Thursday, 24 July 2008

drop those rates. now.

interest rate cut today from the reserve bank - yay!!! or not?? i couldn't believe it when i heard this discussion on radio nz this morning with westpac chief economist brendan donovan and bernard hickey, both of whom were justifying why banks wouldn't be cutting their lending rates, even though the reserve bank had cut the official cash rate (OCR).

that's right, they were trying to justify to us that the banks get to keep charging the same rate to it's customers, while taking the benefits of the lower OCR. why did the noise they were making sound so familiar? well that's because it's the same noise the petrol companies make when they dither about cutting petrol prices, even though the price of crude oil has come down.

first let look at the commentators. mr donovan works for a bank. as i've stressed in many previous posts, his job is to ensure the best outcome for the bank, so of course he will try to justify this position. what i don't understand is why radio nz continues to get comments from bank economists, when these economists are doing little more than advertising for their bank or the banking sector in general. it's not like radio nz takes advertising money from these banks, as do all our major newspapers and tv stations. radio nz is independent, so could ask economists from a university (they are happy to use uni experts for many, many other news items) whose income is not dependent on saying what the banking sector want them to say.

but moving on to mr hickey. he doesn't work for a bank. that makes him an independent commentator, doesn't it? well not quite. mr hickey is the managing editor of the site it's a one-stop shop for information on financial products from various institutions. that still sounds independent, in that he doesn't represent any single institution. until you look at the advertising page on this site. items 3, 4 and 5 will be advertising revenue from banks and other financial institutions. a lot of the advertising revenue from items 1 and 2 will be as well. so mr hickey is not independent, in that the income for this site is dependent on those financial institutions. which may incline him to say what's best for the paying customers of this site, rather than what's best for the rest of us. yes, yes, i'm sure he would say, as does any editor, that the advertising is totally separate, he doesn't know who pays how much. doesn't matter. he clearly knows which industry the bread and butter is coming from, and there is the possibility that this will influence what he says.

the dodgiest bit of advice coming out from these two this morning: fix your mortgage interest rates NOW because the bank lending rates won't be coming down any time soon. well they would say that, wouldn't they. of course they want to fix as many people as possible on to a higher interest rate now, cos it means the banks will be creaming it as interest rates actually do come down. and they got away with saying this without any questioning of their motives or any skepticism at all. grrrrrrrr. normally i really enjoy kathryn ryan (actually, i'm a big fan), but today: grrrrrrrrrrrrr.

moving on to the substantive point: the banks should be passing on the cut in interest rate to us, the customers. the reason they claim they can't is because they have to get money at higher rates on the overseas markets, so have to pass that rate on to us.

there are a few things to consider here. first, the reason why overseas credit is expensive is because some cretins in the US decided to make loans to people with no income and no assets. they enticed people to take these loans by initially offering them low interest rates, (higher rates kicked in a bit later). these were risky and stupid loans to make. the people who made them knew this. they managed to create extremely complex financial instruments to sell off some of these risky loans to others. at some point, it became clear that the loans would not be honoured by many numbers of people, and resulting in a crisis which dried up the supply of credit and pushed up interest rates. who is repsonsible for this crisis? the morons who made the initial loans, and then created the financial instruments. but who is expected to pay for their mistakes? all of you with mortgages who will not get a cut in your interest rates.

does that sound ok to you? because it sure sounds like something is seriously wrong to me. the people who cocked up should be the ones to pay up. but like the owners of hanover finance and all the other failed finance companies, they appear to be totally getting away with it.

second thing to consider: with all these finance companies collapsing, people are becoming increasingly conservative with their investments. this means that there has been a lot more cash going back into bank term deposits, as this is seen as the safest form of investment. you would think then, that the banks had plenty of available cash.

third thing to consider: why should the customer pay the full cost of the financial crisis? shouldn't the banks at least shoulder some of the costs? it's not like they are loss making ventures about to go under. every major bank i've heard of, just like every petrol company i've heard of, is continuing to make massive profits. they haven't even had reduced profits. it's not like they can't afford to absorb it. there is only one phrase that comes to mind here: blatant profiteering.

however, on the news tonight, i heard that ASB has cut its rates. hopefully other banks will follow. because for the life of me, i can't see any reason why they shouldn't.

fourth thing to consider: from listening to various commentators during the day, you'd think that cutting OCR was a terrible thing. the dollar is going to fall, which means the costs of imports will be higher, which means higher inflation, which means workers will push for increased wages, which means higher inflation, downward spiral ad infinitum. doom and gloom.

then why exactly has there been a clamour for a cut in interest rates in the last few months? hon bill english has just put out the most attrocious press release (nah, won't link to it), even though he has been one of the loudest in complaining about high interest rates hurting the average homeowner, our hard-working kiwi mums and dads. bizarre. and he has been vocal in complaining about how our high dollar has been hurting exporters and worsening our balance of payments. just crazy.

the facts: we are lucky to have an economy well placed to face an economic downturn. we are lucky to have a government that paid off a lot of our debt, saved for aging population and introduced kiwisaver so that there is cash available for investment. lowering the OCR at this point is a good thing, but yes it will take time to have an effect just as interest rate rises took about 2 years to kick in. that's mostly because of people fixing their mortgage rates. but there should be some more immediate effects as the dollar comes down, increasing the value of our exports. export-led growth is much more healthy than debt-fuelled import-led growth. c'mon guys, this really is a good thing.


Anonymous said...

Actually, what I get sick of is the focus in the media on financial institutions and mortgages. It's skewed towards the middle classes with property and working classes struggling to be part of that - probably due to the hype around property ownership in the media. And in the long run it benefits the better off property speculators. And as someone who has never been interested in owning property - buying into that whole mind-set, and who, at my age will never own property, the focus on property and mortgages just seems very reactionary.

I like that some commentaries are now starting to acknowledge that high interest rates benefits those of us with a little savings. Though the size of interest rates is not a biggie for me. I do think the media could focus more on how the economy effects people on low incomes who are struggling to survive.


stargazer said...

i agree with your main point carol, there is way too little focus on financial issues for those on lower incomes. main reason: they don't by papers, they don't pay for expensive advertisements. in a sector that has a profit motive, poor people don't generate much profit so don't get much attention.

re the investment thing: high interest rates are really bad overall for the economy. they lead to unproductive investment, reduce the velocity of money and so mean a sluggish economy. even worse for those on lower incomes in the long run, even though as an individual earning a decent amount of interest, it doesn't feel like it. but the reason why dr bollard kept raising interest rates a few years ago was to slow down the economy. it has finally worked, but i think he wasn't counting on the sub-prime mortgage crisis and the collapse of the finance sector at that time.