There’s not really a lot Wayne Swan can do about banks
Wayne Swan is aggrieved. The hard-working treasurer is disappointed at the way his long-heralded bank reform package has gone over. But should he be surprised really?
Let’s face it, bank packages, especially over-hyped ones, always underwhelm. Knowing this, it is curious that the Government has again managed expectations so ham-fistedly, taking weeks to reveal an unremarkable hand. Perhaps, like many things, it depends on where you stand.
After toiling away behind the scenes, the Government feels it has offered up serious reform. This may or may not turn out to be true if things like genuine portability of account numbers come to pass. Ditto with allowing banks to tap into the one trillion dollar national superannuation nest-egg, which may help storm-proof the finance sector against future global credit crunches. But neither of these reforms, nor many other aspects of the package, will do much for home-owners right now.
This is Mr Swan’s real problem. He is asking for a tick for effort.
Yet home-owners rightly couldn’t give a fig about that. Faced with mortgage pressure - already showing up as worryingly soft consumer demand - they are likely to view the package as so much howling at the moon.
Reasonable or not, many expected more. What they got will deliver no impact this Christmas and in all probability, nothing noticeable by the next one.
The problem for Mr Swan is that while both his and the borrowers’ perspectives are valid, only one of them counts.
Welcome to the noisy but largely pointless interface between politics and finance. Politicians are always tinkering, trying to look active in the interest rate space because being seen to do nothing is tantamount to not caring.
This is unthinkable in today’s turbo-charged empathy-driven politics.
Of course, the Government’s real dilemma is that there is actually nothing substantive to be done because the banking system is working as it was intended to.
Unless you want to change the fact that banks are profit making businesses, (something lauded during the GFC) there are no easy gets here, no low hanging fruit.
While Mr Swan has been careful not to claim his package will of itself lower rates, he wants voters to conclude it will be the case. Indeed this is its central rationale: that increased competition - putting the big four under genuine price pressure by elevating the leaner, hungrier, smaller banks and mutuals - will give consumers more choice and put ``downward pressure’’ on rates.
It sounds great but even this worthy goal is probably pie in the sky.
For a start, bank interest rates are determined primarily by the Reserve Bank which sets the official cash rate expressly to manage demand and keep inflation within a 2 to 3 per cent target range.
This ensures (ideally) that the economy neither stalls not overheats. If overly strong demand for goods and services drives prices up, the economy can grow too fast.
Crude as it sounds, the RBA reins that demand in, by lifting rates thereby clipping your discretionary spending power. It’s a bluntest of instruments except for all the others.
So, even if Mr Swan’s package eventually works and banks drop their rates by dint of increased competition, (thus freeing up money in your wallet for a smart-phone, a flat-screen, or a holiday) it’s a fair bet the RBA will lift the cash rate to compensate - assuming that is that it is big enough to make a difference.
We can be confident of this because right now, while borrowers are baying for blood over rate hikes in excess of the amount dialled in by the RBA, its Governor, Glenn Stevens thinks retail rates are about right at present.
In other words, the most recent official hike of 25 basis points (a quarter of a percentage point) would have been greater were it not for the fact that Mr Stevens and co second -guessed the big four, saw their funding margins were being squeezed, and approved a smaller hike.
They knew it would be exceeded anyway - that the actual result would be closer to 45 bp - which it was.
That’s the real game. Heads the bank wins, tails, you lose.
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