Contra Celsum is compelled to nominate David Cunliffe, Bill English and the Parliamentary Finance and Expenditure Committee for an S-Award, Class II.
Citation:
The nation woke yesterday to a thundering declamation against New Zealand banks, issued by none other than the Parliament's Finance and Expenditure Committee, antiphonally augmented by a shrilling David Cunliffe, Labour's Finance Spokesman.
The banks, apparently, have been profit gouging (whatever that is). They have not reduced the interest rates on lending to reflect the Reserve Bank's generous reduction of the overnight cash rate to 2.5%. Mortgage rates remain stubbornly high. Apparently it is time for the banks to come to the party and help struggling home owners and businesses by reducing interest rates still further. The parliamentary committee warned them that they need to do so. Mr Cunliffe (apparently forgetting that he was no longer in government) said that unless the banks took heed, they would legislate.
Not to be outdone, the Minister of Finance chimed in, excoriating banks for not reducing mortgage and lending rates, since the Reserve Bank had delivered such low "official" rates.
Spare us the populist faux-outrage. Now, we are in no doubt that banks, their managements, and their shareholders are, in the end, venal and self-interested. We believe that they will do whatever they can to increase their profit margins. Given half a chance, they would double in an instant their interest rates, and pay themselves huge bonuses to reward the achievement of enormous profit growth.
And that is the point. Given a chance. What shuts the window of opportunity roundly and soundly against such extreme self-interested behaviour is their competitors. It is the most reliable means of keeping them half-way honest and reasonable. It's what economists call the "discipline of the market". But that is just a highfalutin term for the salutary influence of competitors, who would quite like to take away all your customers.
But there is more. Banks on-lend capital. They must first of all entice money to be lent to them. They entice people to lend them money by offering an interest rate. What NZ banks have discovered is that when they offer interest rates on deposit of anything less than four percent, people just don't bother. The Reserve Bank could reduce the overnight cash rate to zero, and it seems that ordinary mums and dads will not take one bit of notice. Competition amongst banks to attract deposits is keeping interest rates up. Customers want at least four percent on their bank deposits.
The banks were not slow to make that very point.
But Westpac and locally owned Kiwibank and TSB Bank all echoed comments from ANZ National on Tuesday that mortgage and other lending rates were now being driven by fierce competition for retail deposits rather than the Reserve Bank's cash rate. . . .
Westpac's general manager of product management, David Cunningham, conceded the report "reflects the fact that banks haven't perhaps been that flash in terms of what's going on and how rates are driven".
"Probably the thing that most people are missing is that there is an intense deposit price war taking place. That is the key reason interest rates have not fallen as far as the official cash rate."
In other words, the banks' clients are being appropriately prudent about where they will put their money. They have an expectation of what return they want to get on a bank deposit, and they will not invest money with the bank until they get the return they believe is appropriate.
This is the real world which politicians find so hard to grasp. Swollen with the hubris of the power of passing laws and regulations, it never occurs to them that people will refuse to behave in the way they believe they should. The hectoring of the banks is badly misplaced. Really, the parliamentary committee should have scolded their own constituents, telling them that they owed it to society to accept willingly much lower returns on their term deposits, so that banks could in turn reduce mortgage rates. Oh, but that might be a bit politically unpalatable. It might affect poll ratings.
And then there is the unpleasant reality of interest rates rising around the world. Why? Why? Why? What demonic forces could be at work here? Well, yes, there are demons at work, and they are called government deficits. It is the self-same politicians which bear much of the blame for higher interest rates. Pandering to the blood-baying colosseum, the media-whipped-mobs, they have engaged in an orgy of reckless spending--deficit spending--to try to assuage the worst of the pain in the current economic slump.
World capital markets are now being asked to stump up unimaginable amounts of money to lend to Western governments to fund their reckless deficit spending. The US government alone is going to the market trying to raise US$150bn every month, just to fund is current spending. That does not include the really big ticket spending items which have yet to come, such as Obama's socialised health care plan.
Governments are competing in a finite market for money. When demand for funds is at historic highs, what do you expect will happen to the price (interest rate) of those funds? Yes, even the most slow fourth form economics student will tell you that excessive demand will result in rising prices. In this case, the price is higher interest rates. So rates are rising in money markets as reckless governments conspire with their feckless voters to compete for vast amounts of funding.
In other words, politicians are indirectly responsible for rising interest rates. Central banks are now effectively powerless. They have no more dry powder left. It is the populist largesse of venal politicians pandering to the cravenness of their voters with their rights-based "gimmee, gimmee, gimmee" mantra that is the root cause of the problem.
But in New Zealand there is another, perverse-outcome twist. The Government has guaranteed bank term deposits. This means that bank deposit customers don't need to consider credit risks any longer when they are investing with banks. There is no trade-off between return and risk any longer. So there is only one variable which matters, and that is the interest rate. The risk is all the same, and it is zero. So, perfectly rational investors are chasing the highest bank deposit rate they can find--the higher the better, because there is no risk--even if deposit rates were to get to 30 percent! It's a beautiful, riskless, one-way bet, underpinned by stupid government intervention. So, let's get this right: the government guarantees bank deposits to keep everything turning over nicely. And the unexpected outcome--interest rates rise!
Several years back it used to be said that New Zealand was living on the back of the savings of Japanese housewives and Belgian dentists. We were funding our high consumption living standard by borrowing overseas. Now the party is over. Capital, global capital, is once again scarce. Sorry, chaps. Interest rates are going to rise, and rise, and rise.
Is there any way out? Of course. It turns out that there is a hard way and an easy way out. So, the easy way it will be, then. Governments will likely get the the point where they will give up trying to fund their burgeoning deficits by borrowing; they will increasingly move to print money(that is, create it out of nothing) in order to fund their deficits. Then, the genie of inflation will be truly out of the bottle. Watch interest really go up then--well into double digits.
The hand of Divine judgement is writing on the wall. "Mene, mene. Tekel. Upharsin. Your days are numbered. You have been weighed and have been found wanting. You will be broken into pieces." Spiralling national debt enslaves generations to come. Debasing the currency is theft. Western nations, with their demand-rights idolatry, have sowed to the wind. Now the tornado is coming.
Let's be in no doubt: politicians conspiring with venal voters are the root cause of the current rising interest rates. The attempt to push the blame on to New Zealand banks is beneath contempt.
David Cunliffe, Bill English, and the Parliamentary Finance and Expenditure Committee: S-Award, Class II, for actions in the public square that are Stupid, Short Sighted and Supercilious.
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