Economy needs surgery, not band aid.
The Productive Economy Council today reminds the government that 80 percent of mortgage holders are still stuck on inflated interest rates while the cost of money has plummeted. The PEC believes that this additional cash flow benefit could be going into the economy instead of repairing the balance sheets of our bankers. A rough calculation would suggest the benefit to the country is between $30 and $70 million a week* with the only obstacle being the inflated bank break fees.
“No one is suggesting that banks aren’t entitled to make a profit or that banks should not get their original contracted margin between the cost of borrowing and the cost of leading, but current breaks fees look more like gouging,” says PEC spokesman Selwyn Pellett.
Pellett says the PEC encourages the government to have a decent look at this issue.
“If the argument from the banks is that they borrowed at the time to cover their customers’ loans then the margin is established and break fees can be calculated based on actual loss to the bank, which seems fair and reasonable. It is however reprehensible if banks attempt to capitalise on a collapsing economy by using the new low official cash rate figures to trigger inflated break fees and hold customers hostage to the inflated interest rates,” he says.
Critics will suggest that consumers should have left their interest rates floating and therefore are partly to blame but Pellett argues that as interest rates went from 7-8% to 9- 9.5% that the consumers who attempted to maintain a floating rate were the last to fix, and were forced to do so before they lost their ability to retain their homes.
“The PEC is not a consumer advocacy group and this issue is only of interest to us in the wider discussion of how we both protect jobs during the recession and rebuild from a passive, capital-based economy to a productivity based economy.” says Pellett.
In addition to the urgent need to get mortgage holders off their currently high fixed rates the PEC is concerned that we have yet to address the three big cows in the room that have plagued our economy for the last decade and collectively made our economy less competitive and highly vulnerable.
The PEC believes we are a Cash Cow for foreign currency (FX) traders around the world who love nothing more than to see an RBNZ statement that inflation is reaching upper boundaries and a period of sustained inflation is about to take place. Money floods into New Zealand to capitalise on the higher interest rates and the guaranteed appreciation of the NZD that follows. Thus we have our dollar traded at a maximum of 118 times our Gross Domestic Product in 2007 **. By way of comparison the Australian dollar was only traded at 65 times GDP at its peak.
“We then have our Milk Cow, where foreign banks play the same game, effectively farming New Zealand property owners,” says Pellett.
“It’s our fault as our addiction to property speculation must be sustained with increasing amounts of capital from off shore. However, dropping housing deposits from 30%-20% to 10%-0% was highly inflationary and has caused property appreciation as more and more Kiwis participated in what became little more than a pyramid selling scheme.”
“The problem is that unless the economy grows - with real wage increases - underneath this property value appreciation, eventually you get an affordability gap. New home owners can’t enter the market as this gap widens and rents no longer cover mortgages. All this pyramid selling does is increase our indebtedness to foreign banks with zero increase in productive assets, jobs or our ability to compete internationally and it’s just stupid,” says Pellett.
“Even worse, is the fact that the banking system makes hyper profits as the OCR rises to curb inflation”. We get the immediate increase in the exchange rate and exporters go to the wall.
Finally we have the Sacred Cows of no Capital Gains Tax (CGT) on property and our 1999 Monetary Policy, says Pellett.
“As Dr Bollard has said, he can only control the price of money via the OCR not the volume”. Too much money in circulation without a corresponding increase in production is classic inflation.
The PEC’s data suggests that New Zealand’s productive sector is the third most vulnerable in the world to the effects of FX trading ** and yet of the most vulnerable countries identified, no others have a Monetary Policy like New Zealand’s.
“When you take into account the lack of protection in our Monitory policy and the inability of exporters to sell their products back into their own economy if our dollar goes too high, then the productive sector of our economy becomes the most exposed of the 21 we measured.” Says Pellett.
The PEC believes we need open heart surgery on the economy if we are to come out of this recession globally competitive. The alternative is inadequate savings, more rounds of asset-based inflation and higher international debt at the expense of jobs and a sustainable long term economy.
The PEC has draft strategies and solutions to the above and will be releasing them over the coming weeks says Pellett.
Data * Savings from decreased interest rates: [Total value of fixed mortgages * decrease in interest rates]/ average length of mortgages in weeks
[125643mn * 0.03]/ 88= NZ$42.7mn
** Media Pack on Economy Vulnerability