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Are consumers being duped by Swan’s $4 billion prop-up of non-bank lenders?

Government rhetoric is that the Treasurer Wayne Swan’s recently announced $4 billion investment in AAA-rated Residential Mortgage-Backed Securities will boost competition in the lending market, which in turn will benefit consumers.

When non-banks first entered the lending space 16 years ago, pioneered by Aussie Home Loans’ CEO John Symond, interest rates started falling.

But Associate Professor at the School of Economics & Finance, University of Western Sydney, Steve Keen doesn’t view this scenario favourably.

He maintains it was this competitive pressure that triggered irresponsible lending practices and in part instigated “this ridiculous level of debt that households have got themselves into over the last 16 years”.

“Lenders wanted to secure market share and one way to do that was to drop their lending standards, which meant everyone had to follow,” Keen told Money Confessions.

He said the argument that interest rates dropped when the non-banks came into the sector doesn’t fly because rates dropped too low.

“The low interest rates reduced the margin between lending rates and deposit rates, which is where banks make their profits. To get around the problem the banks expanded the level of debt more than they expanded deposits,” he said.

Keen contends that the government is throwing money at the wrong end of the problem.

“This ($4 billion) plan of Swan’s will provide more money for borrowers to buy properties and that’s the last thing we need,” Keen said pointing out that the ratio of private debt to GDP is now more than double the level that triggered the Great Depression.

Money Confessions would like to hear your opinion on this. Do you agree with Steve Keen who maintains that if it was up to him he would let the non-banks sink? Or do you think that propping up the non-bank sector and re-introducing competition will benefit consumers?

Tags: Property, interest, mortgage, rates

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Permalink Reply by AlRow on October 8, 2008 at 1:13pm

My major worry is, now that governments world-wide have bailed out the banking industry, they (governments( the taxpayer)) will be expected to do it again and again.
I can imagine our American investment banking friends saying "When you're on a good thing, screw it for all it's worth.

I would be a lot happier to have the entire industry regulated until their eyes water. They have proved that they cannot be trusted to act ethically

Actually the whole share market should be pulled into line. Naked Short Selling is just short (no pun intended) of sharp practice

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Permalink Reply by Jill Fraser-FatCat journalist on October 8, 2008 at 1:19pm

Yes, you wonder where it's going to stop.. I'm still waiting to see the positive flow on from the US$700 billion bail out.

Do you have any thoughts re this proposed plan of Swan's to prop up the non-bank lenders? Do you think that consumers will benefit ? Or like economist, Steve Keen do you advocate just letting them sink?

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Permalink Reply by Jim on October 8, 2008 at 3:23pm

I am still trying to work out how the wisdom of buying millions of dollars of debt from banks and other financial institutions will work without getting rid of the overpaid members of the "old boys club"(which it seems you become a member of and can never be kicked out ) CEOs who have made deciscions that were very risky and self rewarding for themselves under the pretext that they were working in the shareholders interest.No one can "EARN" the money that they accept as "fair reward" for steering the company on to the rocks in a lot of cases.Transfer that down to lesser managers,factory,retail.bank etc and I am willing to bet that the rules of engagement make it clear that sales and nett profit budgets need to be met or no payee.