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Exposed: Banks’ secret against rate cuts

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The banks don’t want you to enjoy lower rates.

One of the things about being trained in the dark-arts of marketing like I am, is that you recognise a publicity campaign when you see one.

They happen all the time. Most of them just slip under the radar. They subtly slip into the collective consciousness, and just become fact.

“Women need to eat more meat, because iron,” for example. 

Anyway, one of these clandestine campaigns came up on my radar the other day. While most people were celebrating last week’s rate cut, The Australian Financial Review was not loving it.

In fact, it started running a bunch of articles about how we didn’t really need rate cuts, and in fact, rate cuts weren’t good for us anyway.

Like this little nugget from Morgan Stanley’s James Gorman:

Morgan Stanley chief executive James Gorman has warned central banks that further cuts to official interest rates risk reducing their “firepower” to deal with an unforseen geopolitical crisis.

After Reserve Bank of Australia governor Philip Lowe suggested the official cash rate could fall to 1 per cent and US Federal Reserve chairman Jay Powell indicated US rates could move lower amid fears escalating trade tensions will hit the US economy, Mr Gorman described monetary policy as unpredictable and limited in its impact.

Won’t somebody think of the unforseen factors?

Or there was former RBA Deputy Governor Stephen Grenville:

Former Reserve Bank of Australia deputy governor Stephen Grenville has challenged the effectiveness of the RBA’s inflation target and interest rate cut, as he warned that cheap borrowing costs distort housing and stockmarkets.

Following the historic reduction in the RBA’s cash rate to a record-low 1.25 per cent on Tuesday, Dr Grenville writes in The Australian Financial Review today that negative real (inflation adjusted) interest rates “don’t make much sense” and fiscal policy should play a larger role to stimulate the economy.

Yeah, kinda. Fiscal policy (government spending) could definitely be doing a bit more heavy lifting, but that’s hardly news.

And there was a raft of others, none of them any more insightful or persuasive than these.

And so when you see a string of weak arguments for something, all supposedly unrelated, but adding together to give the impression of a broad consensus, then you know you’re in a clandestine publicity campaign.

But I’m like, why? Who doesn’t love rate cuts?

So I did a bit of digging. And you know who doesn’t love rate cuts?

The Banks.

Turns out that when interest rates get super-low, the banks have much less flexibility to manage their money, and that starts cutting into their profit margins.

That’s what the analysts at Goldman Sachs reckon:

…if the cash rate was to fall below 1.50%, every additional rate cut thereafter would shave about 5 bp off sector margins. The sensitivity of margins to falling rates accelerates once the cash rate falls below 1.50% because the various levers the banks have at their disposal become less flexible as the cash rate approaches zero and we would particularly highlight the following:

So banks don’t like rate cuts because the lower rates go, the more it binds their hands, and the less profit they can make.

And so what do you do? You use your mouth piece (The Australian Financial Review) to start campaigning against rate cuts…

… no matter what the country needs, no matter what the economy needs, and no matter what the property market or individual borrowers need.

Nope. It’s bank profits and everyone else be damned.

That Royal Commission sure was money well spent, wasn’t it?

JG

No BS Friday: I Give Up (Seriously)

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Give up trying to ‘make it’.

You are never going to make it.

But this is the secret that no one tells you.

There is no “make it”.

There is no point where you’re done, where you’re putting your feet up with a whiskey in your hand and thinking, yep, I’m a success.

Because if you’re defining success on your achievements – on your business successes, on your fancy cars, on you funds under management – you’re chaining yourself to the wheel.

There is nothing you can do that will ever be good enough. Think about Alexander the Great.

He’d conquered half of Asia Minor and it still wasn’t good enough.

Even the most mighty king is never free.

But freedom can be yours.

Don’t look to what you do in the world, but look to what you do in yourself.

Do you give everything every thing that you’ve got?

Do you rise to meet your fears and hit things with relentless courage?

Do you strive to see yourself clearly and honestly in the mirror, striving to be the best version of yourself that you can be?

This is the only definition of success that matters.

And so this is the secret I will share with you. When you set your soul on this course, then you can “make it.” You can be a success.

You can sit back, take a long look at yourself in the mirror and think,

“Yes, I am the person I want to be.”

Then you will have made it.

And peace and freedom will be yours.

Take the pressure off now… give up!

Surrender to the person that you truely want to be…

The real YOU!

No B.S. FRIDAY: Don’t leave a beautiful corpse…

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Are you tip-toeing at the moment ?

If so, I have some advice for you.

You are not here to leave beautiful corpses.

I broke my arm once when I was a boy.

My uncle said that the only people who’ve never broken a bone, are cowards (He was tough old Greek).

If you’re too scared to climb trees, jump off sheds, pull tricks with your bike or get into a bit of biffo, you might be lucky. You might get through childhood without breaking anything.

But do you want to spend the best years of your life wrapped up in cotton wool?

I don’t know if I’d recommend everyone taking life advice from that particular uncle, but on this occasion, his words stuck with me.

Life is risky. That’s kind of what makes it exciting.

And you can maybe get away without taking any knocks – maybe you can leave a lovely corpse in your coffin that doesn’t have any scars – but the only way to do that is to live a small life.

It’s to live your life wrapped up in cotton wool, not taking any gambles, any chances. Not risking anything.

But that is smaller than your life would naturally be, and it’s smaller than the life you should be living.

We’re not here to create beautiful corpses.

We’re here to live bold and beautiful lives – to create epic stories and take ourselves on wonderful adventures. Start businesses, fall in love, grow empires, eat risky foods from street-side vendors in Asia.

And we’re here to break bones, break hearts, go bankrupt three times and then leave an ugly corpse with the life completely squeezed out of it.

Agreed ?

This is what you are here to do.

So go out and break something.

You’ll thank me for it.

Go for it.

NO BS Friday: Fear your way to freedom

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The great American President, Franklin D Roosevelt said “The only thing to fear is fear itself.”

The great American President, Franklin D Roosevelt said “The only thing to fear is fear itself.”

Obviously he’d never been to Australia otherwise he wouldn't have said that…

“The only thing to fear is fear itself and bloody great red-back spiders hiding under the toilet seat”… but the point still holds.

Fear guides us way more than it should.

It holds us in patterns, in dull and comfortable careers, in uninspiring relationships, in bland and boring pursuits, way more than it should.

At least the fear of a redback spider will get you off your arse and running for the nearest tree.

This other, nameless fear – a fear that has no specific name or target – just locks us up. It stops us from moving.

And so we stay stuck in boring lives, long after we’ve outgrown them.

The antivenom is confidence.

You need to learn how to back yourself.

I’m lucky. I’ve always been too stupid to doubt myself.

And so whenever I was challenged to try something new – to turn my back on the comfortable life I’d made for myself – take a gamble on a totally new career direction, I did it.

In my mind, even if things went wrong, even if it was a disaster, I would manage. I’d fall back on my wit or charm and somehow, I’d get by. I’d be alright.

And it was this confidence that allowed me to conquer that nameless fear, and keep myself moving.

But I don’t know anything you don’t.

I’m sure you have the same resources that I do.

I’m sure you have the same charisma, wit, cunning good-looks – whatever it is you need to get you through.

Maybe you’ve just never been tested..

But back yourself. You are capable of more than you can dream of.

And the only thing holding you back

Is fear.

Use it to move you forward…rather than hold you back.

Fear is good, if you know how to manipulate it.

Fear you way to success and wealth is what I want for you.

– JG

Economy is crapped-out, but that’s not the real story

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Yesterday’s data showed that the economy wasn’t doing great… but there’s a bigger picture here.

Yesterday, the economy turned a momentous corner.

And not momentous in a good way.

The headline from the Sydney Morning Herald says it all:

AUSTRALIA FALLS INTO PER-CAPITA RECESSION

A “per capita recession”? What even is that? We’ve never heard that before.

Basically it’s economic growth once you strip out the impact of population growth. So if it wasn’t for population growth, and immigration in particular, our economy would be going backwards.

We’ve never bothered to do that before. But now all the papers are doing it. This is a new world.

Australia's economy has slumped into a per-capita recession for the first time since 2006, leaving the country relying on population growth to propel its economy and creating a political hurdle for the Coalition.

The Morrison government has pledged to reduce the migration rate but figures released on Wednesday show that without migrants fuelling consumption, Australia's economic growth would be going backwards.

The Australian Bureau of Statistics data shows the economy grew by 2.3 per cent over the year and 0.2 per cent in the December quarter – below market expectations and well short of Reserve Bank forecasts of 0.6 per cent.

The budget forecast of 3 per cent growth for 2018-19 and the mid-year economic update's revision to 2.75 per cent will struggle to be met, putting a strain on preparations less than a month out from Treasurer Josh Frydenberg's first budget.

The fact that a major paper is leading its reporting of the GDP figures with a comment on immigration shows just what a hot-button topic it is.

And people might be right to wonder why we’re still importing record levels if immigrants when our economy is actually going backwards. People might start to wonder at the sense of that.

Spineless politicians on both sides might look to duck that whole issue and focus on the headline numbers, but there’s not much joy there either.

The headline number was positive, but much weaker than people were expecting, and much weaker than the RBA had been forecasting.

That makes the prospect of rate cuts more likely.

When you break it down by components, you see that growth has been driven by public spending, which was the best performing component.

But that’s not great. It’s saying that if the government wasn’t spending away, the economy would probably be going backwards. You can’t have a government-dependent economy… not for long anyway.

That sounds ok, but when you remember that inflation was 1.8%, it means that in real terms, wages fell by 0.3%.

The figures also showed that average compensation per employee (a fancy term for wages) rose just 1.5% in 2018.

Put all that together, and you don’t have a pretty picture.

Wages are going backwards, on a per-person basis we’re already in recession, and if it wasn’t for immigration and government spending, our economy would be stuffed.

This is not the pre-election snap-shot Scott Morrison was hoping for, I can tell you that.

Hayne: what it means for property… and capitalism!

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Hayne says the problem is capitalism. The solution? Let’s all move to fairy-land.

Ok, so I’ve been digesting the Hayne Royal Commission report over-night, trying to make sense of it all.

But there’s something weird at the heart of it all.

I’ll get to that, but first, what are the implications for the property market and property investors? Here they are in a nut shell:

1. No big changes to the industry

This is being billed as a reset of the financial industry, but I don’t see any major changes here. The banks aren’t having to break up their vertically and horizontally integrated business models (e.g, where a bank owns a funds manager that recommends the banks products to its customers), and apart from doing more to comply with the law, the banks aren’t being asked to change their business models in any real way.

2. No changes to the law

Hayne went to lengths to point out that he didn’t see any need to change the existing laws, only to make sure that the laws were being properly and prosecuted.

3. Regulators need to pull up their socks

On that front, the regulators need to do more, and he wants to see them being less shy about prosecuting banks under the law. Remember how ASIC dealt with the Comminsure scandal by asking for a $300,000 community contribution rather than issuing an $8 million fine? Hayne probably has a point.

4. No changes to the credit environment

As Hayne uncovered more and more dirt on the industry, the banks started tightening up their credit standards. The fear I had was that Hayne would push this further and harder, and credit would slow even more. This hasn’t happened. There’s no recommendations here that are going to crimp credit.

That said, there’s nothing here that relaxes credit either. The banks have already started moving away from income and expenditure benchmarks in favour of looking at customers actual income and expenses, and Hayne wants this to continue.

For property prices, I reckon Hayne is neutral, and given the banks’ history of successfully watering down reforms, possibly price-positive in the long run.

5. Mortgage Brokers hung out to dry

Hayne recommends banning trailing commission on mortgage broking, and moving the mortgage broking industry to a fixed fee system. Many mortgage brokers reckon this will kill the industry, and they’re probably right. I think your owner-occupiers and mum and dad investors will probably just go back to walking into whichever bank has the cuddliest mascot, rather than paying a couple of grand upfront. Banks will go harder on these customers and they’ll pay more in the long run (while the customers will pat themselves on the back in the short run – look how much I saved, Honey!)

I can see there is a mis-alignment of incentives with trialling commissions paid by the banks, but killing the industry without putting in place something to help your average punter navigate the complex world of mortgage finance is a recipe for ripping people off.

6. Capitalism is a flawed system

This is where we get to the bit where it’s just a bit weird for me.

Hayne reckons there’s a problem with the banks’ “culture”. Not “culture” in the sense of their rock art and quixotic dance rituals, but culture in the sense that many people in the industry seem to be motivated by money.

“Why did it happen..? Too often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained?

“…Banks searched for their ‘share of the customer’s wallet’. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales.”

Staff were rewarded by reference to profit and sales… what a highly unusual business model that is. What are freakishly strange culture to have.

I mean, you wouldn’t see that in my business. My staff are motivated by my witty company-wide emails and by premium biscuits in the break-room. Money never comes in to it.

But seriously, what are we even talking about here? Yes, capitalism has its flaws. When people are motivated by money, sometimes people with low ethical standards do things that people with higher standards wouldn’t do. There’s nothing new there.

But are we really suggesting we should remove the profit-motive from banking? And if so, why stop at banking. Let’s just make profit illegal altogether. Let’s move to an economy-wide biscuit-based incentive structure.

Let’s all move to fairy land.

But no, I actually think this talk of culture is a squib. It allows us to feel morally righteous, while doing nothing to address the fundamental issue – the disproportionate power that has been allowed to accumulate in the finance sector, and the captured, wet-lettuce approach to regulation.

But no, we’re not tackling that. We’re talking about some fantasy culture, where no one cares about money.

Off the planet.

Running on a hamster wheel? There’s a reason for that…

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I’ve found a bug in the economic system that explains why most of us have such a crappy experience of it.

One of the great challenges western economies face is the concentration of market power.

Australia actually has one of the worst track records on this front. Try to think of an industry that isn’t controlled by a small group of companies – many are controlled by just two: Coles and Woolies, Bunnings and Mitre 10, Virgin and Jetstar/Qantas, Optus and Telstra, MacDonald’s and Hungry Jacks, the big banks, the energy sector… it goes on.

Now, economic theory tells us that this is bad. The concentration of market power leads to consumers being gouged and rent-seeking behaviour.

(I think I just described the Australian economic model right there.)

So we have “competition policy” and the ACCC – to make sure that our markets stay competitive.

But there’s a bit of a bug in this theory.

The idea that competition is good seems to come out of Darwin’s theory of evolution. Species in competition with each other push each other to be bigger, better, faster or simply just smarter.

(I didn’t get this brain by accident).

The fastest animal on earth is the cheetah. The second fastest animal on earth is cheetah food – gazelles.

The competition between cheetahs and gazelles creates faster and faster animals.

And so this theory of competition has given us the two party political system, and a judicial system based on competition between prosecutor and defence, for example.

And it has given us the modern economic orthodoxy that says so long as there is genuine competition, even if it’s only between two companies, then the economy and the consumer is better off.

So where’s the bug?

The bug is with where we place the perspective. Competition between cheetahs and gazelles creates faster species, and that’s kind of cool, but what about for the individual animals? For them it kind of sucks. They’re in a system where they’ve got to constantly work harder and harder just to survive.

The species evolve, but only by keeping individual members of those species under pressure.

Or what about companies? Say a company develops some new tech and increases it’s market dominance. That’s good for the company and good for its shareholders. But it’s not good for the economy, and the ideal economy would see that market dominance quickly eroded, and shareholder returns fall.

Same story with the labour market. A competitive labour market is good for employers and the economy, but it’s hard work for the individuals inside it. Any surplus they capture – any wage premiums they’re able to secure to make their life a little easier – again, ideally these advantages are quickly taken away.

In competitive economies, individuals are locked in constant, grinding competition.

This is the restlessness that lies at the heart of the modern economy.

Either you go towards the concentration of market power, and accept the evils that come with that, or you keep everyone in the economy toiling away on their hamster wheels, in endless competition with each other.

And they’re the only two possible outcomes.

Do you see how both outcomes kind of just suck for the individuals?

And so we’ve created a system that is good for our abstract ‘economy’ but sucks for the individuals who have to exist within it.

Does that sound like a good design to you?

We need a new system (he says, stating the obvious). I don’t know what that system looks like, but until then, we need to be developing strategies that bust us right out of the system and the tyranny of competition. You need something that puts you in a different game altogether.

For me it was property and a knowledge company. But whatever it is for you, you’ve got to find it.

You can’t run a hamster wheel forever.

How to make and how to lose $100K in 13 months

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Flipping always looks like a great strategy in the good times. But are some investors about to come unstuck?  

 Sometimes you strike it lucky in property.  

Like this story of a guy on the Gold Coast who flipped a parcel of land for a $130K uplift.  

(The story appears in the UK’s Daily Mail, because there’s a picture of him with his girlfriend in a G-string. Pure class).  

A 23-year-old man has made more than $101,000 profit after buying a plot of land and mowing it twice. 

Anthony Dart, 23, bought the property on the Gold Coast for $310,000 and 13 months later he sold it for a staggering $439,000. Mr Dart told Daily Mail Australia he made a solid profit of $101,000 after expenses. 

The young entrepreneur was shocked by how much the property appreciated in value in just over a year. 

Hats off to him. From what I know of the Gold Coast market, at that price I expect he bought under market value, and that’s what made those kinds of gains possible.  

And with property prices on a tear-away in recent years, a lot of people would have similar stories.  

Trouble is though, people seem to think that these kinds of stories are the norm.  

Amazing deals like this happen when you do your research and buy under-market, or when you do your research and buy in an area primed for growth.  

That is, when you do your research.  

If you’re not doing your research, then you’re only going to get these kinds of results if you get lucky. And if you’re relying on luck, then you’re just gambling.  

And all gamblers lose at some point.  

Western Menbourne might now be about to become a case in point.  

There’s been a bit of a frenzy going on out there in recent times around house and land packages.  

It’s pulled in a lot of speculative activity, with buyers looking to flip their purchases before settlement.  

As prices stall though, there’s an air of panic brewing:  

Speculators who hoped to get rich on a boom in Melbourne land prices are “panicking” as settlements loom and they can’t find developers to on-sell their sites to, according to Resi Ventures’s Khurram Saaed, who has been developing for 15 years. 

Mr Saaed said he was getting one call a week from panicked speculators, including one buyer who had put down $21 million in deposits on a number of sites and risked losing all their money. 

“These are people who have been successful in other business, and who have just bought land with no due diligence in the hope of making a lot of money in three to four years’ time by flipping the site prior to settlement,” he told The Australian Financial Review. 

And there’s been a strong rise in people taking to gumtree to offload their properties, as real estate in general takes longer to sell:  

A rising number of land owners in Victoria are selling off-the-plan housing lots on classified advertisement and community website Gumtree ahead of their expected settlements next year. 

In the first three weeks of October, nearly 50 advertisements have been uploaded – more than twice the number in September – offering sales of lots in communities like Dahua Group’s Orchard project in Tarneit, Satterley Property Group’s Botanical in Mickleham, MAB’s Merrifield in Mickleham and Stockland’s Edgebrook Community in Clyde and Cloverton in Kalkallo. 

Other land sites for sale are in places such as Greenvale, Melton, Lyndhurst and new suburb Weir Views, all of which are about 20 to 35 kilometres from the Melbourne CBD. 

I’d be keeping a wary eye on this space.  

I don’t think the growth corridors of Western Melbourne were bad places to invest, if you were genuinely investing. I think they’ll be decent going forward.  

And I wouldn’t say no to buying there now… but I would be driving a very hard bargain with eyes wide open.  

But if the flipping spree was as widespread as they say it was (possibly isn’t, who knows), then some extra diligence really is in order.  

Don’t say I didn’t warn you. 

JG 

NO B.S.FRIDAY: Such is Life…

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Why do we love bushrangers so much? Are we all just bushrangers too busy with our day jobs?

November 11th was Remembrance Day, but I also noticed it’s the 138th anniversary of Ned Kelly’s death. They hanged our most famous bushranger on November 11, 1880.

I feel like we must be due for another round of bushranger romanticism. Seems to come around every 30 years or so. I mean, it’s been 15 years since the last Ned Kelly movie.

(Update: they’re in the process of making one right now. There you go.)

But why do we love bushrangers so much?

Kelly has more brand recognition than any Australian has ever had, including Don Bradman, well over a century after his death.

And Kelly’s life was hard. He was born into a poor family, took a lot of knocks along the way, before finally going to the gallows at the tender age of 25. Not a lot to envy there.

But we collectively get starry-eyed, and imagine ourselves in an iron suit, both guns blazing.

(Or is that just me?)

Bushrangers were a product of that time, and our romanticism has as much to do with that period in Australian history as it does with them.

I mean, if Ned Kelly were alive today, he’d probably end up on Today Tonight, with a camera man chasing him through the streets of Melbourne. Clank, clank, clank. “Mr Kelly. We just want to ask you a few questions.”

No one is getting misty eyed about car thieves in tracky-daks and sneakers these days.

But still there is something in the archetype of the bushranger that calls to our spirit.

To me, I think the key selling point of brand bush-ranger is ‘rebelliousness’. That’s what elevates them from the muck of humanity’s dregs, into the rarefied air of cultural hero.

But what does that say about us?

Why do we love and celebrate the rebellious? The rule breakers? The trouble makers?

Do we secretly long to cast ourselves in that light – break the rules, trash the law, kick down the doors and leave our name in bullets in the wall?

Are we all just bushrangers, too busy with our day jobs to cause anybody any trouble?

Yes. Yes we are.

The world is repressive. It crushes our freedom, our unique spirits, our playful, child-like natures. It’s just how it is. As we get older, we find the adult world with all its rules and regulations has us all bound up in a straight-jacket.

The question becomes how do we respond?

Do we suffer in silence, taking a photo-copy of our bottoms when the boss isn’t looking in an impotent act of defiance?

(Brian, I know it’s you. Just stop it, ok. It’s unhygienic.)

Or do we go totally off the hook, become a renegade, dying in a rain of bullets and glory?

That’s sexier, but still pretty sad in the end.

Or do we find another way? A third way? Do we find a way to push back the prison walls of the world, and find a way to live on our own terms, with our own money, with our own drive and our own autonomy?

Do we find a way to keep expanding the sphere of our own freedom?

This has been one of the central missions in my life in recent years. Finding that freedom.

Sure, that’s partly about money. Money can buy you many freedoms in life – the freedom to travel, the freedom to follow your own interest, freedom from the stresses of a hand-to-mouth existence.

But it’s also about making it part of my life goals – finding a career that let’s me set my own hours and schedule. Living somewhere that gives me easy access to the things I love doing. Putting energy into my relationships so they are supporting me, rather than holding me back.

But ultimately, it starts with recognising that we are all living in Ned Kelly realities – realities where the system is not set up to maximise our freedom and fulfilment.

This is the first step.

The fight then and must come second.

Such is life.

JG

The biggest risk for property right now? Morrison.

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Could the response to the Banking Royal Commission be too harsh? The RBA is clearly worried.

One of the headwinds looming for the property market is the fall out of the banking Royal Commission.

I mean, it was so serious they had to get ‘Royalty’ involved. I’m sure Meghan and Harry were taking a very keen interest in between cuddling koalas.

We’re already seeing a chilling effect on the credit market, as the banks try to get ahead of the game and get their houses in order.

And the spikey end of the stick with that is serviceability calculations. One of the key revelations is that the banks were possibly lending people more money than they should have, particularly by under-calculating their living expenses.

So the banks are going hard now, and mortgages that would have just got a rubber stamp 18 months ago are now being poured over with a fine tooth comb.

That’s been a bit of a drag on things.

But that’s all before the Commission has even handed down it’s report, and the recommendations that are probably going to come with it.

That’s due in February.

That creates a political risk in my mind.

It’s political because the government will have to respond to the recommendations.

And with the Morrison government taking a belting on every front right now, there’s every chance we could get something a tad ‘populist’.

(Remember it was Morrison who came up with the bank levy tax.)

And that could leave the banks reeling, and it may be the blow that knocks lending to the floor.

APRA restrictions, uppercut. Royal Commission preliminary findings, right jab. Morrison implementation of findings, whirling haymaker.

Now I’m no fan of the banks, but I am a fan of property and business lending, and it would be a shame if property owners, investors and business owners end up bearing the brunt of all this.

But surely we could trust the government not to do anything ‘rash’?

Hardly. In an election year, with the Prime Minister struggling for legitimacy, we’ve got all the ingredients for some pretty wild policy thought-bubbles.

Expect them to go for headlines, not for sustainable reform.

Now this might sound like Jon’s got his cynical hat on again, but I’m not the only one worried about where this might be headed.

The RBA and Treasury have also taken the unprecedented steps of cautioning the government against going too hard.

The AFR was reporting that:

The Reserve Bank of Australia and Treasury have privately cautioned the Morrison government that any regulatory response to the financial services Royal Commission must be careful to avoid putting the brakes on lending to home buyers and business.

Treasury then doubled down on their private warnings, taking it public last week:

Treasury secretary Philip Gaetjens has warned that a key risk to Australia’s strong economy is banks cutting their lending too much in response to the Royal Commission into financial services and tougher credit rules imposed by the prudential regulator.

Amid complaints from small business and home buyers that they are finding it harder to attain finance, Mr Gaetjens said a tightening of credit conditions could constrain household consumption and business investment.

Now some people might say that this just proves that the RBA and Treasury are in the banks’ pockets.

But I actually think it says the opposite. Both institutions know full well the carnage that could be unleashed if the government went too hard now, just as the impacts of APRA restrictions are still being digested.

This is not a time for rash policy on the run. This is a time for cool heads.

Let’s hope the heads of Treasury and the RBA prevail.

JG