Kevins Thoughts and Musings

Kevin Young Responds to Glenn Stevens' Interview

On March 29th, in his first televised interview, Glenn Stevens said interest rates were on the way up and we should not assume they will stay low. Read more...

Kevin Young responds to Glenn's comments and provides points as to why interest rates should be lowered.
 

Click here for Kevin's comments.
(youtube file)

Click here to view the New Dwelling Finance and Mortgage Rates, Source Westpac Economic Report.

Do I Change Banks?

6th January, 2010

Following the last interest rate hike and the big move up by Westpac, the question I am now getting a lot is “is it worthwhile shifting from Westpac to a lower rate with another lender?”

The answer in a nutshell is that it  may in fact  not  be worth shifting. Westpac have been very clever in realising that by the time that you pay any exit fees, discharge fees, then your application fees.  The total of these charges could  come to be approximately the total amount that you would save by switching to a lower rate with another lender.

So in effect you have spun your wheels with all that time and effort for nothing , and keep in mind that future rate movements by other lenders may be more than Westpac too.  As all lenders have different servicing guidelines, you may still gain an additional property by a cashflow restructure with repayments, and a lower rate albeit that many lenders have similiar rates with variable and fixed rates.

The other point to consider is that if you did this, you would also have reduced your tax deductions! Our Club Loans brokers would be happy to give you the two sets of figures so you can do a sensible comparison , and take a close look at exit fee conditions.  This brings home one of the reasons we started Club Loans. Out there in bank land or broker land you  may  be encouraged to switch. The broker or bank  could be eyeing the extra commissions from your  possibly needless transaction. Banks and Brokers get extra commission from this  “churning”,  as it is  known in the industry.

Finally, say you have made the change to a lower lender then there is another change of rates, the greedy bank will now come up with a better offer due to competitive pressures!!

What is needed in the market place is competition in the banking sector as we had once before prior to October 2007. We need wider rate offers to encourage people to walk from the current monopoly.

Regards,

Kevin Young

Interest Rates and Inflation

5th January 2010

Glen Stevens refers internationally to the period from the mid 1980s and to the mid 2000s as a period of “inflation in most countries was low and pretty stable. So were interest rates.  Australia shared in this experience from about the mid 1990s onwards”.
(This is a lie as our graph on interest rates clearly shows. First Ian MacFarlane (Stevens predecessor) and then Stevens boasted that they would be the first to return rates to “normal”. So Australians did not enjoy the international experience of ”low and pretty stable in relation to interest rates”.

So, has Stevens learned his lesson and is he going to return us to these ‘pretty low and stable’ interest rates? Clearly not as he has recently stated that he regards a setting of over 5% as neutral. This is bizarre.  A neutral rate is not double the rate of inflation!

This is another quote from Stevens. “Compared with the instability of the 1970s and early 1980s, this was a remarkably good period”. This was referring to the mid 1980s to the mid 2000s internationally. Now I agree that the period 1970s to the mid 1980s was unstable. What made it unstable was particularly America and Australia’s flirting with high interest rates to bring down inflation. America quickly realised this was a failed logic and abandoned high rates. Australia still has not come to that logical conclusion.

What is a neutral rate? Well, if we remove the interest rate settings from the 1970s through to the mid 1980s, the period of “instability” * that Stevens refers to, we find that for all of the previous century, the neutral setting was in fact just simply 10% over core inflation.  We had stability and low rates. So what should our neutral rate be if this logic is applied? It would be somewhere between the 2.25% that the ANZ Bank predicted would become our rate in 2009,  and up to a maximum of 3.2%.

* these are quotes from Stevens’ address to the 2009 Economic and Social Outlook Conference in Melbourne on the 5th November 2009 entitled “The Road to Prosperity”.

Regards,

Kevin Young

The Reserve Bank is a wealth hazard!


(youtube file)

Kevin Young speaks about the RBA rising interest rates.
"We need stable rates, we need low rates"

RBA Rally
Part 2 of 5
Part 3 of 5
Part 4 of 5
Part 5 of 5
(Youtube files)

The Latest Word from Kevin Young

Inflation is at a ten year low of 1¼%. The neutral setting is half a percent over the core inflation rate, so we should have official rates now around 13/4 %.  This would sit easily with comparable sensible Central Banks around the world. 

Why instead is our RBA talking about returning rates to “normal”? The only thing normal about their 5% rate setting is that it was “normal” during the last 25 years of last century when we had doubtful quality people in charge of the economy. For the greatest length of our time, the neutral setting has been ½ % over the core rate.

Will someone tell our Reserve Bank? Will someone turn the lights on in the Reserve Bank’s ivory tower so that they can see that the low inflation rate, actually the ten year low, is only the result of them breaking with their high rate tradition and lowering rates. Will someone please turn the lights on at the RBA? Paula, can you also send this off as a letter to the Editor?

If common sense prevailed and the Reserve Bank did lower their rates, it would help our balance of payments which has been under discussion in the AFR lately. The only other simple step to complete our financial independence from the world is to tap into our great savings rate. Savings that is ignored in official figures. Prevent half a trillion dollars of our savings that has been wasted on overseas share markets.

Direct a better return on this money by keeping it inside Australia and directing it towards the securitisation market. This would save paying rents and mortgages and business loans to overseas greedy investors.

I have recently returned from overseas and it is embarrassing trying to explain to overseas business people why our Government stands out alone in the world offering such a high rate on bonds, yet at the same time we offer the safest economy. You try and explain that!

Kevin Young - President
The Investors Club

Difficult to Plan for the Future

Month by month Australians are on tenterhooks as we wait to see where rates are going.

How difficult is it for a business or a home owner to plan for the future in this environment? 

In contrast, it is great to see what is happening overseas, especially in the UK and in the US, as the Central Banks announce that rates will be on hold for much longer than expected, providing some level of uncertainty and impacting on the currency value.

What great news for exporters in America. Each export will bring in more cash to the country. Australia, in contrast, has a rising dollar because we are raising rates.

The RBA is promising certainty and yet what are their rates? They are 3% below our Central Bank’s world high of rates.

Wouldn’t it be good to have their central banks running our economy?  Take action today and join our petition to hold the RBA accountable.

Reserve Bank Will Not Be Lowering Rates

It is no coincidence that since the Reserve Bank of Australia signalled to the world that it would not be lowering rates in March of this year, that the Aussie dollar has appreciated 30% against the US dollar.

This has been accelerating as each RBA meeting has passed.  The impact? While mortgages remain high, we must fund these mortgages from overseas finance which presents more realistic rates.

We are making overseas investors wealthy at the expense of hard working Australians. Further, the Australian higher dollar means our exports are more expensive overseas and hence, we sell less.

Why isn’t this being discussed at length in the media?

Why in the Reserve Bank minutes don’t they discuss the possible results of lowering rates?

There is lots of discussion of what would happen if they raise rates but not about the many benefits of lowering rates. Why?

Do you think we need an enquiry into the Reserve Bank’s performance? If you do, please add your email to our growing list that will see a real enquiry happen.

In New Zealand there is an free speech on the monopolised banking system. For example in early August, the New Zealand Manufacturer’s and Exporter’s Association warned the strength of the currency would cost jobs and called on the central bank to lower rates. Further, to help weaken the rapidly rising currency there up 28%. Even the Central Bank Governor there echoed this by suggesting that further interest rates cuts could be on the cards if the New Zealand dollar kept rising.  Such common sense seems to be missing from the Australian media.

Do you have some interesting facts and figures to contribute to our arguments? Please do so here. We would be only too pleased to add them.

Do you believe the Reserve Bank is again missing the worldwide
trend of low rates and it’s again going to embark on years of unnecessary high rates?

Don’t blame the high cost of funds from the world financial crisis, spruiked in the media, for Australia experiencing the world’s highest mortgage rates. In Canada you can get three year loan rates at 3.88% and in America (the centre of the meltdown) you can get five years at 5.6%. 

It is the RBA that is has Australia sitting on the highest mortgage rates in the world.  Naturally, this has brought up the Australian dollar; hurting our exports and bringing less cash into the country as a result.

The RBA minutes show they do not even discuss or debate the merits of lowering rates.  Their focus is simply on holding rates or talk of increasing them.  Talk of high rates suits the banks, many of whom have affiliation with the financial commentators: high rates = high margins = high bonuses!

Would like to do something about this?  Please add your name to our petition for a Royal Inquiry into the performance of the Reserve Bank.

We believe this situation is out of control. Over the years, we have arraigned to lift its veil of secrecy that saw them not releasing the reasons for rate changes and then not releasing the results of their meetings for 24 hours. In January 2007 (through our success) they now release their rate decision immediately and then some days later they release their reasons; but they are still refusing to release individual board member’s minutes.

Are we going to be active and get some action?  We do live in a democracy.  We do have access to our members of parliament who are supposed to carry out our wishes.  Let’s access them with a solid petition.  We need your help.  Please tell your friends and add their email to our growing petition.

RBA - Interest Rates Remain Unchanged

As the RBA announce their decision to leave interest rates unchanged at 3% and the RBA governor, Glenn Stevens, says that although the effect of low mortgage rates are yet to be seen, future rate cuts are possible if the economy continued to deteriorate

- "The prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed” –

we again question the basis of the RBA decision making and urge policy makers to call a royal enquiry into their actions... read more.

Quote from CEO of the Small Business Association on Lateline Business

“We are seriously having to consider whether we advocate to Government the further regulation of the banking sector so that transparency of fees and charges is increased so that if only fees and charges that perhaps banks would be able to make would be on a cost recovery basis or a cost plus basis.”

This was after it was announced that the banks had reported huge increases in the incomes from fees and charges on accounts.  TIC research had already shown that since the Reserve Bank got its independence (and supposedly in charge of being the watchdog on banks) their income from fees and charges had not escalated due to inflation (ie 32%) but between 300% and 450% with no signs of abating.

Also

Julia Gillard said on Insiders Programme on Sunday 24th May saying that people should put “acid on their banks to get a better rate – if not they should walk with their feet to another bank”.  Which bank???  Why doesn’t Julia Gillard, our Deputy Prime Minister, know that there is no competition between the banks and that there is no opposition since the securitisation market dried up eliminating the non-banking sector?

St. George commented before it was gobbled up that it “walks in-step with the major banks” – so where is the competition, Julia?  Do you bank in Australia?  Where are the levers the Government has to force the banks to become more competitive?  Have you heard of the PAR powers that the Government and the RBA have?  Do we need a royal commission into the effectiveness of the “crystal ball system” used by the Reserve Bank?  I believe an effective, efficient economy needs and effective and efficient banking sector. Do we have one?

Reserve Bank Fails to Lower Rates

It is mid-May and the Reserve Bank failed to lower rates and is now making all the murmurs that they are not going to lower rates as the hard times will end soon. 

They appear to have no sympathy for consumers; no understanding that the lack of spending is what is causing the recession.

“Local banks continue to report big losses on their loan books.  The Commonwealth says its provision for bad debt charge for the March quarter was $630million.  That came from an increase in consumer lending deterioration among small and medium enterprises and losses in specific industries like mining, tourism and the export sector.”

All these people are suffering under tight conditions, a credit squeeze and extremely high business loans – all thanks to the Reserve Bank.  The budget is predicting higher unemployment – thanks to the Reserve Bank.

Who is the winner out of all this?  Well, in the first quarter the Commonwealth Bank reported over a billion dollars in earnings.  A huge increase – but wait for it – they have reduced their dividends by 25%, so even the shareholders are suffering.

All this wealth has been centralised in the banks and what has the Reserve Bank had to say about this transfer of wealth?  Nothing!

Has the RBA Ignored the Facts and Made Yet Another Error of Judgement?

Morgan Stanley predicted that the Australian domestic demand will slow. This is at odds with the Reserve Bank that is going full tilt to raise rates to stop demand. So has the RBA ignored the facts and made yet another error of judgment?

Both the RBA and the Government’s budget in May were saying that GDP would pick up towards the end of 2009 because of the housing construction. What have we seen? Seventeen continual months of decline in the commercial sector and construction that was slowly turning around, yet still below the levels of 25 years ago.

In fact, there was a 5% increase in dwelling construction in August, the first such increase for 18 months. So has the Reserve Bank crushed the first green shoot of progress?

Rallying for Change in the Banking Industry

It would seem support is rallying for change in the banking industry, see Christopher Joye today in Business Spectator:

Here I dare anyone to risk Rory’s (Robertson) wrath by asking him whether the RBA has the right to target asset prices (yes, not just CPI), as appears to be their latest want, despite the Bank’s chequered performance in every major crisis it has confronted: take the 1987 crash—by keeping rates too low for too long in response to Black Tuesday, they allowed inflation to run amok (headline CPI averaged c. 7.3 per cent between Dec ’87 and Mar ’89 yet mortgage rates remained unchanged between Sep ’87 and Feb ’89); recall the 1990-91 recession we had, care of the RBA, to have—well, mortgage rates were eventually jacked up in response to burgeoning inflation in the late ‘80s, and rose to an incredible 17 per cent by Jan ‘90.

Yet in spite of the onset of the worst recession since the 1930s they were stunningly slow to come down, averaging 13.7 per cent between 1990 and 1992 while unemployment increased inexorably to 11 per cent; finally consider what transpired during the 2007-2008 global financial crisis—yes, this was the only central bank in the developed world that hit its unassuming households with 6-7 official and “de-facto” rate hikes in the midst of the crisis because of misplaced concerns about inflation. And when mortgage rates peaked at 9.6 per cent in August ‘08 and the RBA was forced to commence an embarrassing 180 degrees turn in September, a compliant commentariat had the temerity to describe them as “ahead of the curve”- give me a break.

If these guys can’t accurately forecast inflation, how on earth are they going to target much more volatile asset prices? Governor Kohn certainly seems to agree).

RBA Short-Sighted In Not Lowering Rates

The RBA decided (in its wisdom) to not continue to lower rates.  In its minutes it argued that the world economy will continue to recover in the second half of 2009 and that Australia’s trading growth will rebound strongly to just under trend in 2010. 

At the same time for months they have been saying cynically that unemployment will rise to 7%.  Within days of their inaction the ABS already started showing that 53,000 people had lost their jobs.  Continuing this fact, which would indicate that the Reserve Bank had made another “serious error of judgement” (PM’s quote from 2001).
Read more...

Some Interesting Facts - Domestic Banking Fee Income

The source is the Reserve Bank Bulletin which amazingly only has these figures correct to December 2007!

Inflation since 1997 has risen around 3% per annum, bank fees should have risen 32%.

But transaction deposit accounts have gone from $416 million fee income to $1.6 billion that is $1,615 million not a 32% jump but a massive 400%.

Other deposit accounts went from $23 million in fees (not a 32% increase to $30 million) to $79 million which is a 350% increase.

Housing loans went from $290 million in fee income (not a 32% increase) to $899 million – a 300% increase.

Personal loan fee income $116 million dollars (again not a 32% increase) to $557million (500% increase).

Credit cards $134 million of fee income (not a 32% increase up $176 million) increased to $1,146 million dollars – a 900% increase!

Total income has risen from $1,142 million (again not a 32% increase to $1.4), a massive jump to $4,376 million.   Read more...

Points to Ponder

• Are the banks short of funds?  ASIC have just released the fact that the banks now have $500billion in low interest and no interest bearing deposit accounts!  What would it do for competition if the government could offer a AAA guarantee on these funds if they were transferred to the non-banking sector to free-up the flow of funds into the non-banking community for valued projects?
   
• Interest rates have come down, according to the Reserve Bank, but did you know the banks raised rates by .5% before the rate drop and therefore, even if they matched the RBA, they still would be overcharging .5%
   
• Overdrafts to business (which feeds on into higher prices and inflation) have actually risen .5%.  Banks are taking advantage of their monopoly on this position with no action from the RBA
   
• Kleenmaid have disclosed laying off nearly 200 workers.  A direct result of the slow down in the housing construction industry.
   
• When the Government realises there is a housing crisis and forces the banks to renew funding to this sector – where will the resources be to meet this demand?  Kleenmaid have gone broke – who next?  Many builders have gone broke – who next?

Banks Are Not Passing on the RBA's Rate Drop 

Conditions in Global Credit Markets Have Improved?

In March, Glenn Stevens commented “conditions in global credit markets have improved since November” and yet, here we have banks refusing to pass on the RBA discounted rate, claiming the reverse.  In fact, they are saying the RBA is lying??

Government announces future board members chosen from list provided to Govt by Governor

On 7th December, 2007, the Government announced that future board members will be chosen from a list provided to the Government by the Governor and the head of Treasury.  It was announced that this would be a more transparent and democratic process.  Is it?  Read more...