Republishing in full not allowed without permission.. Source: bhatt.id.au/blog/

ANZ Bank will soon disprove the myth perpetuated by many parts of the Australian media and backed by disingenuous statements from federal politicians that implies the Federal Government and Reserve Bank of Australia directly control interest rates charged on mortgages and other loans.

photo credit: woodleywonderworks

EDITOR: This article was syndicated/re-published at the ABC Online – The Drum Unleashed under the title Busting Interest Rates Myths.

The current treasurer Wayne Swan has been accused by Business Spectator journalist Stephen Bartholomeusz of “in effect making a direct and misleading linkage between the cash rate and their [bank] funding costs”.

In reality the federal treasurer cannot force the banks to move interest rates. All the current treasurer Wayne Swan can do short of breaking up/strongly regulating the retail banking oligopoly is release stern statements like “the heat is on” and try to make it easier to switch a mortgage to a different bank.

A recent Essential Poll result for the question “which party would you trust most to control interest rates” predictably resulted in Liberal 42% vs Labor 24%.

In fact looking at the last 15 years of results of News Polls for the Australian newspaper, the perception of participants in each poll has been that the Liberal/National coalition was better at “handling interest rates” than the Labor party.

Despite the well-known claim by former Prime Minister Howard that “interest rates will always be lower under a Coalition government than under a Labor government” the reality according to economist and former Labor advisor Stephen Koukoulas is that “for only 5 months of the 11.5 years of the Howard govt was the cash rate this low (Dec ’01 to May ’02). For the other 11 yrs, it was higher” .

The Australian’s Peter Brent astutely points out that: “the consequences of good or bad policy generally take time to arrive, and in the short term external [eg: global economy] factors matter more”. For governments elected in the mid 1990’s “the economic circumstances were conducive to longevity” and “ low inflation, the lowest interest rates and unemployment”.

According to Koukoulas: “until now, banks have done a poor job highlighting how small a part the official rate is in their funding models. That’s about to change”.

By reviewing rates on the 2nd Friday of each month and breaking out of the tradition of changing mortgage and loan rates in lock step with changes in the RBA cash rate, ANZ Bank is attempting to reduce the howls of outrage directed at them as a member of the big 4 banking oligopoly when RBA cash rate reductions aren’t passed on swiftly or in full.

Alan Kohler, ABC News Finance commentator and Editor in Chief of Business Spectator said this was a “smart move” by ANZ to level with their customers.

Kohler had just suggested prior to the ANZ announcement that Australian banks should explain how their “funding costs work then when there’s a change in the price of the 26 per cent or so of funds that come from wholesale financial markets, change the interest rate on your loans then, rather than waiting for the first Tuesday of the month, when the RBA board meets”.

When making the announcement ANZ Australia chief executive Philip Chronican told the media that: “We just wanted to get out of this exercise where the RBA announces things and everybody expects us to move the next instance … the real world is not like that; we fund ourselves with various instruments, so the RBA cash rate is a pretty small part of the overall picture.”

Uncertainty over whether the European sovereign debt crisis will be resolved or drag on causing further chaos has resulted in vague hints from several banks including Commonwealth Bank, Bank of Queensland and ANZ that the cost of overseas funding may rise during 2012 and these costs would inevitably be passed on to borrowers.

No wonder the public is misled considering they are offered the usual flood of sound and fury articles on the issue every time there is a rate change eg Fears the big banks will try to set their own regime on interest rate reviews, ANZ to review interest rates every month, creating rift with RBA, and ANZ chief defends shift on rates.

The media would be well advised to consider the lead of Crikey’s Bernard Keane who looks at the bigger picture, pointing out that instead of political jawboning and media indignation it would be more useful to conduct a bi-partisan inquiry into the financial system and more appropriate regulation of Australian banks, which are currently a super profitable “protected species”.

Otherwise the uncompetitive status quo described in the report Competition within the Australian banking sector published on May 11th 2011 by the Senate Economics References Committee will remain, with “the four major banks now dominat[ing] the Australian banking market, accounting for around three-quarters of deposits and assets and a larger share of home loans”.

Visit the Rambling Thoughts Blog regularly to read articles about Technology, Personal Finance, TV Shows, Politics, Environment, Books and more

Republishing in full not allowed without permission.. Source: bhatt.id.au/blog/

In “Freakonomics: The Movie” Steven Levitt and Stephen Dubnor explain why incentives matter because if you can figure out what people’s incentives are you can guess with reasonable accuracy how they will behave. Economics is just boring graphs and statistics – wrong. Freakononics challenges conventional wisdom by analysing how people behave in interesting situations, stripping away the maths and complexity which makes Economics hard to understand.

“All of economics is meant to be about people’s behavior. So, what is behavioral economics, and how does it differ from the rest of economics? Economics traditionally conceptualizes a world populated by calculating, unemotional maximizers that have been dubbed Homo economicus.”
-Econ Lib

In reality human behaviour and decision making is far from logical and often bad for their own interests in the medium to long term.

photo credit: Depletedcranium.com and Livefromroswell.com

Economics is the study of scarcity, the trade offs made when there are things people want but not enough of the things to go around. Examples like “does your real estate agent have your best interests in mind?” are used to illustrate how incentives effect people’s bahaviour in a disjointed set of mini documentaries connected by banter between Dubner & Levitt.

The Extras 36 minute mini-documentary explains what Freakonomics a lot more cohesively then the movie does. I suggest watching it before watching the movie so you understand the context and ideas behind the story.

The Truth About Real Estate Agents

The Incentives Of Daycare

“Freakonomics: The Movie” can be purchased in DVD format from Madman Entertainment (Australia’s leading distributor of special interest TV/movie genres). A review DVD copy was sent to me by Madman because they knew I am interested in behavioural economics.

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People who spend most of their payday money within a few days risk uncertainty and having to borrow money from friends and family if they suddenly need to pay medical fees, need urgent repairs to their car or lose their job and a few weeks later don’t have enough money for the next rent or mortgage payment.

One of the topics I’m keenly interested in is financial literacy and how people behave when dealing with money. Recent research by the Australian Federal Government into changing behaviour (PDF) revealed that:

“Most people heavily discount future costs or benefits compared to immediate costs or benefits. The further into the future the costs and benefits are likely to occur the more they are discounted. This is a key tendency in helping to explain the difficulties people experience in making lifestyle changes where benefits are longer-term”.

This applies to making the decision to start saving some money in a separate account for emergencies as much as it does to other big decisions like whether to quit smoking or binge drinking.

photo credit: Images_of_Money

“Temporal discounting is our tendency to want things now rather than later. In order to encourage us to save money, banks have to offer us a reward in the form of an interest rate. In order to delay gratification, we have to be convinced that the reward in the future is going to be sufficiently large to compensate us for going without right now.” – I Want it Now!Temporal Discounting in the Primate Brain

Setting Up an Emergency “Rainy Day” Fund

A good place to start would be to setup an emergency fund of at least $1000.

Call it a slush fund, self insurance or a rainy day fund, having one can mean the difference between the comfort of knowing you can pay an unexpected cost or the constant nagging fear that you’re one bill shock away from disaster.

photo “Rainy Day makes me Blue” credit: Neerav Bhatt

Mortgage Offset Account For Emergencies?

The chair of the Federal Government’s Financial Literacy Board Paul Clitheroe is a frequent guest on the ABC Local Radio Nightlife program and he often discusses how a home loan mortgage is a great form of forced savings, which compels people otherwise reluctant to save money, to do so by having to make regular mortgage repayments.

I agree but suggest that an emergency fund should be separate from your mortgage because otherwise instead of paying the mortgage debt off steadily over time you’ll be lured into using previous mortgage repayments as a piggybank to draw from for unexpected expenses.

Encouraging Your Kids To Setup An Emergency Fund

If you’re a parent you my have the nagging suspicion that your grown up 20-something year old kids (also known as “kidults”) think of you as their emergency fund in case dire financial circumstances befall them.

The concept which explains this behaviour is called moral hazard which means that “people with insurance may take greater risks than they would do without it because they know they are protected, so the insurer may get more claims than it bargained for”.

If your kids know that you’ll bail them out if they rack up a $1000 mobile phone bill, how do you think they’ll act when making mobile phone calls?

Evidently it’s in both their and your best interests to encourage them to setup a rainy day fund, so they build up a savings habit and don’t hit you up for “bailout money” at regular intervals.

Kickstart An Emergency Fund

One of the best ways to save money from your pay is to whisk it away from your transaction account before you get the chance to spend it.

Choose a small amount you won’t miss like $50/week and setup an automatic savings plan so the money gets withdrawn from your transaction account on pay day into a high interest savings account. After a year that adds up to $2600 plus interest.

Do you “live for today” or “save for tomorrow”? What do you think about the idea of having an emergency fund?

Visit the Rambling Thoughts Blog regularly to read articles about Technology, Personal Finance, TV Shows, Politics, Environment, Books and more

Republishing in full not allowed without permission.. Source: bhatt.id.au/blog/

The Sony Pictures documentary Inside Job says the 2008 meltdown of world financial markets was avoidable. The global financial crisis of 2008 was an “Inside Job” that led to a global economic recession, millions of people losing their jobs, savings and homes and huge increases in government debt in order to pay for corporate bailouts.

The main perpetrators in the property, banking, financial industries not only got off without being charged but many got bailed out of losses with taxpayers money.

Now towards the end of 2011 the world stands on the brink of GFC2 as European nations struggle to cope with their debt burdens and the USA has what is known as a “U6″ under/unemployment rate of 16.5%.

Over 104 minutes Matt Damon narrates the sorry story, tracing the causes to:

Aggressive Financial Deregulation – It’s worth reading an essay by former Australian Prime Minister Kevin Rudd which argues that the “crisis is the culmination of a 30-year domination of economic policy by a free-market ideology that has been variously called neo-liberalism, economic liberalism, economic fundamentalism, Thatcherism or the Washington Consensus. The central thrust of this ideology has been that government activity should be constrained, and ultimately replaced, by market forces”

Excessive salaries, cash bonuses and stock options given to financial services industry staff and CEO’s – Failed CEO’s are often given millions in bonuses and compensation rather than being sacked. The New York Times has a good infographic about executives of seven major American financial firms that have either collapsed, were sold at low prices or have received taxpayer-funded bailouts.

Banks advising customers 1 way and then betting against them – This New York Times article: Banks Bundled Bad Debt, Bet Against It and Won explains the issue well: “The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

Greedy Credit Rating Agencies – AFP reported that “the powerful “big three” raters – Moody’s, Standard & Poor’s and Fitch – have been accused of blithely awarding mortgage-backed securities their lucrative “AAA” investment ratings simply to net more business.”

Prominent Economists Had Huge Conflicts of Interest – they were key players in financial services deregulation but also earnt a substantial portion of their personal income from directorships, advisory posts and consultancy work for banks, insurers etc. Read the comments at this Financial Times article to see what I mean.

Loans Were Given To People Who Couldn’t Pay Them – NINJA loans are one example (No Income No Job or Asset). NPR produced a special show called Giant Pool of Money that explained what the American housing crisis has to do with the turmoil on Wall Street and why banks made half-million dollar loans to people without jobs or income.

Finance Industry “Owns” Government – There is an old saying that “He who pays the piper calls the tune”. In the USA the financial industry is one of the key financiers of political campaigns and “owns” politicians on both sides, Democrats and Republicans.

In Australia it is commonplace for former politicians to work for the financial industry as staff or consultants such as the ex-NSW premier Bob Carr.

The following excerpt from a Sydney Morning Herald report “Macquarie: government by private enterprise” gives several more examples:

“‘Ten years ago Macquarie dealt with the pollies through David Clarke and his connections,’ says one executive director. “When they got serious about lobbying, they hired [former federal minister] Warwick Smith to try and understand how the government thought.”

Since then Macquarie has made an art of poaching politicians – former Victorian treasurer Alan Stockdale, to the colourful ex-member for Parramatta, Ross Cameron, to the controversial appointment of former premier Bob Carr earlier this year.

The string of political appointments has sparked a local debate on the appropriateness of politicians leaving office only to walk into the arms of the country’s most successful bank.”

The current level of belief that politicians and governments work in the public interest is abysmally low as more and people have realised that politicians are beholden to the corporations like banks and mining companies that help finance the cost of their election campaigns.

Along with other factors this has led to the We Are the 99% website and Occupy Wall Street movements. We will see in time whether the protests fizzle out or have an actual impact on elections, politicians and corporate decision making. Getting fair media coverage will be tough

Other Peoples Reviews

“an angry, well-argued documentary about how the American financial industry set out deliberately to defraud the ordinary American investor.”
- Roger Ebert, Chicago Sun Times

“Ferguson’s really well made documentary makes at least some of the puzzle clearer. There are graphs and charts and graphics and numbers galore, but the bottom line is that the poor old punter has been taken for a ride by greedy corporate business tycoons who have been hand in glove with government departments. It’s a horror movie, in a way, one designed to make you angry and want to do something about it.”
- David Stratton, ABC At The Movies

“Inside Job is a powerful experience and functions as one of the better guides for understanding The Global Financial Crisis in the documentary format.”
- Andrew Moraitis, Filmink Magazine

“You don’t have to be a financial whiz kid to find this superbly made documentary fascinating. As gripping as any thriller, Inside Job tells us everything we wanted to know about the global financial crisis but didn’t know the right questions to ask. Informative, intriguing, funny in an ironic way with blatantly terrifying implications, filmmaker Charles Ferguson has constructed a five-part film which describes, explains and analyses what, why and how it happened. We can digest as little or as much as we want; to absorb it all, more than one viewing is required.”
- Louise Keller, Urban Cinefile

Visit the Rambling Thoughts Blog regularly to read articles about Technology, Personal Finance, TV Shows, Politics, Environment, Books and more