Thursday, August 14, 2008

Profit, or Profiteering?

It’s all very well for the Prime Minister to tell the banks that they ought to pass on any interest rate reductions to their customers. Unfortunately it is meaningless hot air. It is quite simply a matter of a politician saying the right words to placate the voting public, and the banks now it. All along, a number of banks have maintained that circumstances might lead them not to pass on the full extent of any cut announced by the Reserve Bank of Australia. Those circumstances are supposed to be the increased cost of providing funds brought on by the United States credit crunch.

Of course the Prime Minister was responding to the news that the Commonwealth Bank has just announced a record profit. Again. He, like the rest of us, is probably wondering if times are so tough for the banks where did this magic profit result come from? Quite obviously times are not quite as tough as some are making out. In fact, the evidence suggests that banks are taking the opportunity to profiteer from the current economic climate.

Banks, like any other business, exist to produce a profit for the benefit of their owners. There’s nothing wrong with that. In fact, if they weren’t profitable then we’d all be in trouble. But it does seem to be somewhat arrogant when record profits are squeezed out of a difficult market by ensuring that everybody else, including your customers, suffer all the pain, rather than wearing some of it yourself.

Once again, we see that the results of deregulation are not always what we were promised. Rather than increased competition delivering better service and better value, deregulation means that the banks can simply ignore the advice of the Prime Minister, safe in the knowledge that he will absolutely nothing about it.

The catch is that banks, like oil companies, provide an essential product which impacts all other businesses. If they go too far, politicians might just be left with no choice but to actually do something. It’s part of a cycle where deregulation leads to arrogance which leads to excess, which leads to political fallout, which leads to re-regulation. That’s why it is just possible that a return to tighter regulation might be put back onto the agenda.

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