can be offset against other income, and the capital gains are tax free. it's apparently the perfect investment. what they don't make clear are that the tax losses are cash losses - the rent from these properties is never enough to cover the mortgage interest & principal, let alone rates, maintenance costs etc. for people who aren't cash rich, it's a risky investment - particularly one with a 100% loan. and rental properties don't always deliver a gain. one client had to spend $30,000 refurbishing a bathroom that had been totally trashed by a tenant. the capital gain only ensues if the property is well looked after.

there is a wider issue. if financial institutions are consistently lending to people who can't afford to repay the interest and principal, this can only lead to disaster in the long run. in america, some institutions were lending to people who had no income and no assets. no wonder the sub-prime mortgage crisis has occurred, and financial institutions are either collapsing or having to cover major losses.

the american response to this has been to lower interest rates. i don't get it. the problem is risky lending. to fix the problem, measures should be put in place to reduce the level of lending, ensuring that borrower has sufficient income to service the loan. lowering interest rates, on the other hand, will increase the level of lending because it's cheaper to borrow. tax cuts won't solve this problem, as those on the lower end of the income scale aren't going to get anywhere near enough to cover their debt servicing costs.

excess borrowing has been one of the major causes of inflationary pressures in our economy. the level of borrowing per person has been increasing rapidly, and most of that money has gone into consumption. there are some who would have you believe that increased government spending is the major cause of inflationary pressures, but it's nowhere near the amount that is coming through our lending institutions. i heard an excellent lecture by bryan gould on this topic, and his book "The Democracy Sham:How Globalisation Devalues Your Vote" is well worth a read. see here for a review.

another group that are against the current monetary system are the democrats for social credit. while they are mostly a way-out-there leftist group, their ideas around the current monetary system quite seem quite interesting. i met a group of them in hamilton a couple of years ago, when they asked me to do a speech on the islamic banking system. if nothing else, they do challenge the conventional view of things, and as gould pointed out, there is not nearly enough debate about the monetary system, and things like the reserve bank act. we mostly accept things as they are because it takes an advanced degree in economics to understand the alternatives!

but good on finsec for starting this campaign. unfortunately, i haven't heard any mention of it on the tv news, i don't expect it to create headlines in tomorrow's papers either. banalities around owen glenn seem to be much more important than the country's financial wellbeing.

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