Sunday, February 10, 2008

Regulating the free market

“The Reserve Bank of Australia (RBA) raised its official cash rate 0.25 per cent to 7 per cent on Tuesday.” Sky News

Australia is facing a growing inflation threat – consequently driven by rate rises, although the affects of raising the price of money is specifically quarantined from the Consumer Price Index used to determine inflation.

The immediate result has been for banks to raise interest rates again, one bank’s hit was nearly double above the official rate with most others well above the 0.25%. The banks blame lack of profitability because of exposure to foreign markets.

Kevin Rudd’s new government has responded to the avaricious banks, albeit tentatively, by forcing banks to take the cost and drama out of changing banks to find better deals on credit and deposits.

Of course the banks, like telcos, have built in enormous disincentives to churning. Non-bank financial institutions (here that means credit unions and building societies) already offer a no cost, pain free swap. That swap, apart from costs might mean changing a number of direct deposit and debit transactions.

Of course the banks might respond to Rudd’s regulating by simply declaring recalcitrant customers, those who want to swap banks, unsuitable customers. They have already forced many low return customers to the non-bank sector.

Warren Buffet is envious of the profitability of Australia’s big banks, and they have apparently been out-earning his Berkshire Hathaway vehicle. They aren’t about to give up those huge profits easily, and this first shot at regulation really only touches on the crying needs.

I’m hoping this is a case of ‘stay tuned’ for the bigger regulation guns to roll out. I want to see a situation where either the government or an independent group actually regulate bank rates again. The banks gamble, but when they are losing they simply charge their customers to make up the loss.

10 comments:

D.K. Raed said...

I don't pretend to understand the complex reasons for, or fallout from, govt-mandated interest rate changes. I do think the U.S. has been artificially dropping our interest rates in an attempt to spur the economy. They are a one-note trombone on this subject: lower interest rates (to spur wall street) and lower tax rates (to spur their rich rat friends into making sure they get re-elected).

Problem is, OUR interest rates are so low now, I'm not sure they can go any lower without causing the trickling exodus of foreign-investors to turn into a flood.

Now your country is raising interest rates. I know that adds to inflation, but is it a reasonable interest rate? Or is it choking off capital expansion? Cuz I can tell you Warren Buffet and I both are envious of a 7% return from a bank deposit! Where do I sign up?

Cart said...

You sure understand the markets :) I think Warren should be doing a heck of a lot better than 7% and I'm not sure he'd play with the risks here.
I'm not convinced playing with rates is the answer,seems to me there are more effective mechanism, but then I'm no economist

~kj said...

Is this now affecting the people who purchased real estate who didn't 'lock in'

There are a huge amount of foreclosures happening in the US with more to come.

I am almost considering investing in US real estate.

btw- you said 'Cuz'

Cart said...

"btw- you said 'Cuz' " Nah, d.k. said Cuz. Wouldn't hear me using slang and contractions.
But you are right, if I had Canadian dollars to spare I'd be buying into the US. Better than fiddling with an Aussie notional 7%.
Harper has amazed me, for all I was concerned he is just a Liberal in different clothes. His economy seems to be no worse than the others.

D.K. Raed said...

What, "cuz" isn't a word 'cause Shakespeare didn't use it, Cos'? Now I KNOW you're just pulling my leg over slang, Cart. If not, perhaps you can explain mysterious words like "onya" that have appeared in your own comments?

OK, about investing in US Real Estate: As a public service, I will say that most of us here realize not only have our RE market values dropped from their 2005-6 hyped-sellers-market high, but they continue to drop & probably WILL continue to drop for AT LEAST another year. We hope it will only be another year; it may be quite a bit longer until it finally troughs-out & starts the inexorable rise upward again. I'd just hate to see someone investing now, thinking it's reached bottom or near-bottom. Maybe-maybe-maybe if you find a desperate seller willing to accept the same price he would've in say, 2001-2? Even then, I'd carefully check out holding costs, such as annual property taxes & eventual capital gains tax upon selling that will slowly eat into your expected gains. If all that doesn't deter you, just think of it this way: you'd be locking in your foreign dollars' excellent exchange rate into a currency that is being purposefully manipulated into an ever-decreasing exchange rate (through artifically lowered interest rates) simply because it gives US citizens the illusion that cheap money means they should borrow more -- like we are so stupid we don't realize that most of our citizens already owe more than they can handle. And like we never studied Germany's pre-WWII economy.

I'll shut up now. It's a good thing I'm not trying to sell my home today, or I might've had to swear, in some artful slang format 'natch.

Cart said...

I thought Shakespeare used every possible combination of vowels and consonants. However I don't intend to go searching for the proof of cuz.
kj just likes to catch me out cuz I'm a smartarse at times.

lindsaylobe said...

Hi Cart. I noticed your comment on Josie’s blog so I have called in to say hello. I gather you reside in the beautiful area of Port Macquarie?

I don’t know whether you have seen the most recent RBA Statement of Monetary Policy but is exceptionally hawkish, unlike its counterparts overseas such as the Federal Reserve in the USA and UK who have abandoned any concern over inflation. The RBA is intent on engineering a period of very weak private demand in an effort to reduce inflation, but it(the RBA) has virtually no control over most of the supply side forces which is causing the current inflationary process such as increased petrol( oil parity costing), food( drought related),heath and rents( interest costs and supply shortages).Because of the recent more bearish view of the global economy the RBA may still leave rates unchanged, I hope they don’t increase rates yet again, however the tone and forecasts are very hard to ignore.

The Federal Govt has maintained and pledged the independence of the RBA so their hands are tied. Instead ,Tanner is stating a reduction in spending and increases the surplus to a record 1.5% for GDP, but I don’t think the Govt can do much in the short term.

Any moves on the 4 major Banks for more competition will at the margins, underlyiong financial tightening in credit markets is very tight indeed, witness the collaspse of Rams home loans which was contingent on overseas bank funding. Hence the main reason for our high interest rates at 7% + compared to 2/3% overseas is the interest rate hikes from the RBA.
Best wishes

Cart said...

Lindsay I rarely communicate with felloe Aussies, so I was pleased to see you. I began blogging while I was in Canada and tended to build that north American network.
I was involved in the political scene there as I have here for many years. I expect from your comment that we deviate economically, though not necessarily in preferred outcomes.
The American experience – unlike the Canadian – made me wary of the shallowness of the market economy model. In fact if you trawl through my bog you will find a few heavy critiques on America’s capitulation of economics in favour of monetarism and market forces.
I guess we are a couple of old blokes so you will understand when I tell you I joined the Young liberal’s, Earlwood branch, the year John Howard was the immediate past president. I think I was 15 at the time. Tom Hughes QC, the Fed member, told me then I was the youngest member of the party in the country.
I did not like Howard then and I certainly don’t approve of his legacy now. I’m not sure I am a Rudd fan either; I just want the right results.
What I have realised, after all these years, is that the period through Menzies to Fraser were far better than anything we have had since. I can only talk as far back as those years from my life experience.
We weren’t arguing economic issues then as we have in recent years. Sure Ming capitalised on the communist threat, and he did have the odd economic hiccough, particularly around ’61.
But the important factor in the economics of the period was a willingness to regulate markets when needed. That was a political decision. Since Hawk/Keating we moved to the Thatcher model of giving responsibility for the economy to non-elected bodies.
I think the RBA do a great job, but it makes you wonder why we spend a fortune electing castrated MPs.
I don’t expect we’ll agree on mechanics, but I am pleased to have come across you. I hope we can share thoughts.

lindsaylobe said...

Hi Cart-
I used to be a liberal voter all of my life up until the last 2 elections when I voted for Labor.
Howards was a big dissapontamnt for me, I thought he was a okay at first but by the second term I was already very disenchanted notwithstanding our relative prosperity arising from improved terms of trade from the china minerals boon.

Fraser I think was also good in the early periods but I thought he squandered his final term in office.

I think economics is about the larger macro settings but its no substitute for leadership, responsibility and building our social capital, our most important asset in any country.
Currently I think we have far too much reliance on monetary policy as I alluded to in my previous posting.I agree with you in that sense,in that we are locked into anothers agenda and seem paralysed to take bold steps to avoid an impending downturn, not of our own making.
Certainly I am also particularly concerned over the world wide phenomena to make sacrifices within democracies to curtail relative individual freedoms in the name of security and the so called war on terror. Some action was justified , but not to the extent legislated. At least that is my view.

Best wishes

Cart said...

Lindsay, defining or expanding the language has been helpful, thank you. We seem to be pretty much in agreement. I d see economics encompassing the social structure. The problem I see with a focus on monetarism is that it loses or changes the focus on why we even bother.
My criticism of the US situation is that they have abandoned any social focus and instead opted for corporate welfare. I know that is a fiscal issue, but still a component of the wider discipline.
So often I find Americans argue finance as though it were in fact economics. I expect the country has always tended toward markets rather than the common good. For all that I’m fond of North America and my blog tends to talk to them.
To find someone, just up the coast, to bounce some of these ideas off is a real bonus. I’m no economist, even less a financial expert. Thanks again.