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Monday Message Board

March 31st, 2008

It’s time once again for the Monday Message Board. Please post your thoughts on any topic. Civilised discussion and no coarse language, please.

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  1. March 31st, 2008 at 11:59 | #1

    Some lively discussion at ALS about the new Dutch short film “Fitna” manages to put us momentarily on the wordpress front page, and number 2 in google news.

    The film is controversial and correlates various verses from the Koran, footage of preaching by some Imams and specific violent acts (quite graphic). It has reignited the ongoing debate in Europe about free speech and the unfortunately all to usual threats of violence from extremists.

    http://alsblog.wordpress.com/2008/03/28/fitna-the-movie-is-out/

  2. Tony G
    March 31st, 2008 at 12:32 | #2

    Why are interest rates always higher under Labour?

    http://www.abc.net.au/news/stories/2008/03/28/2202236.htm

    The major banks are now charging 9.37 % on standard variable rate loans. A spread of 2.12% over the RBA Official Cash Rate.

    Under Howard the spread over the RBA Official Cash Rate was always well under 2%; Most years it was around 1.8%. In April 97 the spread went down to 1.2%.

    Under ‘hard Labour’ the spread is always well north of 2%. In Sept 94 it blew out to 4% and under the previous Labour Government never got under 2.25%

    The figures are here you will have to calculate the spread between the OCR and the SVR yourself.

    http://www.infochoice.com.au/Home/Banking/RateWatch/tabid/86/Default.aspx?ArticleId=22007

  3. Ernestine Gross
    March 31st, 2008 at 13:50 | #3

    Good to see Professor Quiggin is a 2020 Summit participant. (Well, I hope he accepts the invitation.)

  4. Lord Sir Alexander “Dolly” Downer
    March 31st, 2008 at 14:16 | #4

    I look forward to Terje’s reaction when I release a film showing him and his family having sex with goats. Free speech is an abolute – correct?

  5. March 31st, 2008 at 14:34 | #5

    Lord Sir Alexander – Knock yourself out. However careful you don’t get sued by them goats.

  6. swio
    March 31st, 2008 at 15:31 | #6

    Congrats to Professor Quiggin.

    There are a number of other prominent bloggers who are going to participate as well. I am curious about the relationship between blogging and a summit like this. A question is coming up increasingly about where to draw the line between what is said in private, what is said to a person for publication in the traditional media and what a person can post on their blog. Specifically I wonder if information and conversations had at the summit would qualify as public by default and therefore suitable for publishing on a blog, or could participants consider what they are saying to be private? And what about informal conversations with other participants. Do you have to ask permission on a conversation by conversation basis to post about them, or would posting while hiding identifying details be sufficient?

    In the US I have noticed a number of situations where bloggers attended conferences or were given information informally and were very unclear about what they felt they could share with their readers as there were no established standards about this stuff. And would other participants feel less free in talking to someone who has a popular blog?

  7. Tony G
    March 31st, 2008 at 22:12 | #7

    Further to # 2

    From Wiki

    http://en.wikipedia.org/wiki/Yield_spread

    “yield spreads”

    “When spreads widen between bonds with different quality ratings it implies that the market is factoring more risk of default on lower grade bonds. For example, if a risk free 10 year Treasury note is currently yielding 5% while junk bonds with the same duration are averaging 7%, the spread between Treasuries and junk bonds is 2%. If that spread widens to 4% (increasing the junk bond yield to 9%), the market is forecasting a greater risk of default which implies a slowing economy. A narrowing of spreads (between bonds of different risk ratings) implies that the market is factoring in less risk (due to an expanding economy).”

    i.e. the spread is always wider under Labour;
    ” the market is forecasting a greater risk of default which implies” a slower economy under labour. A reflection of Labours economic mismanagement.

  8. Pinguthepenguin
    March 31st, 2008 at 23:49 | #8

    A reflection of Labours economic mismanagement.

    You mean:
    A reflection of Labors perceivedeconomic mismanagement.

  9. Tony G
    April 1st, 2008 at 09:16 | #9

    If you are a player in the financial markets you might think its “perceived”.

    If you are paying 40 basis points extra on your mortgage because a Labour government is in power you would find that pretty real.

  10. Ian Gould
    April 1st, 2008 at 09:45 | #10

    So let me get this right Tony G. – your data to support your argument is a table covering the period
    July 1994 to March 2008.

    During which period, Labor was in office for two non-consecutive periods covering just over two years and on that basis you conclude that “interest rates are always higher under Labor”.

    One could use data from the same period to argue with equal validity that “average rainfall is always higher under Labor”.

    But if you did that people would probably point to the sample data and the refusal to consider possible confounding variables.

    I also have to ask: if interest rates fall over the next couple of years will it result in a change in your political affiliation?

  11. Smiley
    April 1st, 2008 at 09:52 | #11

    Tony G, are you actually trying to tell us that the last two interest rate increases wouldn’t have happened if the Howard government had won the last election?

    The Howard government orchestrated a period of some of the largest increases in the cost of housing (inflation) and you want to blame Labor for the mortgage stress. You’ll have to excuse my incredulity.

  12. April 1st, 2008 at 11:23 | #12

    Tony G: A most interesting snippet of information. What causes this to be?

    Commenters have responded to you above, though without understanding your post, consequently their responses miss the point.

  13. Tony G
    April 1st, 2008 at 13:24 | #13

    I do not know if this will come through

    Cash Rate (CV) Standard Variable Rate (SVR)

    CR SVR Spread

    Aug-90 14 16.5 2.5
    Oct-90 13 16 3
    Dec-90 12 15 3
    Apr-91 11.5 14.5 3
    May-91 10.5 14 3.5
    Sep-91 9.5 13 3.5
    Nov-91 8.5 12.5 4
    Jan-92 7.5 12 4.5
    May-92 6.5 11 4.5
    Jul-92 5.75 10.5 4.75
    Mar-93 5.25 10 4.75
    Jul-93 4.75 9.5 4.75
    Aug-94 5.5 8.75 3.25
    Sep-94 5.5 9.5 4
    Oct-94 6.5 9.5 3
    Nov-94 6.5 9.55 3.05
    Dec-94 7.5 10.5 3
    Jun-96 7.5 9.75 2.25
    Aug-96 7 9.25 2.25
    Nov-96 6.5 8.75 2.25
    Dec-96 6 8.25 2.25
    Mar-97 6 7.55 1.55
    Apr-97 6 7.2 1.2
    May-97 5.5 7.2 1.7
    Jul-97 5 7.2 2.2
    Sep-97 5 6.7 1.7
    Dec-98 4.75 6.5 1.75
    Nov-99 5 6.8 1.8
    Feb-00 5.5 7.3 1.8
    Apr-00 5.75 7.55 1.8
    May-00 6 7.8 1.8
    Aug-00 6.25 8.05 1.8
    Feb-01 5.75 7.55 1.8
    Mar-01 5.5 7.3 1.8
    Apr-01 5 6.8 1.8
    Sep-01 4.75 6.57 1.82
    Oct-01 4.5 6.32 1.82
    Dec-01 4.25 6.07 1.82
    Apr-02 4.5 6.32 1.82
    Jun-02 4.75 6.57 1.82
    Nov-03 5 6.82 1.82
    Dec-03 5.25 7.07 1.82
    Mar-05 5.5 7.32 1.82
    May-06 5.75 7.57 1.82
    Aug-06 6 7.82 1.82
    Nov-06 6.25 8.07 1.82
    Aug-07 6.5 8.32 1.82
    Nov-07 6.75 8.57 1.82
    Feb-08 7 8.99 1.99
    Mar-08 7.25 9.36 2.11

  14. Tony G
    April 1st, 2008 at 13:29 | #14

    Spread is the last figure.

    Standard Variable Rate (SVR)taken from here;

    http://www.rba.gov.au/Statistics/Bulletin/F05hist.xls

    Cash target rate http://www.rba.gov.au/Statistics/cashrate_target.html

    The labour years the spread is always much bigger.

  15. Smiley
    April 1st, 2008 at 13:40 | #15

    SATP, so you don’t think that there is a correlation between the deregulation of the banking system and the delayed realisation that people who need to borrow 105%-110% of the value of an asset may not be able to pay back the debt?

    Please remind me under which government did private debt explode?

  16. Ian Gould
    April 1st, 2008 at 14:32 | #16

    SATP,

    Minbdless “I agree” posts aren’t made any more convincing by gratuitous insults.

    Exlain please exactly what point it is that we’ve apparently missed.

  17. Tony G
    April 1st, 2008 at 19:45 | #17

    Ian,
    You “apparently missed” a lot since August 1990

    From August 1990 to when Howard got in 1996, the oligopoly banking sector could charge a margin averaging 3.65% on top of the cash rate. The highest achieved margin over that period of Labour reign was 4.75%, the lowest margin was 2.5%.

    From March 1996 until November 2007 (Howard’s Reign),the oligopoly banking sector could charge a margin averaging 1.84% on top of the cash rate. The highest margin during Howard’s reign was 2.25% (which he inherited from the Bolshevik’s), the lowest margin was 1.2%.

    Ian, I am not making any point, just the observation that interest rates were higher under labour and they are again.

  18. April 1st, 2008 at 19:49 | #18

    Tony G. Have you any information as to why the spread would seem to be greater under an ALP government?

  19. Ian Gould
    April 1st, 2008 at 21:52 | #19

    Tony I just think your statement that interest rate margins are “always” higher under Labor is based on a fairly small sample – and if you look back at the table in the link you provide at 2 it only starts in
    July 94.

    Honestly, you’d want to see data over at least a couple of full business cycles before drawing any conclusions.

  20. Tony G
    April 2nd, 2008 at 01:18 | #20

    Ian,

    “and if you look back at the table in the link you provide at 2 it only starts in
    July 94.”

    True, but if you look at the figures provided in comment 13, they go back to Aug 1990 through to Mar 2008,
    “a couple of full business cycles ”

    As per comment 13 1990;
    Aug-90 14 16.5 2.5
    etc to
    Mar-08 7.25 9.36 2.11

    Aug-90 Being Cash rate 14%; Standard Variable 16.5%; Margin over the cash rate 2.5% etc to

    Mar-08 2008 Being Cash rate 7.5%; Standard Variable 9.6%; Margin over the cash rate 2.11%

    The margin or spread is the last figure for each line in the distorted table in comment 13.

    Standard Variable Rate (SVR)figures from the RBA taken from here;

    http://www.rba.gov.au/Statistics/Bulletin/F05hist.xls

    RBA Cash target rate figures are taken from here:
    http://www.rba.gov.au/Statistics/cashrate_target.html

  21. jquiggin
    April 2nd, 2008 at 09:18 | #21

    Tony, this kind of pointscoring is silly in relation to a government that is less than 6 months old. It makes about as much sense as observing that the unemployment rate under the current government is well below the average under Howard.

    It’s even sillier in relation to the current increase in bank margins which is clearly due to events in the US.

    The high bank margins of the early 1990s can reasonably be traced to the impact of financial deregulation, a policy introduced by Labor but supported by Howard.

    To sum up, if you want to criticise Rudd’s economic performance, wait a year or so, and look at variables that are significantly influenced by public policy. Then you might have a case. As it is, you are showing ignorance or, worse, pretending it.

  22. April 2nd, 2008 at 11:18 | #22

    Tony, Correlation need not equal causality.

    The increase in spread under a Labour treasurer may be coincidental, as JQ states above, but it isn’t a good thing for the party to have on it’s resume.

    Now we wait and see what happens to the spread under Rudd/Swan.

    Swan certainly isn’t the aggressive intimidating type that Costello was. Perhaps Swan hasn’t the ticker to keep the banks in line? Lindsay Tanner may be made of the right stuff.

  23. wilful
    April 2nd, 2008 at 12:07 | #23

    Costello intimidated you Steve?

  24. Tony G
    April 2nd, 2008 at 12:18 | #24

    JQ,

    “in relation to a government that is less than 6 months old.”

    Sorry, my comment is meant to be in relation to the ALP in general and my data above was amended to show the last 18 years. The most recent 8 years ALP and 11 Years of Coalition.

    During the 11 years of coalition government the risk premium charged to unsuspecting home loan borrowers averaged 1.84% over the RBA target cash rate.

    During the 8 years of ALP government the risk premium charged to unsuspecting home loan borrowers averaged 3.65% over the RBA target cash rate.

    Both periods had economic tribulations. Foreclosure rates to outstanding loans in Australia varied little over the period, so the actual risk was the probably the same.

    On the above measure the average rate charged by the banks was 97% higher on the ALPs watch.

    Whether this was “A reflection of Labors perceived economic mismanagement” or other issues I do not know.

    What I can say there is a definite pattern of higher rates under the ALP. Yes, it is unfair to judge Rudd prematurely, but the short term trend thus far is not looking good and hopefully it will reverse.

  25. Smiley
    April 2nd, 2008 at 16:00 | #25

    Tony G,

    I’m still intrigued as to why you do not see a greater correlation between the Sub-Prime meltdown, the fact that a lot of banks are having to write-down billions of dollars of credit and the sudden increase in the risk premium. I doubt that the new Labor government in Australia has anything to do with it.

    While deregulation of the banking system may have (over the short term) produced lower risk margins (through greater competition), it has also had other side effects such as a greater personal debt load, and in the long term a return to higher risk premiums. This should be a lesson for the peddlers of deregulation as a panacea

    And we shouldn’t forget that a lot of the toxic debt is emanating from a country where there’s been a conservative government in power for the last 7 years. A question that I think needs to be asked is: why is it that some of the biggest financial meltdowns in recent history (i.e. Sub-Prime and Savings & Loan) occurred under conservative governments in the US?

  26. wilful
    April 2nd, 2008 at 16:24 | #26

    Tony G, I don’t know why you’re going on about this, Prof Quiggin’s response is more than adequate. BUT, to humour you, why are you talking about interest rates? Aren’t they merely an inadequate measure of housing affordability? What ahs happened with housing affordability in the past 18 years? Isn’t that a more fundamental question?

    If so, have a look at this: http://www.rba.gov.au/Speeches/2008/sp_so_270308.html

  27. Ian Gould
    April 2nd, 2008 at 18:51 | #27

    It looks like Robert Mugabe may finally be about to give up power in Zimbabwe – but nothing’s final yet and Mugabe has demonstrated a rare capacity for blood-minded stupidity and irrationality.

    It’s frightening to reflect that bad as he is, Mugabe would have been considered unremarkable back in the 60′s and 70′s when much of Africa experienced similar or worse misrule and repression.

    I suppose that reflects the fact that Africa is actually making progress however slow and however inadequate to the needs of its people.

  28. Tony G
    April 3rd, 2008 at 15:07 | #28

    If the economic gurus won’t let me pin the increase risk premium on the ALP, then the next palatable target is the banks.

    Smiley said;
    “I’m still intrigued as to why you do not see a greater correlation between the Sub-Prime meltdown, the fact that a lot of banks are having to write-down billions of dollars of credit and the sudden increase in the risk premium.”

    The Australian banks only source about 26% of their funding from offshore debt markets and not all of those debt markets are markedly affected by the U.S. sub prime crisis.

    http://www.rba.gov.au/PublicationsAndResearch/StatementsOnMonetaryPolicy/Boxes/2007/2007_11_d_box.pdf

    The Australian banks source 3/4s of their funding locally, at very favourable rates, The sub prime crisis should only have a marginal effect on them.

    The banks have failed to raise the rates they pay on deposits at the same rate the RBA has moved, yet they have put 30+ basis points on top of all their loans plus passed on the full RBA cash rate moves. Forgive me if I am not sympathetic to the banks crying poor over sub prime events in the US.

    wilful
    That is an interesting article I think this section is relevant;

    “factor that has been mentioned is the existence of a range of government charges, including developer levies or infrastructure charges. More broadly, concerns have also been expressed that zoning policies and building approvals processes have hampered in-fill development closer to the city centres.”
    Should be zoning policies and building approvals processes have hampered development everywhere.

    When the manufacturers of housing are taxed at 65% it is going to impact on supply and prices.

    http://www.propertyoz.com.au/pdf/Tax_Karantonis.pdf

    Table six in this study by Professor Angelo Karantonis clearly indicates that manufacturing of housing is taxed at a much higher rate than other manufacturing.- averaging 65% (the last row).

    We have been over this issue before.
    http://johnquiggin.com/index.php/archives/2008/02/02/the-great-australian-dream/#comment-205735

    Dwelling commencements in NSW are at record lows
    and if the supply side issues are not addressed soon, some people will be living under trees.

  29. wilful
    April 3rd, 2008 at 15:41 | #29

    But tony, they are State issues, and Labor hasn’t been uniformly in power anywhere at that time except most recently. So your ideological point is entirely lost.

    And besides, most of the objections to infill come from the safe Liberal seats.

  30. Tony G
    April 3rd, 2008 at 16:01 | #30

    Wilful,

    I am not aligned to Liberal or Labour, I hate them both. The people are divided by party lines and conquered by the elite political ruling class.

    Yes, housing affordability is primarily a state issue.The states have increased total housing taxes from 11% of State revenues to 30% over the last 10 years. And that does not include GST on new houses.

  31. April 3rd, 2008 at 17:22 | #31

    The ideological point making belongs with all those whose response to Tony G’s point was a knee-jerk denial of a problem, or an attempt at moral equivalence, or something, rather than objective analysis of the question posed.

    Just because something makes the ALP look like dickheads does not mean that it is wrong.

  32. wbb
    April 3rd, 2008 at 18:36 | #32

    Housing affordability is a state and federal issue.

    The national and international credit bubble, the long economic expansion, the first home buyers subsidies, the unfettered population growth due to importation of hundreds of thousands of skilled workers to plug the gaps left by underfunded education system; the lack of oversight of credit providers and irresponsible lending have all combined to vastly overprice houses in Australia.

  33. Katz
    April 3rd, 2008 at 21:40 | #33

    This spread thing is potentially interesting.

    Spreads are determined by:

    1. The policy of the big market makers. Presumably, there was very little difference between the spreads of the individual big banks.

    2. The propensity of savers to deposit in these market-making banks. If savers in fact invested elsewhere during ALP administrations, then the banks would have to offer more at that time to encourage local depositors. That answer could be determined by calculating the relationship between official rates and rates on term deposits offered by the big banks.

    If there is no appreciable real difference in the banks’ cost of borrowing during Coalition and ALP administrations, then it is arguable that banks use ALP administrations as an opportunity to feather their own nests and/or use interest rates to make life uncomfortable for ALP administrations. In other words the spread has a political rather than a financial motive.

  34. Ian Gould
    April 3rd, 2008 at 23:34 | #34

    Katz, no – deposit rates are determined by “The propensity of savers to deposit in these market-making banks” (well partially most of the money actually comes from wholesale investors).

    The spread is the difference between the official interest rate (the rate which the Commonwealth is prepared to pay on funds borrowed) and the lending rate.

    The spread can move independently of either deposit or loan rates.

  35. Katz
    April 4th, 2008 at 05:57 | #35

    Katz, no – deposit rates are determined by “The propensity of savers to deposit in these market-making banksâ€? (well partially most of the money actually comes from wholesale investors).

    I read this as you acknowledging that I am correct. Those wholesalers you mention also compete for savers’ money. They are competing in the same capital market as the banks are for term depositors.

    The spread is the difference between the official interest rate (the rate which the Commonwealth is prepared to pay on funds borrowed) and the lending rate.

    Commonwealth? We’re talking about private loans here.

    The spread can move independently of either deposit or loan rates.

    How is the above different from this:

    In other words the spread has a political rather than a financial motive.

  36. Ernestine Gross
    April 4th, 2008 at 09:05 | #36

    I would not conclude anything from the two financial rate of return series given by Tony G. except that the difference is not a constant. I’d be very surprised if the difference would be a constant.

  37. Tony G
    April 4th, 2008 at 10:59 | #37

    Katz said

    “calculating the relationship between official rates and rates on term deposits”

    I am not sure what that data does to my assertions.

    I used 60 day $10,000 term deposits as published by the RBA for a benchmark of deposits, found here;

    http://www.rba.gov.au/Statistics/Bulletin/F04hist.xls

    Cash Rate to 60 day $10K term deposit, last column is the spread.
    i.e
    Aug 90 CR 14 TD 13.05 Spread 0.95

    CR 60 Day TD Spread

    Aug-90 14 13.05 0.95
    Oct-90 13 11.9 1.1
    Dec-90 12 10.75 1.25
    Apr-91 11.5 10.4 1.1
    May-91 10.5 9.75 0.75
    Sep-91 9.5 8.8 0.7
    Nov-91 8.5 7.75 0.75
    Jan-92 7.5 6.95 0.55
    May-92 6.5 6.4 0.1
    Jul-92 5.75 5.45 0.3
    Mar-93 5.25 5.15 0.1
    Jul-93 4.75 5 -0.25
    Aug-94 5.5 5.15 0.35
    Sep-94 5.5 5.3 0.2
    Oct-94 6.5 5.55 0.95
    Nov-94 6.5 5.75 0.75
    Dec-94 7.5 6.05 1.45
    Jun-96 7.5 5.9 1.6
    Aug-96 7 5.45 1.55
    Nov-96 6.5 5.3 1.2
    Dec-96 6 5.05 0.95
    Mar-97 6 4.9 1.1
    Apr-97 6 4.8 1.2
    May-97 5.5 4.5 1
    Jul-97 5 4.25 0.75
    Sep-97 5 3.7 1.3
    Dec-98 4.75 3.5 1.25
    Nov-99 5 3.45 1.55
    Feb-00 5.5 3.85 1.65
    Apr-00 5.75 4.15 1.6
    May-00 6 4.35 1.65
    Aug-00 6.25 4.4 1.85
    Feb-01 5.75 3.95 1.8
    Mar-01 5.5 4.9 0.6
    Apr-01 5 4.8 0.2
    Sep-01 4.75 2.8 1.95
    Oct-01 4.5 2.7 1.8
    Dec-01 4.25 2.9 1.35
    Apr-02 4.5 2.9 1.6
    Jun-02 4.75 3.15 1.6
    Nov-03 5 3.65 1.35
    Dec-03 5.25 3.75 1.5
    Mar-05 5.5 3.45 2.05
    May-06 5.75 4.1 1.65
    Aug-06 6 4 2
    Nov-06 6.25 4.25 2
    Aug-07 6.5 4.75 1.75
    Nov-07 6.75 5 1.75
    Feb-08 7 5.6 1.4

    Further to that, the spread between standard variable rate loans and 60 day $10k term deposits.

    Aug-90 3.45
    Oct-90 4.1
    Dec-90 4.25
    Apr-91 4.1
    May-91 4.25
    Sep-91 4.2
    Nov-91 4.75
    Jan-92 5.05
    May-92 4.6
    Jul-92 5.05
    Mar-93 4.85
    Jul-93 4.5
    Aug-94 3.6
    Sep-94 4.2
    Oct-94 3.95
    Nov-94 3.8
    Dec-94 4.45
    Jun-96 3.85
    Aug-96 3.8
    Nov-96 3.45
    Dec-96 3.2
    Mar-97 2.65
    Apr-97 2.4
    May-97 2.7
    Jul-97 2.95
    Sep-97 3
    Dec-98 3
    Nov-99 3.35
    Feb-00 3.45
    Apr-00 3.4
    May-00 3.45
    Aug-00 3.65
    Feb-01 3.6
    Mar-01 2.4
    Apr-01 2
    Sep-01 3.77
    Oct-01 3.62
    Dec-01 3.17
    Apr-02 3.42
    Jun-02 3.42
    Nov-03 3.17
    Dec-03 3.32
    Mar-05 3.87
    May-06 3.47
    Aug-06 3.82
    Nov-06 3.82
    Aug-07 3.57
    Nov-07 3.57
    Feb-08 3.39

  38. smiths
    April 4th, 2008 at 11:10 | #38

    off the rates topic, but ithink the alan kohler full story on opes prime to be found at link is pretty good explanation of what is known so far for anyone who is interested

    http://www.businessspectator.com.au/bs.nsf/Article/Opes-the-full-story-DCQKF?OpenDocument

  39. Katz
    April 4th, 2008 at 11:24 | #39

    Nice work Tony G.

    It looks to me that there is no readily discernible pattern in the Coalition v ALP years.

    In other words, the banks were reacting to commercial exigencies.

    Your last table suggests that the banks sailed closer to the wind, allowing less margin for error as time went by.

    In other words, the banks ran leaner and meaner over time.

  40. Smiley
    April 4th, 2008 at 14:37 | #40

    The Australian banks source 3/4s of their funding locally, at very favourable rates, The sub prime crisis should only have a marginal effect on them.

    So why has there been, over the last six months, constant news reports (I listen and watch ABC mostly) that the banks are increasing their margins because it is becoming more difficult to source funding. Both the RBA and the news reports cannot be right.
    The term that I’ve heard being used recently is Credit Crunch

  41. Smiley
    April 4th, 2008 at 16:34 | #41

    So I guess what I’m trying to get out of you Tony G is that you don’t believe that there is a credit crunch going on at the moment and the banks are lying. They should be saying that they’re increasing their lending margins because Labor is in power.

  42. Ian Gould
    April 7th, 2008 at 00:40 | #42

    “Commonwealth? We’re talking about private loans here.

    The spread can move independently of either deposit or loan rates.

    How is the above different from this:

    In other words the spread has a political rather than a financial motive.”

    The Commonwealth Treasury quotes rates at which it will sell and re-buy its own bonds. This is he official cash rate.

    The spread, yet again, is the difference between the official cash rate and the rate at which private banks lend to home buyers.

    The RBA can raise or lower the official rate for a whole variety of reasons – including for example to try to prevent a rapid increase or decrease in the value of the dollar.

    If, for example, the RBA cuts rates and banks delay passing on the cut to borrowers then in the short term the spread is increasing at the same time interest rates are declining.

    Yet again, there is only a vague connection between the official interest rate and the the spread. For the past couple of years, until early this year, the spread remained roughly constant while official rates were repeatedly raised.

    And wholesale lenders primarily use funds raised from super funds or merchant banks such as Macquarie not, as you appear to think, private individuals.

    And don’t even get me started on the Yen carry trade.

  43. Tony G
    April 7th, 2008 at 09:43 | #43

    looking at the deposit data in tandem with the lending data, I do not think it changes my unpopular view (on this blog) that rates charged to borrowers were higher under the ALP (the numbers are prima facie evidence).

    Over the ALP era 1990-96 depositors were paid more as the margin below the cash rate was less.

    Borrowers were charged more as the margin above the cash rate was bigger.

    The over all spread between what depositors received for their money and what borrowers paid was slightly bigger during the ALP era, compared to the Howard era.

    From 1996 -07 depositors were paid less, as the margin below the cash rate was bigger.

    Borrowers were charged less as the margin above the cash rate was smaller.

    The over all spread between what depositors received for their money and what borrowers paid was slightly smaller during the Howard era, compared to the ALP era.

    As stated above, we are in a new era now and time will be the judge of Rudd.

    Smiley Said;

    “you don’t believe that there is a credit crunch going on at the moment and the banks are lying”

    IMHO (met with general discredit on this blog) there is something happening in the credit markets, but I do not believe a lot of the sensationalism portrayed about the credit markets in the media.(sensationalism is how they sell newspapers). Also leverage players in the financial markets make a lot of money when markets move, they have a financial interest in sensationalising things.

    In relation to the risk of Australian home borrowers defaulting. The home mortgage default risk in percentage terms has changed little, yet they are being charged more (so if “the banks aren’t lying” someone is. )

  44. Ian Gould
    April 7th, 2008 at 18:51 | #44

    Tony, let’s put it this way – the banks are seeking to increase their profitability to convince lenders and shareholders of the strength of their balance sheets.

    It’s no coincidence that the major bank with the largest overseas assets (NAB with its English and Irish banks) is leading the way.

    If there is a systemic tendency to higher interest rates under Labor (and I’d still like to see a larger data set) it may simply mean that bankers have greater confidence in Coalition governments and therefore have a systematic perceptual bias.

    Certainly, the Coalition has been very, very kind to the banks on a range of regulatory and competition issues.

    Maybe Kiwi Bank needs to open some branches here.

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