Banks are in the business of making money, and if they don’t, we should be worried. Photo: Paul Rovere Banks are in the business of making money, and if they don’t, we should be worried. Photo: Paul Rovere
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Banks are in the business of making money, and if they don’t, we should be worried. Photo: Paul Rovere

Banks are in the business of making money, and if they don’t, we should be worried. Photo: Paul Rovere

COMMENT

We want cheap houses, cheap credit, a strong economy – oh and bank profits make us feel a bit sick.

If the above sentence seems like a reasonable proposition, I’ve got news,   It’s not. You’re being manipulated.

It’s not really your fault. It takes an economist to understand these things sometimes, and we can’t all be economists. Most of us wouldn’t want to be anyway.

But the situation isn’t helped when, for the sake of populism, consumers are simply told they are being rooted rather than trusted with the complex truth.

ANZ has just announced a record $7.2 billion profit. The announcement follows NAB’s $6.7 billion announced Wednesday, also a record and a 20 per cent increase on last year.

Investors like it when banks book record profits, but it’s not a great political look when they are, at the same time, being caned for making mortgages more expensive.

Following NAB’s announcement, consumer advocate CHOICE raged  on this point. The group rightly pointed to competition as the means to lower prices, but missed the mark by saying NAB was “increasing profits and consumer costs at the same time”.

Maybe. Probably. We don’t know yet. What we do know for sure is that not a penny of the money made from increasing rates last week found its way into a profit figure calculated from books that were closed on September 30.

We’ll have to wait six months, when the bank gives its next results presentation, to see how it has fared in the context of this increase. That goes for ANZ as well.

At any rate, the 20 per cent figure is a little misleading.

The number that’s a lot more relevant to the things people get angry about is a lot smaller: 1.85 per cent.

That was the bank’s net interest margin – the difference between what it costs to make a loan and what they get to charge for things like mortgages. As Malcolm Maiden has explained, the slice has become a lot thinner over the past 10 years.

But here’s a truth: banks make money. That’s what they do. Often they make a lot of money. When they don’t, it’s generally a bad thing because it means there is probably not much going on in the economy.

Last week’s rate rises were also met by the predictable “warnings” from treasurer Scott Morrison, who said he wouldn’t give the banks “a leave pass”.

“The government didn’t make you do it,” Mr Morrison said. He followed this with the admission that it was a “good thing” to have strong banks and “they are in a position to actually pass these costs on”.

You can’t have it both ways. If you know a particular action is going to have a particular effect, and you do it anyway, you’ve got to wear a bit of the responsibility.

The banks say the increases were the result of a letter sent to the banks last December by the n Prudential Regulatory Authority, in which the regulator limited the amount of money on the banks’ books that they could lend to property investors.

If people want something, and you make that thing less available, its price increases. It’s the most basic economics out there.

And it’s not as if the banking sector has become massively more competitive since December, so much so that the banks’ ability to pass costs on to customers has been dramatically lessened.

Mr Morrison knows this. If he didn’t, he’d be in big trouble as Treasurer. There are economic concepts you’d want him to know well that are a lot more complex than these.

Otherwise, how could we trust him to navigate the country through another financial crisis, if there is one?

The last time that happened, it put into stark relief that mortgage rates just aren’t tied to the Reserve Bank the way they used to be.

That means the RBA’s cash rate isn’t such an effective throttle on the economy. The whole argument about “out of cycle” rate movements has been obsolete since at least 2008.

Mr Morrison’s comments are a marginal improvement on the mock outrage then-treasurer Wayne Swan and his predecessor Peter Costello gave voice to when the banks raised rates – or even threatened to do so – during the crisis. They are marginally better because he followed them with: “I think what I have to focus on is what are the things I can change and what are the things I can do something about”.

Good idea. The best change we can hope for is a bit more honesty all around.