April 18, 2012

Horse 1321 - We are all doomed Mr Mainwaring!

Great cries of consternation and whelps of dread arose over the weekend as the ANZ announced last week that it will increase interest rates for variable mortgages and small business lending by 0.06 per cent or 6 basis points on April 20th. The sting of this announcement is that people will pay more in interest on their mortgages; on a mortgage of $300,000 it works out at about $14 extra a fortnight.

If you look at where is puts them in relation to everyone else the movement doesn't seem quite so horrid:
7.31% - NAB
7.36% - ANZ (old)
7.41% - CBA
7.42% - ANZ (new)
7.46% - WBC

The big difference I suppose is that the ANZ made it official policy to move its interest rates independently of the Reserve Bank in a regular meeting on the second Friday of each month a while back, whereas the other banks do so on a purely ad-hoc basis. What the official policy itself though says, is that the ANZ is prepared to take a gamble on funding every month in the hope of increasing its profits.

The official reason for the ANZ's rate rise was given in Friday's SMH:
"The funding environment changed quite dramatically in late 2011 as a result of the economic and financial crisis in Europe. This has seen wholesale funding costs rise and competition increase dramatically among  banks for deposits.
We accept our response to the new funding environment is difficult for some of our  customers - even though deposit customers have benefited from better rates.
Given this and the volatility we have seen in wholesale funding markets, we wanted to ensure these costs were sustained before we acted to pass them on. We also wanted to pace increases in a way that was manageable for our customers and ensured we were competitively positioned,"
- Phil Chronican, as quoted in the Sydney Morning Herald, 13th April 2012.

Put simply the ANZ bank is complaining (as indeed the other three majors are) about the increased costs of deposits and wholesale funding. The thing is though that given Australia's very large pool of superannuation savings, the biggest single cost driver on the price of money are term deposits.

If in fact the financial meltdown has had any effect at all on the price of money in Australia, it will be because the banks (in particular the ANZ) have found that due to falling credit ratings in Europe, the price at which people are prepared to lend governments money at has gone up; this of course makes perfect sense. Lending money to countries like Greece, Italy, Portugal, Spain etc. is a riskier proposition than it was even four years ago; increased default risk naturally carries with it a higher cost for those funds lended.

This means that the ANZ probably is facing larger costs than it did because those avenues of funding in Europe are now likely to be more expensive as the supply curve for those funds. Also, collectively as the banks search for alternate funding sources domestically, that has the effect of pushing the demand curve for domestic funds to the right and forcing the cost of funds upwards to a new equilibrium position.
This though is something of a vicious cycle because by increasing domestic lending rates, then buyers of credit are disincentivised and this puts downward pressure on profits. Downward pressure on profits leads to downward pressure on your credit rating which itself leads to a rise in the cost of wholesale credit; hence, interest charged on mortgages will rise to cover that cost.

All of this sounds perfectly reasonable until you realise the rather sober fact that money itself isn't real and that banks like the ANZ and indeed the whole financial sector are little more than coupon changers. When someone borrows money from a bank, they're completely aware that that money must be paid back with interest.
A lecturer I once had suggested that there are only two methods to make money: work or win. Of the four factors of production, only labour produces an award based on actual work; the other three are basically forms of winning. 
The problem is that that money is generated by producing real goods and services, whereas the bank doesn't really have to work at all to turn itself a profit. There is a "minor" amount of effort and skill at sourcing funds but the cost of money doesn't actually truly reflect the work generated by the bank to make those funds available. Meanwhile profits generated by banks and indeed the whole financial sector itself are little more than the difference between the cost of money borrowed (by the bank) and the rewards paid out to the people lending the money (investors). There is a truly hideous amount of cream skimming going on by the financial sector, but rather than face up to the fact that it's no morally better than a highwayman holding the economy up at knifepoint, people are prepared to throw ever higher salaries and wages at the knaves.

It can be very easily argued that the banks have a social responsibility to the economy and the nation by virtue of the fact that they're really the only sector apart from possibly the car industry basically underwritten by the government. During the height of the Global Financial Crisis, the big four banks even managed to swindle the government of the day into guaranteeing deposits held with them, which seems to me to patently unfair as no other business has such an ability.
Mind you, given that banks over the past 40 years have shifted from a respectable social position on the high street to a predatory one, I seriously doubt whether they even consider whether they even have any social responsibility . Mr Manwaring may have existed once upon a time, but he's been executed by the same knife wielding highwayman holding the economy to ransom.

Thomas Jefferson said that:
I believe that banking institutions are more dangerous to our liberties than standing armies. If the people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
That is almost certainly true for the United States and increasingly becoming true for Australia. Largely because money itself isn't a real thing, banks by inference have the power to create the stuff via the credit creation process on a fiat basis. The costs of that money are ultimately born by mugginses who actually have to do real work for a living. We actually are all doomed Mr Mainwaring!

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