The Power of Banks


Oh goody, an important development occurred this week, and it’s just what Australia needs…

More credit for housing! Not only that, you should be able to get approved for the loan in under 25 minutes. Let’s not muck about with such things!

In case you didn’t catch it, the Australian Financial Review reported yesterday that company Hollard Insurance is ‘eyeing a slice of Australia’s $1.3 trillion mortgage market’. It’s already started selling them to their existing customers with ‘deposits as low as 10 per cent’. The company has a developed a ‘fast-approval product’ for loans valued up to $750,000.

It seems the big four banks have a little work to do to defend their turf from the competition. For example, ME Bank told the market a few weeks ago it has plans to double the value of its home loans even if its margins are low and its return on equity stays way down. Not only that, the outcome from the David Murray Financial System Inquiry is likely to take away the regulatory advantage the big four enjoy.

For the moment, the big four banks don’t have to hold as much capital against their mortgage assets as regional banks. That’s likely to change, which will reduce the big four’s profitability. You know what that means — more property loans required to maintain profitability.

By the look of things, there won’t be a shortage of customers. Investor loans are now running at 50% of the market as Brisbane looks to be the next hotspot.

Of course, from the borrower’s perspective, investing in real estate is a perfectly rational thing to do. You only have to look at some the recent statistics coming out of Britain to see why.

This week the UK Office for National Statistics released its Annual Survey of Hours and Earnings report. It shows that median gross weekly earnings for full time employees are up 0.1% from 2013. That means they went up a dismal £1 — and that’s after rounding the figures up. Adjusted for inflation, UK wage earners have been going backwards since 2008.

There appears to be some minor quibbling with the numbers and inclusions and exclusions, as there always is with reports like these. Regardless, British wages are going nowhere.

Now compare that to the rise in British property values. The Guardian reported the following yesterday:

‘The value of homes rose to £4.7tn last year, more than three times their estimated value of £1.4tn in 1997. The statistics from the Office for National Statistics showed that this boom in property prices pushed household wealth to an average £289,000. The main drag on wealth came from the government’s increasing debt and a drop in households’ accumulated financial assets following a period of falling stock markets.’

You simply have to know this. Over time, the property owners capture the wealth; the wage earners get the crumbs. We spend a lot of time at Cycles, Trends and Forecasts showing subscribers why this is — and the way to beat such a system.

Let’s not forget the poor British taxpayer had to bailout the UK banking system to the tune of billions. Now those banks are back raking in the profits off those high property values via the mortgages.

It’s the same old story: socialise the losses and privatise the gains. It’s offensive at the best of times, but considering the larger UK banks are guilty of a litany of rate-rigging, manipulation, falsified applications and fraud, you can’t help but wonder how the bankers keep their entire con job going.

The system we have forces us to rely on bank credit to supply the economy with money. This is why banks hold so much power. And credit creation is a very profitable business. They’ll do everything to defend it.

The Wall Street Journal ran a most interesting story this week on the Bank of North Dakota. It’s the only bank in America that’s state-owned. Here’s what reporter Chester Dawson had to say about it: ‘It’s more profitable than Goldman Sachs Group Inc, has a better credit rating than J.P. Morgan Chase & Co. and hasn’t seen profit growth drop since 2003.’

The bank is able to extend credit to build infrastructure (roads, hospitals, housing) and finance new businesses. It then remits the profits back to the state government.

The Bank of North Dakota is at least a contrast to the tales of Wall Street and City of London criminality and their lapdog politicians, not to mention the bonuses that come from rank gambling in derivatives, commodity and foreign exchange markets backstopped by the taxpayer anyway.

As a libertarian, I’m always suspicious of anything in government hands. But you only need to take a moment to realise there isn’t even a semblance of a free market in credit, in currencies or in banking anyway. It’s more like a creepy fascism between high finance and the State. An alliance of the elites!

The very pinnacle of the system is the petrodollar standard, where oil must be traded in US dollars. But China’s recent moves to internationalise its currency, the yuan, risks marginalising the US dollar out of world trade. Russia is the most vocal supporter of a shift from the petrodollar.

This is not something the US will stand by and let this happen. Libya and Iraq were the last two countries to bring this system into question. Countries as big as China and Russia, however, up the stakes of the game. 2015 will be most interesting.


Callum Newman+
for The Daily Reckoning Australia

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Callum Newman

Callum Newman

Callum Newman is the editor of The Daily Reckoning and Associate Editor of Cycles, Trends and Forecasts. He also hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to The Daily Reckoning here.

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