Getting passed on

Any Brown Couch readers ever had an interest rate cut 'passed on' to you in the form of lower rent?

No? Didn't think so.

Maybe we need to get the Federal Treasurer to include that message in his pre-RBA Board meeting media messages. For the past week Wayne Swan has been in the media saying that there would be 'absolutely no excuse for the banks not to pass on any rate cut that was delivered by the Reserve Bank'.

OK, so he wants to put what pressure he can on the banks – there's no harm in that, is there? Actually, we think there is, when it distracts the government from our real problem with debt, and particularly housing debt. The really important problem is not interest rates, but the huge size of the debt on which interest is levied.

(Source: RBA Chart Pack – Interest Rates, October 2011)

(Source: RBA Chart Pack – Household Sector, October 2011)

But it is the banks' interest rates that have caught the government's attention, so that its reform agenda is directed to increasing competition amongst lenders – including by encouraging new sources of credit (and there's been about $14 billion worth of tax-payer funded encouragement so far, through purchases by the Australian Office of Financial Management of residential mortgage backed securities).

The risk is that lenders will compete not only through lower interest rates, but also by drumming up more business through reduced lending standards – hence more debt, and more risky debt.

What the banks really need is not the supposed discipline of the market, but the discipline of regulation, that actually gets at the amount of debt that households, and the economy, is carrying. Countercyclical captial adequancy requirements, perhaps? New controls on credit, such as maximum loan-to-valuation ratios? For more, have a look at the Joseph Rowntree Foundation's recent report on 'Tackling Housing Market Volatility' in the UK, around pages 35-40 or so.