In Australia, banks are very unpopular. They are seen by the public as greedy blood-suckers who are out there to rip the people off with fees and oppress them with debt repayments. Thus, when the Big 4 oligopolistic banks raised mortgage rates by up to twice the increase in rates by the Reserve Bank, there was an outcry by the heavily indebted majority.

As a result, politicians have to be seen to be doing ‘something’ to rein in the ‘greedy’ bankers. They have to engage in populism by coming up with policies to improve ‘competition’ in the banking sector in order to put downward ‘pressure’ on interest rates. But as we wrote two years ago in Support mortgage lenders to keep borrowers in indentured servitude?,

These economists do not understand the concept of competition. In the real economy, competition means utilising scarce resources in a more efficient way to produce more, create new products or make better products. But for the mortgage industry where the product is credit, how can the idea of ?competition? be applied when the product (money and credit) can be created limitlessly out of thin air by the government (central bank) and financial system?

If higher interest rates are that evil, why bother with difficult policies to put downward ‘pressure’ on interest rates? Why not legislate interest rates to zero? As we wrote in Why does the central bank (RBA) need to punish the Australian economy with rising interest rates?,

Think about this: if raising interest rates is ?bad? and cutting interest rates is ?good,? then why don?t the RBA set interest rates to zero, thereby putting the economy into a path of eternal boom (plus runaway inflation)? For those who think this is a good idea, then this article will set to let you understand why this is a bad idea.

Politicians are toying with the idea of introducing a fifth pillar to the banking system (in addition to the current Big 4) to increase ‘competition.’ But the fact that they are thinking about this shows that they are either dumb or extremely short-sighted. For example, as this article reported,

CREATING a ”fifth pillar” of banking through building societies and credit unions would require small players to almost triple their lending levels within four years, analysts say, raising questions over its impact on financial stability.

…

Australia’s housing debt is already equal to 82 per cent of gross domestic product, one of the highest proportions in the world. He said competition and financial stability had an ”inverse relationship,” a point demonstrated in recent years.

”There was no shortage of mortgage competition in the US and [Britain] between 2000 and 2007,” Mr Mott wrote.

Oh dear! Do we need to teach our politicians how to spell “SUB-PRIME?”

Furthermore, our Reserve Bank (RBA) had already explicitly said that they take into consideration the banks’ interest rates when they set their monetary policy. So, it follows that any downward pressure on mortgage rates will mean that the RBA has to increase interest rates even more.

If the idea of fifth pillar is not harmful enough, both side of politics are considering an even more insidious idea in to put downward ‘pressure’ on mortgage rates- they are considering allowing banks to issue covered bonds to make credit cheaper and more available.

Just what are covered bonds? Take a read at this news article,

Historically, regulators have banned banks from issuing [covered bonds] as they are at odds with legal requirements that depositors rank first in claiming bank assets if a bank fails – a cornerstone of the Australian banking system.

In other words, covered bond investors have a higher claim to the bank’s asset than depositors! Someone wrote of this idea as

The reason covered bonds are cheaper to issue is because they are stealing from the security enjoyed by depositors under existing banking laws. No complicated financial structuring… just straight-up queue jumping.

If the ban on covered bonds are lifted in Australia, how secure will depositors be when the government guarantee on deposits expires next year?

Now, with dumb politicians coming up with dumber and dumber populist policies, Australian investors should now be planning exit strategies for their risky cash at bank!