Why the banks might just be right in refusing to cut rates
Published 28/05/2015 | 02:30
Forensic readers of this column might think that last week's effort was inspired by the new book from David Cameron's former chief strategist, Steve Hilton, lamenting the power of vested interests in modern democracies.
Not so; I came across extracts from the book after the column was despatched. But it was nice to get confirmation from the inside, as it were, of what seems all too obvious from the outside.
Mr Hilton's words are stronger than one would dare to use viewing political systems from the distant vantage point of citizen, or even journalist. "Our democracies are increasingly captured by a ruling class that seeks to perpetuate its privileges," he writes.
The media may even be part of the class. "When the corporate bosses, the MPs, the journalists - and the authors of books such as mine - all go to the same dinner parties, all live near one another, all send their children to the same schools, an insular ruling class develops."
That does sound familiar. But he may be wrong about something more fundamental when he says, "It seems today that political legitimacy stems, not from votes, but from money: the more of it you have, the more government pays attention to your concerns."
It could may be worse than that. "Legitimacy" may come from both money and votes. The politicians swing between giving vested interests what they want, and giving voters what they want, depending on the issue and the state of the electoral cycle.
Neither is calculated to produce idea results but there seems to be no political legitimacy to lead by doing what seems best, telling interest groups where to get off when necessary, and trusting that voters will make a reasoned judgement on their efforts come election time.
The old salts in today's mature democracies have adopted a dual strategy; look after the other constituents of the ruling class most of the time, but offer goodies to the voters at election time. They have become experts in the circular motions which this requires.
The mortgage rate farrago is a case in point. In opposition, Fine Gael and Labour's attitude to the banks bordered on the hysterical. It is almost too kind to call their stance once in government a u-turn; a Pauline conversion seems closer to the mark.
Suddenly, what was good for the banks was good for the country. It should have been obvious all along that what was bad for the banks would be bad for the country. There was, and is, a complex balance to be struck. Cutting variable rates willy-nilly is unlikely to be it.
One says "unlikely" because, of course, there has been no proper explanation or justification. It follows a period when the banks have had it almost all their own way, such as dealing with arrears and insolvency. Another unasked question is whether the money which the banks will lose cutting mortgage rates would produce better results, for the economy and humanity, if spent on writing off insupportable loans.
That would be unpopular both with banks and voters, so nothing much can be expected. We are left to wrestle with the consequences of a cut in mortgage rates, with whatever information we can glean.
Not that we are short of expert advice. So expert that many claim to know how big the cut should be. At least one percentage point. They don't say "percentage point" though; they say "per cent". Normally that error is forgiveable, but not when one percentage point is a 25pc cut in the income the banks would receive on a 4.25pc loan.
Even the "derisory" 0.25pp cut represents a 6pc reduction. But interest is only part of a mortgage repayment, although it is where the bank makes its profit, or loss. There is only one objective here - to give borrowers a noticeable reduction in monthly repayments. Anything else is deemed irrelevant.
Until after the election that is. If any real commercial harm has been done, it will be restored, somehow. Mr Cameron, it is worth noting, is particularly prone to dealing with today's problems only, irrespective of the trouble it may cause tomorrow.
Modern politics holds that, if you get the timing right, the dual strategy can be applied with minimal damage. Get it wrong, though, as the in 1970s and 2000s, and enormous damage can be done. Meanwhile the system gradually corrodes from the wear and tear of these gyrations.
As for mortgages, we do know that things changed pretty dramatically as the crisis abated from 2012. According to Central Bank data, Irish mortgage rates tracked the Eurozone average until then, but have since risen to show an excess of more than one percentage point.
That figure includes the half of all mortgages which are on trackers, many of them cheaper than the Eurozone average - although one might think there were no such things as trackers, for all the mention they get in government pronouncements and general debate.
What we got instead was the demand that the Central Bank sets interest rates. Now there is a proposal which would merit public consultation, a full White Paper and extensive debate. Never mind, a radio show will do.
In fairness, if it could be made to work, such a system might be a useful bulwark in a monetary union, where interest rates will hardly ever be ideal. Another bulwark would be greater use of fixed rates - a potential source of stability pooh-poohed by all and sundry.
Of course, Dame Street would have to be able to order banks to raise rates as well, which may not be what proponents of the idea have in mind. It is all the odder since, to judge from last week's research from the Central Bank, if it had such powers it would probably refuse to cut mortgage rates right now.
The bank cited several reasons why it may be a good idea that Irish banks are charging more than those in other euro states. There is the risk of further losses from bad loans, made riskier by the political determination that there will be no mass re-possessions of houses. One wonders if borrowers would feel better about high rates if they thought they were paying to help keep people in their homes? Probably not.
There is the fact that very few mortgage are actually being taken out, so costs are higher, and when the market does improve, foreign banks in better shape are going to go after the best business.
There is also something which has always bother the Central Bank, and may partly explain its inaction during the bubble.
This is that Irish banks are excessively dependent on mortgages and don't have the alternative sources of profits which foreign banks do.
At the time of writing, it was reported that Bank of Ireland will refuse to cut, despite being Noonaned quite severely. If so, the bank could do a better job of explaining why not and perhaps force the Government into a better explanation of why it should - other than popularity that is.