Interest rates - why bother?

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

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#2555064 1-Sep-2020 18:25

mudguard:

Exactly. Why should taxpayers be on the hook for those who can afford to have money in the bank?

Well, they appear to have been on hook for everyone else of late...

dafman

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#2555069 1-Sep-2020 18:36

I'm a deposit holder at banks and hate the low rates. But there ain't no way I'm taking it out to play the sharemarket casino in this strange new world. We are not in normal times.

driller2000

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#2555071 1-Sep-2020 18:39

Rikkitic:

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.

I don't get this argument. 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.

If I paid for said insurance that's fine - however others seems to be suggesting "YOU" should pay for "MY" insurance which is bollocks IMO.

And yes you have choice re where you put your money - bank, shares, property, a business etc - and I have no desire for you to cover any of these assets for me should they fail.

driller2000

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#2555076 1-Sep-2020 18:43

dejadeadnz:

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.

Ignoring your snark - this is what is proposed:

https://www.interest.co.nz/banking/100359/government-signs-principle-decision-introduce-deposit-protection-regime-under-phase-2#:~:text=stories%20GDP%20Live-,Government%20to%20introduce%20deposit%20protection%20regime%20that%20will%20likely%20cover,bank%20customers%2C%20shareholders%20and%20taxpayers&text=But%20if%20they%20had%20%24100%2C000,would%20only%20get%20%2450%2C000%20back.

And if it does end up being firstly covered by the bank / depositors through levies or a loading in terms of interest rates, then fine - but I still have no desire for you to cover my decisions/risks and vice versa.

mattwnz

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#2555078 1-Sep-2020 18:47

dafman:

mudguard:

Exactly. Why should taxpayers be on the hook for those who can afford to have money in the bank?

Well, they appear to have been on hook for everyone else of late...

Not only that, but if people can't trust the banks, and trust their money is safe, then it could cause some major social problems. Banks are integral infrastructure to NZs economy.

eracode

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#2555091 1-Sep-2020 19:03

dafman:

I'm a deposit holder at banks and hate the low rates. But there ain't no way I'm taking it out to play the sharemarket casino in this strange new world. We are not in normal times.

Us too - but we do have a modest long-held portfolio of shares, which is interesting and performing well.

As retirees, the bulk of our income comes from TDs. Right now we can live with existing rates (supplemented by some older deposits at higher historical rates). My view is that if we currently have TDs at at a weighted-average rate of 3%, if/when rates increase to 4%, our income from them goes up 33%.

Ha - if/when - it may never happen - and if it doesn’t, the weighted average just comes down.

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

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#2555107 1-Sep-2020 19:33

eracode:

My view is that if we currently have TDs at at a weighted-average rate of 3%, if/when rates increase to 4%, our income from them goes up 33%.

Ha - if/when - it may never happen - and if it doesn’t, the weighted average just comes down.

The thing is, if rates go up, the whole house of cards falls (ie. our massive property/equity bubble bursts). Governments need to keep rates at near zero, if not zero or below, for perpetuity, to hold the lid on this mess.

Handle9

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#2555118 1-Sep-2020 19:42

dafman:

eracode:

My view is that if we currently have TDs at at a weighted-average rate of 3%, if/when rates increase to 4%, our income from them goes up 33%.

Ha - if/when - it may never happen - and if it doesn’t, the weighted average just comes down.

The thing is, if rates go up, the whole house of cards falls (ie. our massive property/equity bubble bursts). Governments need to keep rates at near zero, if not zero or below, for perpetuity, to hold the lid on this mess.

Not really - you'll certainly have some property owners go through pain but then they will have to sell some of their properties until the market finds a new equilibrium point. If interest rates instantly rose to 10% it may be a different story (TL:DR lots of inflation is bad).

Gradual interest rate rises certainly wouldn't be clean and would have a significant impact on owners of highly leveraged properties. The majority would be ok but many would have less disposable income.

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#2555322 2-Sep-2020 07:31

Is there anyone here old enough to know what happened to all the interest earning options our parents & grandparents had?
(Which were significantly higher than banks.)

Building society's,

Finance Companies,

? Accountant? lending trusts? (May have this one names wrong - I believe it disappeared 30-40+ years ago)

Yes I know finance companies went belly up 12 years ago - I remember it well - but why? (After successful serving a sector of the market for 50+ years - what changed? 'Was regulation' removed? Or holding security percentages dropped, to allow them to lend with little underlying assets?

cshwone

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#2555325 2-Sep-2020 07:36

Building Society's are still around. For example my local one https://wbs.net.nz/

eracode

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#2555380 2-Sep-2020 08:10

Building Societies and deposit-taking finance companies that offered higher rates than banks only did that because the risk on your money placed with them was a lot higher than the risk on bank deposits. The simple old rule about risk and return.

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#2555705 2-Sep-2020 14:49

Handle9:

dafman:

The thing is, if rates go up, the whole house of cards falls (ie. our massive property/equity bubble bursts). Governments need to keep rates at near zero, if not zero or below, for perpetuity, to hold the lid on this mess.

Not really - you'll certainly have some property owners go through pain but then they will have to sell some of their properties until the market finds a new equilibrium point. If interest rates instantly rose to 10% it may be a different story (TL:DR lots of inflation is bad).

Gradual interest rate rises certainly wouldn't be clean and would have a significant impact on owners of highly leveraged properties. The majority would be ok but many would have less disposable income.

I think it all depends on how unemployment in NZ tracks due to the effects of Covid, and what happens when the wage subsidy runs out.Unemployment due to covid looks like it is going to be a major problem worldwide. If people lose tehir jobs, then they may not be able to service their mortgages, and there maybe forced sales. Not unless banks just continue mortgage holidays, but that is kicking the can down the road, hoping for the economy to fix itself. I feel it could be a slow car crash. There is no silver bullet, but it has been shown that negative interest rates do not work at solving things. eg Japan , Europe etc.

Fred99

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#2556793 4-Sep-2020 10:04

mattwnz:

I think it all depends on how unemployment in NZ tracks due to the effects of Covid, and what happens when the wage subsidy runs out.Unemployment due to covid looks like it is going to be a major problem worldwide. If people lose tehir jobs, then they may not be able to service their mortgages, and there maybe forced sales. Not unless banks just continue mortgage holidays, but that is kicking the can down the road, hoping for the economy to fix itself. I feel it could be a slow car crash. There is no silver bullet, but it has been shown that negative interest rates do not work at solving things. eg Japan , Europe etc.

The Fed in the US has been pumping US $125 billion per month, buying mortgage-backed securities (they did the same post GFC - but the need was slightly different - the entire banking system was at risk of failing). This reduces the "risk premium" that banks charge (difference between deposit rates and home loan lending rates). So it's a two-pronged attack to keep home loan rates as low as possible, to prevent a housing market crash they set interest rates low, then reduce risk and thus risk premium the banks charge by buying securities.

https://fred.stlouisfed.org/series/MBS10Y

Then there's what the Fed is also doing to prop up share markets.

Markets have been behaving irrationally (or not - depends how you think about it). "Bad news" becomes "good news" because any threats to the market result in a reaction to prop the markets up by dropping rates/pumping liquidity into the markets. So "stocks always go up" and "house prices always go up" looks quite rational using retrospective data. It's been working fine so far...

afe66

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#2556885 4-Sep-2020 11:35

Great time to renovate the house though.

Improvement in quality of life not bothered about return on investment as cant see myself moving voluntarily for 10urs plus.

My neighbours agree judging by the amount of building going on. Ie 4 House within a 2 house radius of my place.

Lots of digger action for small boy to watch.

mattwnz

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#2559664 7-Sep-2020 14:40

Fred99:

mattwnz:

I think it all depends on how unemployment in NZ tracks due to the effects of Covid, and what happens when the wage subsidy runs out.Unemployment due to covid looks like it is going to be a major problem worldwide. If people lose tehir jobs, then they may not be able to service their mortgages, and there maybe forced sales. Not unless banks just continue mortgage holidays, but that is kicking the can down the road, hoping for the economy to fix itself. I feel it could be a slow car crash. There is no silver bullet, but it has been shown that negative interest rates do not work at solving things. eg Japan , Europe etc.

The Fed in the US has been pumping US $125 billion per month, buying mortgage-backed securities (they did the same post GFC - but the need was slightly different - the entire banking system was at risk of failing). This reduces the "risk premium" that banks charge (difference between deposit rates and home loan lending rates). So it's a two-pronged attack to keep home loan rates as low as possible, to prevent a housing market crash they set interest rates low, then reduce risk and thus risk premium the banks charge by buying securities.

https://fred.stlouisfed.org/series/MBS10Y

Then there's what the Fed is also doing to prop up share markets.

Markets have been behaving irrationally (or not - depends how you think about it). "Bad news" becomes "good news" because any threats to the market result in a reaction to prop the markets up by dropping rates/pumping liquidity into the markets. So "stocks always go up" and "house prices always go up" looks quite rational using retrospective data. It's been working fine so far...

IMO, in NZ they would have been far better to have introduced far more regulations and taxes over housing, to prevent house prices rises so much compared to inflation, making our prices some of the most expensive in the world. INstead they have relaxed some of them recently, and are even looking at again allowing overseas buyers. House price inflation is conveniently not measured in our regular inflation figures, except I understand for some new builds. Instead the Reserve bank wants house price to continue to increase as it increases the wealth of home owners, and supposedly this means they will spend more in the economy.

"House prices are a key driver of household spending. Recently, house price inflation has been weak, influencing our forecasts for household consumption and residential investment," the RBNZ says.

But if wages aren't increasing to match house price growth, and they are instead lowering interest rates to increase prices, then IMO something is going to break eventually. Covid could accelerate this, if a lot of people lose their jobs and mortgages default. Not only this but higher prices means NZers have to spend more to buy their houses, and save for larger deposits.. This type of thinking IMO is really damaging for those people who don't own a house. Our ratio of income to house price is shocking in NZ and it is still a housing crisis. I am pretty disappointed that our media hasn't really got onto, but I guess for some , the housing market is a big part of their advertising revenue, so maybe they don't want to bite the hand that feeds them, and instead they seem to post good news articles about how it is still possible to buy a house when only 20, or how much net worth people now how since they purchased their house a few years ago etc. But a house is shelter, it shouldn't be such a major part of NZs economy like it is, where if it crashes , it risks bringing down the economy with it.. But Covid in NZ, and low deposit rates, means many people seem to just be buying multiple houses, and some people are turning into accidental landlords, because moving bank deposit money into the alternative such as shares, are seen as too volatile and risky, and it is also seen as a bubble. Whereas house prices don't generally fall off a cliff overnight like shares can.

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