The Greens Will Take Us Back To the 1950's

The Greens are showing their true colours as being just old-fashioned socialists with a new colour. Bank-bashing is always popular, but over-regulating them will kill the economy:

From the ABC:

Greens Leader Bob Brown says Labor and the Coalition are only too willing to criticise the banks, but have been slow in forcing them to change their behaviour.

The Greens will introduce legislation stopping the banks from lifting interest rates beyond official rate rises for two years.

The four major banks - Westpac, ANZ, NAB and the Commonwealth Bank - have defended their decision to hike up their interest rates in the face of criticism from both sides of politics.

All the rate rises are above the Reserve Bank's 25-basis-point official hike last week, but Westpac's latest move is below ANZ's 39-basis-point increase and CBA's 45-basis-point rise.

Senator Brown says his party is also pushing the Federal Government to ban $2 bank fees and cap the level of mortgage exit fees.

"I put a direct challenge to Joe Hockey and to Opposition Leader Tony Abbott to support the Greens in preventing the banks from doing it again," he told the Nine Network.

The problem with what the Greens want to do is that it is too simplistic and ignores the real world.

It is too simplistic because it only looks at the headline increase in rates. If you look at the above information you might conclude that the CBA has the highest interest rates. But that's not true- they just did a bit of catching up with the others and their actual rates are the second or third highest of the four main banks.

Imagine you are a banker threatened with the regulation of your interest rates for two years. Better still imagine you sell doughnuts and the Government is saying that for two years we will control the price increases for your products. It takes months for legislation to go from politicians talking about it to the place where it is passed by Parliament. So what are you going to do? Won't you try to work out the worst possible situation for the next two years and increase your prices to cover that before the price controls come in?

So the Greens legislation will actually lock in higher interest rates for two years.

The other side of this is deposit rates. Where do you think banks get their money from to lend to borrowers? It's from people who are able to save money and invest it in bank accounts. At the moment, Australians not only have relatively high interest rates for loans, we have high interest rates for deposits. So to control the loans side, the Greens proposal effectively ensures that deposit rates become uncompetitive and that means that banks will have less money to lend out, and they will have to "ration" their loans. You might have to save up a bigger deposit to qualify for a loan or perhaps be a customer of that bank for two years to even apply for a loan. That would be a return to the way things were before the 1980's.

And if you are planning on a jump in the value of your home to help keep you in your retirement, forget it. Decreased availability of money to borrow means that demand for buying houses also decreases.

On the other hand, people still have to live somewhere. So rents will increase because fewer people can buy their own home, and they have to wait longer to save up their deposit. The rationing of finance also makes it harder for investors to build houses to let out which again puts upward pressure on rents.

This explains why the greatest period of prosperity in our nation's history came over the last quarter of a century after banking regulations were eased back and market forces allowed to operate freely.

Because the banks have raised their rates more than might have been expected, the Reserve Bank won't have to raise interest rates again early in the New Year. Regardless of what the politicians huff and puff about, another interest rate rise would have happened in February or March anyway because the Reserve Bank needs to keep the economy from growing too quickly to keep inflation under control.

There does need to be some regulation of banks. What we need is maximum stability in the banking sector. It is actually good for banks to make profits. We need to ensure that banks are not tempted to lend money out to people who will not repay. Australia was one of the few nations where banks did not go broke over the last couple of years because our regulations allow them to make money without tying them up in red tape.