Interest rates

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A brief break form the current series this morning just to comment on interest rates. There is much hand wringing going on and in typical kiwi fashion the floor is littered with innocent victims.

So without trying to explain or understand some of the complexities of bank funding the simple version currently is that people are flocking to fix their loans in droves. The banks go and borrow that long term money off shore for the same length as people are fixing for.

The overseas lenders are charging a premium for lending that money to the bank because they don’t want to lend long term. They think interest rates will rise and by lending long term now they are potentially losing profit. You can only lend the same dollar once.

So they charge like a wounded bull for the long term money. You could say it is simply supply and demand. There is huge demand right now for long term money, but the suppliers are in short supply .

Now one could ask what about the millions and millions of dollars the banks are sitting on from depositors? Surely the whole bank guarantee thing would mean the banks are swimming in cash, so why don’t they lend that.

Well the main reason is we deposit money short term generally. The wave of finance company failures in NZ was caused largely by them borrowing short and lending long. Banks would have the same problem if they did that. In fact I would go so far as to say they would be quite irresponsible to use our deposits on mortgages, unless people were depositing for 3 or 5 years.

And the other thing I have said before that we must remember is this.

Banks are businesses, they have shareholders. A banks number one mission is to provide the maximum return possible to it’s shareholders. Do they have a moral responsibility to us?? Absolutely not!! This poor me evil bank game Bollard and others are playing is silly. If you or I had a business and we could make more money legally and ethically we would do it wouldn’t we? So why do we abuse the banks for doing their job.

It is not the Bank of Social Welfare New Zealand, or West give me a break Pac.

Now once the run of fixing is over we may/should see these rates come back down. But banks being the profit making machines they are will most likely keep the additional profit. Like it or not that is what commercial businesses do.

When we say to the banks, give the little person a break we are actually saying: You should put your core values and mission well behind the current situation. You should be helping people who have been either greedy/ dumb/unlucky or victimised by this global credit crunch. We think you should join them in losing money so that we all feel better.

We would never employ a CEO who thought this way, why do we suddenly expect the banks to behave like this??

Stay Safe ~ Dean Letfus @ www.MassiveAction.co.nz