A pain in the bank

Diversionary bank bashing

Bank bashing has always been a crowd-pleasing sport. Banks are money lenders. Money lenders are only popular among borrowers for that brief moment when they agree to lend funds. Thereafter, comes the long disgruntle–causing grind of paying back loans. Then there is the unpleasantness when borrowers get into difficulty. Assets built over a lifetime, businesses, farms and/or homes all taken by those ‘bastard banks’. Bankers really are on a hiding to nothing. Is this fair? Perhaps not, but having worked for some years in a bank, it is true to say, in my experience, that bankers as a group contain more than their fair share of popinjays whose remuneration far outstrips their ability and who deserve taking down a peg or two. Though you have to say that there were better singers than Frank Sinatra yet he got the fame. Good luck to them in their striped suits I suppose, if they can get away with it.

This brings me to Joe Hockey and his nine point plan that Tony Abbott seemed to have trouble endorsing at first. You can think up conspiratorial reasons why Abbott did what he did. None of them fly. My view is that he’d forgotten about Joe’s nine point plan. His mind went blank. He was probably exhausted from his latest triathlon. Or maybe he was jet lagged.

Wayne Swan will now be working extra hard to see to it that his plan seems to cause more pain to the banks than Hockey’s. One-upmanship abounds in the business of bank bashing.

While this has all been going on, the Reserve Bank published a statement on monetary policy on 5 November which contained a chart showing that the major banks’ net interest rate margin had fallen from over 3 percent in 1999 to around 2.4 per cent in 2004. Thereafter it has remained more or less at this level. “In aggregate, the net interest margin of the major banks has fluctuated in a relatively narrow range since 2004, between 2¼ and 2½ percentage”.

In other words, there is not the slightest evidence that banks are exploiting their market position to increase their margins. Mind you, they do exhibit complete ineptness when it comes to the timing of increases in interest rates; and this does not help their cause.

Banks fund around half their book offshore. They correctly point out that their borrowing costs are increasing as offshore borrowing rolls over from pre-GFC times, when rates were lower. Why not then increase interest rates at intervals, as this effect builds? Why wait until the Reserve Bank increases the cash rate which, in fact, increases banks’ average borrowing costs by only about half of any such increase? They give the impression of being shameless opportunists, and play into the hands of populist politicians and the tabloid press.

The problem with untutored bank bashing is that it diverts attention from more substantive economic matters. That might suit Wayne Swan. It is a mystery why it suits Joe Hockey. Interest rate rises in Australia have nothing to do with the banks. They have much more to do with the continuation of massive and wasteful government spending in the middle of a resources boom. The budget deficit in the first quarter of this financial year was $25 billion. This is where the Coalition should concentrate its firepower. It is very doubtful that the Reserve Bank would have increased interest rates to their present level in the absence of massive and wasteful government spending.

As it is, Glen Steven’s statement after the Reserve Bank’s latest decision to increase interest rates was all about what might happen than about what is happening. Credit growth remains subdues but it might get stronger; the labour market is not as tight as in as in 2007/08 but it might get tighter, and so on. Glen’s not taking any chances.

Leave aside the debate about whether stimulus spending works at all. A more modest stimulus and a preparedness to pull back on spending once it was evident that the economy was not falling into a hole and, in fact, was experiencing a very shallow recession, would have lessened pressure on interest rates. Instead of that we continue to have “nation building”, including unneeded “building education revolution” (don’t you just love the slogans out of the socialist manual) school halls and the flight of fancy that is the NBN, going on. Every time mortgage rates rise Hockey would be better employed directing blame and criticism at the government’s policies rather than engaging in pointless and unjustified bank bashing. Why let Gillard and Swan off the hook?