Banking Cartel Says Jump. Will RBA say How High?

The banking cartel is on the move…

Last week, Westpac [ASX:WBC] raised interest rates on some of its variable mortgage products by 20 basis points. The Commonwealth Bank [ASX:CBA] just joined it, announcing a 15 basis point increase to its variable rate yesterday afternoon.

Surely it’s only a matter of time before the other two cartel members join in.

What’s funny about the whole thing is the amount of angst it’s causing for borrowers. We’re talking about a marginal increase in interest rates, from the lowest level in Australia’s history. It’s hardly anything to panic about.

Perversely, there are now increasing calls for the RBA to cut rates!

Let’s try and understand the logic here…

The RBA cuts rates aggressively to offset the mining investment and terms of trade bust. As a result they set off a two-city land boom of epic proportions. This causes banks to lower lending standards and channel their capital into land and house prices instead of genuine productive investment. The banking regulator, APRA, wakes up after years of slumber and says banks should lend more responsibly and hold more capital to strengthen their balance sheets. Banks raise rates marginally to protect profits and strengthen their balance sheets…

And then what happens? The cartel’s working ants, bank economists and the like, call for more interest rates cuts!

The stupidity (or complicity) is on such a grand scale it’s breathtaking.

A marginal interest rate rise on residential mortgages is exactly what Australia needs. The Sydney/Melbourne housing boom needs to stop before it blows itself up and creates untold damage to the economy. It might already be too late, time will tell. But to say a tiny increase in mortgage rates justifies an official interest rate cut to keep the party going is the same thing as saying that Australian savers (and Aussies in general via a lower exchange rate) should subsidise bank profits and carry the risk of a housing led economic bust.

Housing speculation doesn’t create wealth for the country on an aggregate level. It simply shifts wealth from one generation or social group to another. This obsession with housing is killing this country, but we can’t see it.

Who knows what the RBA will come up with on Melbourne Cup day? Perhaps they will bend to the will of the banking cartel. But if they have an ounce of independence or integrity they will keep rates on hold.

As I’ve said for some time, low interest rates are not the solution…they are part of the problem.

Not if you’re a central banker though. Overnight, European Central Bank Chief Mario Draghi threatened to do more on the interest rate front. This included cutting the deposit rate even further below zero than it already is.

This is just more highly paid and revered stupidity. I hope I’m around in 50 years to see what history makes of this moronic and slavish infatuation with central bank monetary theory.

After all that, I’ve worked myself up into a bad mood. I’m going to head out for a morning coffee to calm down. If you’re a little hot under the collar too, read on below for a calming influence. The very sensible and reasoned Jim Rickards answers some reader questions about precious metals, US energy technology, and the looming corporate debt problem.



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Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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