Banking on Big Government

Wherever I go around the country people raise their concerns about making ends meet. The costs of food, utilities, transport and housing are putting pressure on the family budget which, for many families is near breaking point.

That’s why the decision of the Reserve Bank to lift interest rates, and the big banks to raise them by even more, has sparked such a public backlash.

The banks seem fair game for attack from all sides because they make billions of dollars in profits and so many families are already struggling financially. Now I am not in the habit of defending banks but I will always support their ability to make a profit for their shareholders.

Sometimes it is easy to forget that banks that make money are always superior to those that don’t. As long as they are conducting their business in a fair, legal and competitive manner then they can price their products as they see fit. A strong competitive banking environment will ensure that consumers get a fair go in their dealings.

Consider, for example, the current deposit rates on offer. In some advertisements, at call deposits can attract in excess of 6 per cent – even though the official cash rate is 4.75 per cent. That suggests to me that the banks are paying a lot more to access money than many people think they do.

Such high deposit rates are a boon to many with surplus cash and little or no debt but are the bane of those struggling to pay off mortgage and other loans.

And this is the problem that confronts Australia today.

We have a two speed economy with some sectors (such as mining and construction) booming but many regular families struggling to pay the bills. Every interest rate rise, whether official or not, dampens a little of the exuberance but drives a stake through the financial heart of many families.

Media reports suggest that the cost of living for employees was 60 per cent higher than the official inflation data because of their reliance on consumer credit and mortgage interest charges.

For some time I have suggested that interest rates would be significantly lower if the government hadn’t injected so much borrowed money into the domestic economy. Labor’s unprecedented increase in money supply has put upward pressure on interest rates and threatens future inflationary pressure.

Had the government pursued a more measured fiscal stimulus program, it is likely that official interest rates would be much lower than they currently are. This would have helped those now struggling to meet their weekly commitments, kept business costs down and provided for a more sustainable, long-term economic environment.

Of course, such simple conclusions are lost on the advocates for bigger government who demand increasing intervention in almost every aspect of our lives.

So while it may be convenient to ‘beat up the banks’ and insist the government do something to reduce the financial pressure on many families, in this instance we would all have benefited had the government actually done less. It is an important lesson for all of us.