Interest rates - why bother?

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Forums › Finance and wealth management › Interest rates - why bother?

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#2551833 29-Aug-2020 10:58

driller2000:

Good for them i.e those who have, for whatever reason managed to accumulate some assets / wealth.

But I don't see why the govt ie. my fellow citizens/taxpayers - should guarantee MY money, given its MY decision where I put it - so it is MY risk to take on.

Just have a think about why many first world economies do this and the social benefits that such a view may or may not have produced. Then consider whether the decision-makers might have determined that the benefits outweigh the costs and you will get your explanation.

Good luck.

OldGeek

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#2551854 29-Aug-2020 11:18

Rikkitic:

Banks aren't really a choice. People have to have bank accounts to exist in our society. A bank account isn't an investment for most people. It is the only practical way of keeping your money and having it on hand as needed. I think a good argument can be made for placing a limit on the amount that is guaranteed, but there should still be something. I think the FDIC in America was set up after the run on banks in the Great Depression. I think it has or had a limit of $10,000 per deposit. (I'm not sure of this.)

I don't see why there could not be some kind of government-backed insurance scheme that people had to pay a reasonable fee for and could opt out of. Then they would at least have an option. Otherwise there is always the risk of collapse if people lose confidence. It happened once. There is no reason it couldn't happen again.

This original poster to this thread mentioned only investment-level bank accounts - where the purpose of the account is specifically to invest but with the funds always on call. With current interest rates being less than inflation (see my earlier post), investors need to look at other non-banking alternatives. That is much more complex and requires more effort to understand risks and returns but such is life.

I agree that some form of bank account balance guarantee coverage, provided it allows for those who opt in to contribute to the costs.

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Eva888

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#2551857 29-Aug-2020 11:20

Consumer Guarantees Act protects you when you invest your money into a toaster, or a car etc. Those items are also your choice of where you put your money. You give money, they give a toaster/car. The Government protects you against faulty products and bad dealer practice etc.

Why should it be any different for where you must store your money. You should also be protected from bad practices of the banks when you save your already tax paid money with them. You give money, they give paltry interest while they double dip by investing in mortgages, sketchy futures and shares etc. The banks take risks you the innocent depositor have no control or say over. Sure you can store it under the bed, until the Reserve Bank decides to print new currency and you are left with a mattress full of notes with the wrong picture on them.

I agree with Rikkitk that you can’t easily survive any more without a bank account. It is a necessity. You are even required to pay your taxes via the bank and benefits and pensions are paid into the bank as a government requirement so it’s not some silly whim that makes you have a bank account for your savings, therefore you should have consumer protection.

Fred99

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#2551858 29-Aug-2020 11:20

Rikkitic:

I don't see why there could not be some kind of government-backed insurance scheme that people had to pay a reasonable fee for and could opt out of. Then they would at least have an option. Otherwise there is always the risk of collapse if people lose confidence. It happened once. There is no reason it couldn't happen again.

It creates "moral hazard" situations, with a Government potentially tampering with the independence of the central (reserve) bank, while they're also involved in prudential management and having an insurance deposit guarantee role. As an individual you'd put your cash in the highest interest bearing account your could, that drives banks to lend out for the highest returns - and those are highest risk.

So guaranteed depositors with South Canterbury Finance didn't give so much of a damn about security of their investment, SCF invested in crazy speculative investments with expectations of returns that were never going to happen, and paid depositors returns way above market rates. When it inevitably went belly up, the taxpayer was initially on the hook for IIRC $1.5 billion to bail out investors who had the best of both worlds - high interest rates for speculative investments, with no risk they could lose their cash.

The OBR is a good concept - just unproven whether it would work to stabilise the market / counter panic and contagious bank runs if the apocalypse arrived.

robjg63

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#2551860 29-Aug-2020 11:27

mudguard:

Rikkitic:

Taxpayers may be on the hook for a lot more if the lack of a guarantee contributes to a collapse of confidence in the banking system, resulting in a run on banks and mass panic.

Doesn't this always come back to To Big To Fail? If that's the case. Then don't let them get big enough where this could be the issue. Joe and Jane Blogs earning $40k a year aren't likely to care about a run on the bank if they have nothing in it. They'll care about their jobs, which probably aren't in the financial sector.

and Joe and Jane will get propped up by the government if they dont have jobs - In your view this is wrong as well?

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eracode

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#2551894 29-Aug-2020 12:41

In the US, under the FDIC system the standard deposit insurance coverage limit is US$250,000 per depositor, per FDIC-insured bank, per ownership category. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank.

What happens there is that many people with large amounts of cash have banking arrangements with multiple banks and stay under the FDIC limit with each one.

If we had a similar system here, with say a $50k limit, people would do the same thing and have accounts with many of the insured banks. This is not necessarily efficient and probably not a side-effect that the banks themselves would like.

Sometimes I just sit and think. Other times I just sit.

mudguard

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#2551898 29-Aug-2020 13:06

robjg63:

and Joe and Jane will get propped up by the government if they dont have jobs - In your view this is wrong as well?

Providing an unemployment benefit is different to insuring someone who has $50k, $250k or a million in the bank. A bank account still carries risk, albeit historically very little. But it's up to each person if they are happy to do so.

Eva888:

Joe and Jane Blogs with nothing in the bank however will likely be working for the Boss that worked hard in his business and hired them. Boss loses his money in a bank Bail In...Blogs lose their jobs, that will make then care pretty fast.

So boss' business doesn't earn an income and has all that capital sitting in the bank? Maybe, who knows, but do the jobs go before or after a run? Would the boss once his money safely guaranteed keep putting into the business?

I get your point, people are often saying if you increase company tax rates etc, they'll up and leave. I mean that's ok, but how many business would genuinely try and relocate to another country?

Again, there is an emphasis on government guarantees. It isn't a government guarantee, it is a taxpayer guarantee. And as someone pointed, South Canterbury Finance were lending recklessly with no consequence only to be bailed out by you and I. So where was the lesson? Someone with money in the bank can have it at home (I probably wouldn't) if they really want to. The right moves are already in place to force banks to hold more capital which I see as a good thing

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mattwnz

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#2554820 1-Sep-2020 15:03

mudguard:

I get your point, people are often saying if you increase company tax rates etc, they'll up and leave. I mean that's ok, but how many business would genuinely try and relocate to another country?

Again, there is an emphasis on government guarantees. It isn't a government guarantee, it is a taxpayer guarantee. And as someone pointed, South Canterbury Finance were lending recklessly with no consequence only to be bailed out by you and I. So where was the lesson? Someone with money in the bank can have it at home (I probably wouldn't) if they really want to. The right moves are already in place to force banks to hold more capital which I see as a good thing

That is not a fair comparison, because they weren't a bank. The government should never have guaranteed finance companies back then, especially as so many people had already lost money when other finance companies collapse. But if they didn't, it could have led to major problems, and I guess what they did was the lessor of too evils. The fact is that almost all OECD countries do guarantee their banks, including Australia. We are also planning on providing a bank guarantee, as there are plans to do so. So it is looks like it will eventually happen, but apparently it may only be about 50k per bank, which isn't even a deposit on a house these days.

Banks are laregly lending out tto people buying highly inflated houses these days, is that wise. What happens if unemployment rises, and people can't afford to service their mortgages, and house prices drop 15%+ which is what some banks were predicting if NZ became infested with Covid.

wellygary

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#2554890 1-Sep-2020 15:39

Rikkitic:

I don't see why there could not be some kind of government-backed insurance scheme that people had to pay a reasonable fee for and could opt out of. Then they would at least have an option. Otherwise there is always the risk of collapse if people lose confidence. It happened once. There is no reason it couldn't happen again.

Already exists, If you want a government guarantee, lend your money to the government,

Problem is that most people want the extra risk/return that comes from bank deposits,

https://debtmanagement.treasury.govt.nz/kiwi-bonds

6 months 0.25 percent per annum
1 year 0.25 percent per annum
2 years 0.50 percent per annum
4 years 0.50 percent per annum

Earbanean

937 posts

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#2554891 1-Sep-2020 15:39

Eva888: Consumer Guarantees Act protects you when you invest your money into a toaster, or a car etc. Those items are also your choice of where you put your money. You give money, they give a toaster/car. The Government protects you against faulty products and bad dealer practice etc.

Why should it be any different for where you must store your money. You should also be protected from bad practices of the banks when you save your already tax paid money with them. You give money, they give paltry interest while they double dip by investing in mortgages, sketchy futures and shares etc. The banks take risks you the innocent depositor have no control or say over. Sure you can store it under the bed, until the Reserve Bank decides to print new currency and you are left with a mattress full of notes with the wrong picture on them.

I agree with Rikkitk that you can’t easily survive any more without a bank account. It is a necessity. You are even required to pay your taxes via the bank and benefits and pensions are paid into the bank as a government requirement so it’s not some silly whim that makes you have a bank account for your savings, therefore you should have consumer protection.

No, the CGA is totally different. it protects you for faulty goods replaced/refunded by the retailer, not by the government. It doesn't protect you against the retailer going bust. Deposit guarantees protect you against the bank going bust, which is completely different.

Also, let's be clear the government doesn't guarantee them with its own money. It either uses taxpayers money, or it charges the banks for the guarantee - a charge that they ultimately pass on to their customers. So either you and me pay for it, or you and me pay for it.

tripper1000

1617 posts

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#2554919 1-Sep-2020 16:04

eracode: In the US, under the FDIC system the standard deposit insurance coverage limit is US$250,000 per depositor, per FDIC-insured bank, per ownership category. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank....

Wasn't that a major contributor to the reckless lending that lead to the USA's banking collapse and by re-driving reckless lending is preventing lessons from being learned? "The FED will step in and save us..."

Edit: Our Govt has responded by upping the capital holding requirements for banks (rather than insuring their business risks) which is in theory driving up deposit rates and sends a clear message that there won't be a free lunch.

Fred99

13684 posts

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#2554968 1-Sep-2020 16:30

tripper1000:

eracode: In the US, under the FDIC system the standard deposit insurance coverage limit is US$250,000 per depositor, per FDIC-insured bank, per ownership category. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank....

Wasn't that a major contributor to the reckless lending that lead to the USA's banking collapse and by re-driving reckless lending is preventing lessons from being learned? "The FED will step in and save us..."

Edit: Our Govt has responded by upping the capital holding requirements for banks (rather than insuring their business risks) which is in theory driving up deposit rates and sends a clear message that there won't be a free lunch.

FDIC and the FED aren't the same thing.

Remember "LIBOR" rates spiking? Banks wouldn't even lend money to other banks. It was about to go belly-up globally.

This time the banking system was sound. But they're effectively printing money flat out to keep liquidity in the system. And one day that will end, and it will be very ugly.

JimmyH

2886 posts

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#2554970 1-Sep-2020 16:32

Eva888: Consumer Guarantees Act protects you when you invest your money into a toaster, or a car etc. Those items are also your choice of where you put your money. You give money, they give a toaster/car. The Government protects you against faulty products and bad dealer practice etc.

No, the Government doesn't protect you against a faulty toaster.

The law requires the manufacturer/retailer to offer an appropriate standard of toaster. Just like a bank is also required to allow depositors to withdraw their money from current accounts or term deposits as they come due.

If a bank goes bust you won't get all your money back. Analogous to a bank failure, if the retailer and manufacturer of your toaster go bust, you won't get the faulty toaster replaced under the CGA. There is no Ministry of Small Appliances that protects your ability to continue to toast bread if the maker of your broken toaster is insolvent.

But there are policy reasons that a government might want to insure bank deposits, and banks are a bit different to other businesses - which is why they are regulated stringently by the central bank. Mainly to protect against panic and a run on the banking system. Which is how economic difficulties can turn into bigger disasters. It was, in large part, runs on the American banking system in 1929/30 that turned a recession into the Depression. In contrast, runs on appliance manufacturers because of concerns over the durability of toasters weren't really an issue.

mattwnz

20141 posts

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#2555059 1-Sep-2020 18:10

wellygary:

Rikkitic:

I don't see why there could not be some kind of government-backed insurance scheme that people had to pay a reasonable fee for and could opt out of. Then they would at least have an option. Otherwise there is always the risk of collapse if people lose confidence. It happened once. There is no reason it couldn't happen again.

Already exists, If you want a government guarantee, lend your money to the government,

Problem is that most people want the extra risk/return that comes from bank deposits,

https://debtmanagement.treasury.govt.nz/kiwi-bonds

6 months 0.25 percent per annum
1 year 0.25 percent per annum
2 years 0.50 percent per annum
4 years 0.50 percent per annum

That was the argument back when finance companies, collapsed, as to why would people put their money in fiance companies, vs putting their money in the bank. That was prior to NZ banks being government guaranteed too. The interest difference between bank TDs and KBs is tiny.

If you buy KBs through at least one of the big banks, you end up with negative interest rate. I was quoted 0.5% commission. So I would essentially be paying them to lend them money! Imagine banks paying us to borrow money to buy a house!. So no incentive to save, and instead an incentive to borrow. The bank acknowledged I would make a loss if I was to invest through them, but didn't say there was any other way I could avoid this. However I believe you can buy them via other methods without paying this. But based on these rates, it doesn't surprise me that people are buying up houses, and also know someone looking into buying gold.

Handle9

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#2555061 1-Sep-2020 18:15

Eva888: Consumer Guarantees Act protects you when you invest your money into a toaster, or a car etc. Those items are also your choice of where you put your money. You give money, they give a toaster/car. The Government protects you against faulty products and bad dealer practice etc.

This is false equivalence. The government doesn't give you a new toaster if your toaster fails, you have to pursue the entity who sold you the toaster.

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