Breaking up a rates ruckus

If the government takes the rates debate in hand by lending cheaper money to the banks, it could lower the dollar and save jobs over a wide front.

The debate is on. When I set out yesterday how Treasurer Wayne Swan now has the power to play a big role in setting the level of interest rates, and that the independence of the Reserve Bank of Australia to set interest rates is crumbling, I realised it was going to the heart of our economic debate.

What I did not realise is that my commentary, and the amazing Business Spectator reader conversation that went with that commentary, would become part of what will almost certainly be a cabinet discussion on the issue (Swan song for the RBA, February 13).

That commentary and the conversation with it are vital for anyone wanting to understand the looming cabinet debate. In essence my proposal is that, instead of Australian banks borrowing high-cost offshore money, the Commonwealth government should undertake the overseas borrowing and lend the money to the banks, giving them much cheaper money and enabling them to lower – and not increase – interest rates.

My commentary came out on the same day as banks really rubbed Wayne Swan’s nose in the dust by announcing or foreshadowing big job cuts at the same time as their rate hike. I understand why they did it – business is slack and they want to maintain margins.

But they made Wayne Swan look weak. It let Opposition spokesman Joe Hockey off the hook. Joe has been advocating action against the banks and was lucky that no one skinned him alive. But he is now on much safer ground in simply attacking the treasurer.

Many of my readers say that having the government fund banks is a bad thing because it's quasi-nationalisation. And they are right. Others say that the two per cent margin between what it costs banks to borrow overseas and what the government can borrow at will narrow once the bond market sees what the government is doing. Retirees are unhappy at looming lower deposit rates. Some say we need a recession and to curb borrowing.

But the more Machiavellian of cabinet ministers are cottoning on to the fine print. Let’s say the government offers banks money at 1 per cent below what they borrow overseas and pockets a 1 per cent profit. Any bank that did not take the money would be at a disadvantage to their competitors and would lose market share, so they would be forced to take it.

But, as some cabinet members see it, there could be some tags to the offer – the benefits must be passed on; job cuts and overseas call centres are out. So it's true this would enable Canberra to exercise greater control over the banking industry. And that has a big downside.

But any industry that rubs the nose of the treasurer of the land in the dust must expect to cop it in the neck. And remember that unemployment is about to rise dramatically; and overseas hedge funds are contributing to our unemployment by treating the Australian dollar like gold.

The government action could lower the dollar and save jobs over a wider front. For those who want to delve deeper into the debate, here is some past commentary. Regard it as part of the cabinet briefing.

Australia is asleep on the jobs (February 10)

How a rate hike could save the bank (February 9)

The Aussie dollar goes for gold (January 25)

Facing off against a jobs raid (January 24)