The Guardian 9 March, 2005
Banks' record profits: millions in debt
The Reserve Bank's March 2 decision to raise interest rates by 0.25 percent has exposed as a lie the interest rates scare campaign Howard ran with in the last election. The banks and financial markets were delighted, but for the ordinary working (and out of work) people of Australia and for the many families whose cause Howard claims to champion, the decision is disastrous. And there look to be more increases in the pipeline. Last week's bad news was compounded by high petrol prices and the announcement that private health insurance rebates are about to rise yet again.
Rents will rise as landlords seek to recoup the additional interest payments on their investments. Homeowners will be pushed to the wall with higher mortgage repayments.
Repayments on an average home loan of $215,000 being repaid over 25 years at the new rate of 7.32 percent will increase by over $34 to $1564 per month! These are averages; there are huge variations in interest rates, the size of the loan, period to pay it off, and so on. In Sydney, in particular, where housing prices are ludicrously high, mortgage repayments are much higher than the national average. It would be hard to find a family home for less than $500,000.
For a second mortgage — from some finance outfit when a big bank refuses to lend the full amount sought — the interest rates are generally a crippling 20-30 percent. This usually applies to low income people who did not qualify financially for a larger first mortgage.
Banks in more recent times have become far more lax about lending money, even encouraging people to borrow beyond their limits.
Driven into poverty
While the Reserve Bank and Treasurer Peter Costello proudly claim that inflation is low — Costello defended the rise saying anything under ten percent is "low" — the actual cost of living of the people has been, and still is, rising at an alarming rate.
Private health insurance premiums are set to rise by around 7-8 percent. The cost of treatment in the private system is also on the rise, as specialists and hospitals push up fees and private health funds back off "no gap" agreements. It is not unusual for a patient to be several thousand dollars out of pocket after a trip to a private hospital despite paying high premiums for top private cover.
Parents with children at public schools were hit with fees of hundreds of dollars when students returned last month.
Following the Reserve Bank's announcement, the major banks moved immediately and increased rates on loans. Credit card interest rates will also rise over the next few weeks or months. The interest rate on ordinary savings accounts will remain at around 0.1-0.01 percent.
National accounts released last week indicated that the average household spends more than it earns — the savings rate is a negative 2.3 per cent. That means for every $100 income, $102.30 is being spent. (That average includes the super rich and well off.) For the battlers the figure is even more serious.
Floating on debt
The big questions now are — how will workers, families and retirees find the money to make higher mortgage repayments, keep up with credit card payments (interest rates of 16-18 percent) and meet all the other additional costs.
Drawing on savings is not an option for many. They do not have them. Cuts in the necessities is one option — but other bills such as electricity, water, phone and transport to work still have to be paid.
Millions of Australians are floating on debt while the banks wallow in record profits. Credit card debt rose to $30 billion following the post Christmas sales — an average of $1500 per man, woman and child in Australia! The interest repayments on that $1500 are generally around $20-$27 per month — that's without paying any of the debt off!
The debt from the university HECS fee is $9 billion and rising. Families are paying off car loans, some at hundreds of dollars a month.
Some people will go deeper into debt accepting those never-ending offers from credit card operators for you to raise your credit limit. Some will try to find a second or third job, or work more overtime — not only to the detriment of their family life and health but also adding to the loss of jobs. They will be prepared to pick up almost any work, any conditions and most likely on very low wages and a Howard government individual work contract (AWA).
The minimum wage is $12.30 per hour — $492 (before tax) a week, if you can get 40 hours work — and not all employers pay that.
Those going deeper into debt are hoping to stave off crunch time and that some miracle would occur.
Others will be pushed over the edge, forced to sell up and move out into rental accommodation. They will be in for a rude shock, as landlords cry poor over the increased interest payments.
So why is the Reserve Bank taking such action now. It talks in terms of a booming economy which needs slowing down to prevent inflation. But is that really the situation?
Profits are booming and business confidence is high, but the future is not as rosy as the government and Reserve Bank would have us believe.
In real terms the economy has shrunk over the past six months and retail sales have fallen. Australia's negative balance of payments (annual export-import figures) have driven Australia's net foreign debt to a record high of $422 billion.
Retail sales will fall further as their customers have even less money to spend. As people spend less on consumables, the rate rise could have a contradictory effect on an economy which looks set to turn downwards.
Eighty-five percent of that foreign debt is owed by banks and is short-term. The banks have borrowed heavily to fund corporate takeovers of public assets and other forms of privatisation, as well as to finance home loans on a highly inflated market. Higher interest rates will make it easier to attract foreign capital and for the banks to renew their loans.
The banks have helped drive up the price of housing and now, as they become concerned about their own debts, they want to rein them in by tightening the belts of smaller customers. It is ordinary working people who are now being told to pay — and at a high price.