Banking on bad policy

It really was a tragic day for this country when the Government actually came to believe that it had saved us from the Global Financial Crisis. There never was much of a problem to begin with, in spite of the sky-is-falling attitude of Treasury and others at the time. 

But what we now have is a Government that is incrementally ruining this country’s economy piecemeal since it believes that it has the golden policy touch. 

We have seen our savings wasted by the billions in building the education revolution and pink batts. We are watching investment in the mining industry slowly crumble as miners think of alternatives to Australia’s developing tax regime. We are experiencing a gathering industrial relations storm caused by the provisions of the Fair Work Act. The NBN is a virtual certainty to cost this country billions more. 

And now it is the banking and financial system’s turn to have the Government’s interventionist approach applied to its rate setting policies. Another great Pyrrhic victory, this time for home owners, as the Government now intends to get rid of exit fees from home loans. 

The situation at present is that you sign on for a home loan and if you want to leave your lender and go to another there are fees that must be paid as you disengage from your current source of funds. 

The higher the fees the more borrowers are bound to some particular lending institution since they are unable to take advantage of lower rates elsewhere if the differential in interest payments made is eaten up by the exit fee. 

Borrowers are worse off and there is as a result less competition in the mortgage market. Get rid of the fees and rates will fall, the Government argues, because competition will ensure that raising rates above the rate charged by others will see a massive fall in the total value of mortgages on the books. 

Switching the institution from which you borrow would therefore become no more difficult, as the Government sees it, than for example changing chemists. There’s always another one just around the corner. 

Markets Reflect Reality  

But establishing a loan is a lot more difficult than picking up a prescription. Someone wants to borrow, let us say, half a million dollars to buy a house. In the typical circumstance as things are today, they are person unknown to the lender. 

What sorts of guarantees are needed to make sure that the potential borrower will actually repay their debts? If the loan is approved, at some moment the lender will have to draw up a cheque for that half a million. What sorts of things will that lender need to know to give them a really good chance that the money will make its way back to the bank over the twenty-thirty years that the money is in the hands of someone else? 

How long ago has it been that the entire world’s financial system was rattled to its core by a massive failure in the mortgage market in the United States, and the shockwaves have by no means ended yet. Not all borrowers can and do repay their debts. 

Indeed, not all borrowers are the same. There are differences in every respect between one potential borrower and another. As seen from Canberra, everybody is the same. From the perspective of a lending officer, the difference are often immense. 

One way or the other lending institutions if they are to stay in business will cover their costs and risks. If not in one way, then in some other. 

But the major confusion that lies at the core of this package is the decision of the Government to override the operation of the market, to put its judgements in the place of those who are actually risking their capital in the market. This is a region of the economy that politicians should stay well clear of. They have nothing positive to contribute. 

This is the problem of problems. It is that Government’s belief that its judgement is better than the judgement of those making these commercial decisions. I will be frank about this. The Government does not know a thing that the banks do not. It knows next to nothing about how banks work, the commercial risks involved in lending to strangers, the availability of savings and their costs. 

A government knows almost nothing else but politics and therefore, whatever might be the economic effects of this decision, it has decided that it will be a vote winner whatever damage it may do to the country overall and the economy in general. 

But damage it will do without any genuine benefits that I can think of. Since the decision will not generate a single extra dollar of savings – where could those additional savings come from? – all we will do is add to business costs without a compensating benefit, except perhaps to the Government and only to the extent that voters fall for the three card Monte being offered up as banking policy and reform.