Politicians Will Try To Transfer Blame. You Can Bank On It

The Age

Thursday March 27, 2008

Wayne Swan's rage at the banks won't keep interest rates down, or solve the housing affordability crisis.

WARNINGS by the federal Treasurer, Wayne Swan, that banks will suffer market retribution for raising interest rates have become as familiar as the rate rises themselves. Each time banks have increased their standard variable rates on home loans by an amount higher than the Reserve Bank's latest increase in the cash rate, Mr Swan has responded by reminding their customers that they have the option of taking their business elsewhere. If your bank is behaving in a greedy and extortionate fashion, he counsels, then shop around to find one that isn't. And on Tuesday the Treasurer was repeating this advice yet again, while wagging an admonitory finger at the National Australia Bank in anticipation of the third increase in its standard variable rate in 61/2 weeks.

Well, he would, wouldn't he? Mr Swan knows that the recipients of his advice, those who fear being priced out of the Australian dream, are the people formerly known as Howard's battlers. They are the people whose change of allegiance last November propelled Labor into national office and Mr Swan into notional oversight of the national economy. They are people who expect governments to find solutions when times are tough, and Mr Swan has to assure them that he has one.

That poses quite a dilemma for a member of a government that also likes to reassure voters by boasting of its economic conservatism, and which clearly does not have the political will to re-regulate a financial system that an earlier Labor government opened up to global competition. Since there is no magic lever Mr Swan can pull to restrain the banks - in a deregulated economy, only the Reserve Bank has such an implement - the only course available to him is to extol the virtues of the market whose pressures have created the problem. The banks, apparently, are to restrain each other by vying for customers, and if they still don't satisfy, there are non-bank lenders to be found in the marketplace, too (though not as many as there used to be).

Mr Swan must know that this is tosh. The truth is that banks are inflicting pain on their customers because they must borrow money in order to lend it, and the global credit squeeze triggered by the subprime crisis in the United States means that the cost of acquiring the money they need is going up. In order to cover their costs and still maintain a level of profit acceptable to their shareholders, the banks have been jacking up rates beyond the increases dictated by Reserve Bank as it raises the cash rate in its war on inflation. And recognising that this is so does not amount to an apologia for lending institutions, large and small. The difficulties that an increasing number of borrowers face in meeting repayments are testimony enough that banks and other mortgage providers have sometimes loaned money unwisely. And what is worse, they have been all too willing, through extravagant marketing, to maintain the illusion that easy credit never dries up. That does not, however, license the Treasurer to foster an illusion of his own.

None of Australia's mortgage providers can be immune from the global credit crunch that has seen the big four banks push their standard variable rates well beyond the Reserve Bank's 7.25% target, and Mr Swan does nothing to help borrowers by suggesting, in effect, that there will always be some institution available to them that is immune. The first thing that governments owe citizens in times of difficulty is an honest assessment of the risks ahead, however politically unpalatable that may seem in the short term. It's easier to lash out at the banks for raising rates independently of the Reserve Bank's manipulation of the cash rate, but the Treasurer should remember that, although people cannot always render banks accountable by transferring their business to another lender, they can always call governments to account at the ballot box. If he continues to blame the banks for acting as they must in an open market, ultimately voters will blame him for allowing them to act so.

No mainstream political party is calling for a return to pre-1980s-style regulation of the financial system. Nor is this newspaper. The challenge for the Rudd Government is to find ways of responding to the crisis in housing affordability that lessen the incentive for the most economically vulnerable Australians to take out loans that ultimately they may not be able to repay. Such solutions will not be easy to find because aspiration to home ownership remains central to the Australian dream, and politicians know that they tamper with dreams at their peril. But the Government has already, through its proposal to increase the stock of rental housing, taken a small step towards enlarging the dream. If Mr Swan and his ministerial colleagues continue to seek innovative responses to the present crisis, instead of making impotent swipes at easy targets, their political future is more likely to be assured. They might even be hailed as visionaries.