The danger in Swan's rates crusade

All sides of politics were talking tough on banks again yesterday. Whether Labor, Coalition or Greens, the pollies know instinctively that a 'them and us' debate about bankers in shiny suits will play well to their core constituencies.

Shadow Treasurer Joe Hockey argued yesterday that the RBA should "take on a greater role as a referee and in their statement include whether the banks should pass [interest rate cuts] on in full or in part," according to The Sydney Morning Herald. The RBA has all the relevant data on bank funding costs, he said, so it should let us all know how they're really placed to give battlers a better deal.

For Treasurer Wayne Swan, this kind of rhetoric has become a staple. He reiterated his tough-guy position, saying: "I won't be pulling back from my discussion about the important issues associated with interest rate cuts – I will be making frank and fearless comments about that."

If the RBA cuts the cash rate from 4.25 per cent to 4 per cent next week, as widely forecast, Swan will certainly be making plenty of comments. But perhaps he should leave it to others to judge how genuinely "fearless" they are. Swan's bank bashing is only one rear-guard action of a government terrified it's about to be pushed over a cliff by Tony Abbott's advancing army (in today's Newspoll Labor trails 46/54 per cent in two-party preferred terms).

We can smell the fear, Mr Swan.

And Greens MP Adam Bandt hit out at banks "crying poor" yesterday, saying: "The government needs to stare down the banks. They certainly shouldn’t go ahead with big business tax cuts that will net the big banks another $4 billion over the decade.” Let's not mention the stimulatory effect those tax breaks are expected to have, the jobs they will save/create and even the offsetting billions in tax revenue which economic expansion, if it comes to pass, will produce. As long as we punish the banks, all will be well.

All of these narratives work wonders in the era of "Twitchfork mobs", as journalist Kate Bevan calls it in Britain's Guardian newspaper. By limiting arguments to 140 characters, groundswells of public opinion can be generated on Twitter and other social media that increasingly push our leaders into policies that will end up hurting every Tweeter in the country. Bevan decribes the role Twitter played in pressuring RBS boss Stephen Hester into forgoing a million-pound bonus but without much serious canvassing of the issues.

In the era of social media, it's 'me-and-my-twitter-mates versus the bad guys'. That works very well in situations where mob rule is the only option. The Arab Spring showed how years, decades even, of simmering discontent can suddenly be vented through social media and lead to rapid social and political change.

But is that what we want with Australia's banks? Fitch yesterday put the big four banks on 'ratings watch negative', while at the same time reaffirming the same AA rating of Canada's major banks.

Fitch noted the similarities between the two groups of institutions, but said: "...the agency views the Australian major banks’ ratings as under some pressure at their current levels. Specifically, the rating watch negative for the four major Australian banks largely reflects Fitch’s view that despite significant improvements, these banks continue to have a weaker funding profile than other similarly rated peers."

Yes, the banks have made some headway in reducing their reliance on volatile wholesale funding from abroad, but have a way to go.

And the best way to scupper the consolidation of their funding base would be to put maximum political pressure on these supposedly private-sector institutions to squeeze margins by cutting in line with the RBA.

A recent forecast, from UBS, of 7,000 looming job cuts in the finance sector, should give all sides of politics pause for thought. If the pollies succeed in artificially pushing down mortgage rates, ruthless bank bosses will squeeze more staff onto the dole queues. Home borrowers will be able to rack up even more monstrous debts at very low rates (something pollies love as it boosts home prices). And savers will see little point in keeping money on deposit, maintaining pressure on banks to chase overseas funding.

Working against these arguments is the fact that the Australian government provides an implicit guarantee (in addition to the explicit emergency guarantees brought in during the GFC) that helps banks borrow cheaply. So when Hockey, Swan and Bandt speak as if the banks were state-owned enterprises, they're partly right.

But that's the problem they should be addressing – finding ways to remove the implicit guarantee, not postulating some theoretical 'appropriate return' for private companies. That return has always been "as much as we can get" – as it is in every other sector.

The Twitchfork mobs baying for bankers' blood are not hard to rouse. But in that frenzy of 'opinion' few of the difficult issues are discussed. In Australia the larger part of that mob is made up of people who, with each pay packet, buy bank shares through their super funds. They are people whose ageing parents quite like bank dividends and good returns on their cash deposits. The 'them and us' of bank bashing is mostly a fiction.

But then I guess we must all pay a price for limiting public debate to 140-character arguments.

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Let's not forget that banks, like other businesses exist to make profits or more accurately a return on equity. Politicians on the other hand are self serving and would be the first to speak out if the banks' financial positions were weakened. This is a ridiculous situation where banks are portrayed as villains no matter what (The danger in Swan's rates crusade, January 31).
The best thing would be if politicians ceased their running commentary and let market forces work. Swan in particular should just shut up and get on with his job or step aside – the latter option being preferred by most!
If the banks are so vital to our well-being and if they relay on the state for guaranties, then they should be required to open their books. Full stop. Then there would be no need to guess, read between lines from RBA data, etc. (The danger in Swan's rates crusade, January 31.)
Our politicians on all sides are tough talkers. But they are lost in action. This also goes for media. Today, The Age takes the opposite line to you, Rob. So what are we supposed to think is the truth?
The "twittering classes" do not constitute public debate. The real villains are those in the professional media who enthusiastically publish every sensational comment from any politician, whether informed or not. (The danger is Swan's rates crusade, January 31)
It seems Australian banks have abandoned free market rules. They have a portion of their debt formally guaranteed by government because they could not raise funds offshore without such a guarantee. They have such poor positions that they cannot raise funds at a reasonable rate in the normal manner of being unsecured borrowers (The danger in Swan's rates crusades, January 31).
This is because of bad management decisions based on dramatically increased reliance on general offshore funding to fund higher and higher amounts of home loans, driving up real estate prices.
The banks are socialising the costs of their bad management decisions. The quid pro quo is for those bearing the costs (savers and government) to demand better management, including by regulation to reduce leverage and reliance on offshore funding and to increase capital adequacy requirements particularly on sovereign debt and home loans – something the Basel Convention got badly wrong.
The best thing that could happen is dissociative profits with salary packages.
It seems these days that the higher the company profit, the more you can expect out of your annual salary rise.
So I don't think some of these profits we see and hear about are entirely about making adequate returns on equity or returns to shareholders, but in part about their own hip pocket.
A part of executive salary packages are made up of company shares, although I understand you can't trade these shares until you leave the company. That's a mighty big incentive to ensure high profit growth.
Now, I'm sure not every company is like this, but then I think that for this reason the ethics of our big four banks are questionable.
I have said it before, how can senior executives justify salaries packages up to 100 times the basic wage? And when they start to run low on equity, causing concern about their forthcoming salary rise, they free up some equity by sacking some of those on the basic wage.
Unfortunately, greed has taken control, and that includes our politicians. But it seems, ladies and gentlemen, that all we can do is grin and bare it and listen to our politicians tell us what they would like to do. (The danger is Swan's rates crusade, January 31)
Sounds like it is time for Joe to step aside for Andrew. Without strong profitable banks we would all be worse off. (The danger is Swan's rates crusade, January 31)
I agree with everything in the article (The danger in Swan's rates crusade, January 31). Swan and Stevens are constantly favouring property speculators over other Australians by lowering interest rates. People deserve a decent return on their savings yet Swan has advocated interest rate payments to deposit holder be dropped 3 months in a row now. I'm sure this doesn't bother either Swan or Stevens with their hefty taxpayer-funded salaries.
Lowering interest rates just reduces savers' yield while reducing borrowers' costs. Banks are only the brokers (The danger in Swan's rates crusade, January 31).