SUBJECTS: RBA's cash rate decision, stimulus package, First Home Owners Grant, bank guarantee
DEB CAMERON:
The Minister for Financial Services, Superannuation and Corporate Law is Chris Bowen. His electorate is in Western Sydney, he's the Member for Prospect. It's solid mortgage belt country. Minister, good morning.
CHRIS BOWEN:
Good morning, Deb.
CAMERON:
Thank you. How will this rate rise play in Western Sydney?
BOWEN:
Well, of course everybody would prefer interest rates to be lower rather than higher, if they've got a mortgage. But I think the average Australian and certainly people in my electorate have recognised for some time that interest rates were unusually low, the lowest in 50 years, and that in many ways the only way was up, that it was unlikely they'd go any lower.
The Government and the Reserve Bank have been saying for some time now, some months now, that the next movement would be up. We economic Ministers, the Prime Minister, the Treasurer, the Finance Minister and I have been saying that as the world inches towards recovery, credit will become more expensive and interest rates will go up and we're seeing that from yesterday's announcement.
CAMERON:
And this is likely to be the first of some other moves in an upward direction because the Reserve Bank has indicated that as well. So as interest rates continue, let's assume they continue to rise and over geared mortgage holders in the west and southwest and elsewhere start to feel it, you can put the house on within two years, mortgagee repossession sales and personal bankruptcies starting to occur. Now at that point, will you blame yourselves for this or will you blame the banks?
BOWEN:
Look, a couple of points here Deb and as you say, I'm a Western Sydney MP. I've seen mortgage repossessions at very high levels for a couple of years now, for about five years in my electorate, which has been at the epicentre of that. So this has been an ongoing issue, it won't be necessarily particularly as a result of any particular interest rate increase and of course, the largest impact on people losing their homes is when they lose their job. That's when people actually are in real danger of losing their homes, is when they go on unemployment. So that's one of the reasons our big focus has been on keeping our unemployment rate as low as it possibly can be.
So yes, we have had an interest rate increase yesterday, around about $46 a month to the average repayment. Of course, interest rates are still four percent lower than they were at their peak last year and that has taken off about $750 a month.
So we need to remember that interest rates have been at historic lows and they still are at close to historic lows, before yesterday they were at the lowest rate in 50 years, they're still very close to that. And I think most people have factored that into their calculations and factored it into their borrowings and assumed that over coming years, interest rates will edge back towards normal.
CAMERON:
Now the reason for the Reserve Bank's rise in interest rates yesterday was in a way they're feeling nervous, and you've made them a bit nervous because the stimulus package has beefed up the economy, optimism has bloomed in spite of evidence that there's still plenty of reason for caution. And so that's led to this excess. So that raises questions about the ongoing stimulus package. Can it be maintained?
BOWEN:
Well, it's been gradually wound down. That's how we designed it to occur and that's what the Governor recognised, Governor Stevens recognised just last week. He said, 'yes, it's now time to start gradually withdrawing the stimulus, both fiscal and monetary'. And monetary, we're seeing his decision yesterday. Fiscal we're seeing by design. So, for example, as you mentioned, last week we saw the step down in our First Home Owners Boost. That's being stepped down gradually. We've seen a lot of the cash payments flow through the economy. They were really important at that really pointy end of the crisis in boosting people's purchasing power. And that's now washed through.
We've seen the infrastructure program peak; 75% of the repairs and maintenance program on our social housing have been completed, for example. More than 16,500 school projects have already started and I've been out in my electorate, you know, looking at them and they're well advanced. So we designed this, and much more than many other countries' stimulus package, we designed this to be frontloaded so that the money was spent really when the crisis was at its worst so the stimulus package would wind down as the economy inches towards a recovery, and that's exactly what's happening.
CAMERON:
However you've spent quite a bit of time in recent days concentrating on mopping up some of those mistakes that were made with the rapid rollout, and the shutting down of 100 insulation companies who jumped onto the stimulus package bandwagon and then were found to be rogues, sort of points out some of the, yet again, some of the problems associated with the rapid rollout.
BOWEN:
I think we've made it clear that when you're spending a lot of money in a short period of time, you are going to find issues in that and yes, you're going to find some rogue elements jumping on the back of that. The important thing is we've responded and acted. And look, some people point to the schools program and say, 'oh, look at all the principals complaining'. There's thousands and thousand of principals across the country and I've yet to meet one who's actually complaining. You might find five or six out of thousands going to The Australian, saying, 'this isn't quite the project we wanted'. But when you talk to P & C presidents and principals, I mean, they are really just delighted with the way the schools finding is going and you talk to the vast majority of reputable installers of insulation and the people who've actually benefited from that. Again, I've spoken with people in my electorate who say, 'look, this is just great, we wanted insulation, couldn't afford it, now we're saving on power bills'. I mean, you're always going to find a small element in any Government program which chooses to capitalise on it in an unprofessional way. The important thing is you respond and deal with it and weed out those elements.
CAMERON:
My guest this morning is Chris Bowen who's the Federal Member for Prospect. He's also Minister for Financial Services, Superannuation and Corporate Law, and it's in that wider sphere I'd like to get you to concentrate for a moment. The stimulus rollout elements are, you know, millions here and millions there, but a fundamental change that you made to the way the economy runs in trying to insulate us against the impact of the global financial crisis was the way you treated the banks, massively strengthening the big banks. It has affected competition policy tremendously because other smaller banks closed because you put those guarantees in place, the big banks have prospered. You've said that you wanted to address some of the issues around competition and around executive pay, but it is very hard to see how you break the back of greed and overpaid executives while you've got a banking sector that feels so comfortable. At what point are you going to unwind the guarantees that you gave to the banks?
BOWEN:
There is a lot in that question Deb, but a couple of points to start with. Firstly, I don't think it's fair to say we've seen small banks close, that hasn't happened. We have seen a change in the way that people, the size of the banks they do business with. Look, before we put the guarantee on we were seeing a massive dash to the big four. So before we instituted the guarantee, people were very concerned about the safety of their money and were going for the big four banks and moving their deposits into the big four banks out of what we call the middle tier, or the second tier, so those smaller and often regional banks, and that was happening.
The guarantee actually was very important in providing stability to that second tier so that they could say to people, 'look, we know we're smaller than the big four but the Government's guaranteed your money'. And we saw that really calm down. And yes, the smaller institutions have had trouble accessing capital. They've actually been utilising our Federal guarantee, our wholesale guarantee, to get capital so that they can keep their loan book growing, and they've been using that now. We will need of course, and we've said all along, that we will need to wind back the guarantee but we won't do it a day too soon. We'll do it in conjunction with our colleagues in the G20. You wouldn't want to be the first one out there winding back this guarantee, the wholesale guarantee, and then putting all your banks, big and small, at a massive disadvantage and putting a crunch on credit because credit before the guarantee had slowed to a trickle, and once we put the guarantee on we saw it free up again. And that's been very important and continues to be very important, even today.
CAMERON:
But you raise all of these big questions about 'too big to fail', even in the answer to that question. If you don't release some of the taxpayer guarantee you've given to the banks, you'll engineer a situation where once again they're too big to fail and the only way to save economies is by reinforcing taxpayer guarantee, then never face the market again.
BOWEN:
Look, we've been one of the very few Western countries to get through this crisis without a significant financial institution under great pressure and there's been a couple of elements, a couple of reasons for that, but one of them has been the guarantee. You might recall the very tense period in which we put the guarantee on. This was just after the collapse of Lehman Brothers, there was a lot of concern in the community, there'd been scores of banks around the world fail and there was a lot of concern. So we calmed all that down and put the guarantee on. That's the retail guarantee.
At the same time, we found banks refusing to lend to each other internationally, so we needed to put the wholesale guarantee on. With the wholesale guarantee, we put a price in there. It cost banks money to use it, so they will wean themselves off it because it costs them a lot of money to use that guarantee and we're already starting to see them wean themselves off it. They're already starting to raise money without the guarantee. That says we designed it to occur so that they wean themselves off it because of that price mechanism we put in there. We will, as I say, in conjunction with the G20, there are a lot of bank guarantees around the world at the moment, we weren't the first to put it on, but we will, in conjunction with them, work through the issues in weaning financial institutions off the guarantee over time. But it's not going to happen overnight Deb and nor should it. It would be quite a shock to the financial system if we were just to pull the rug out by withdrawing either of those two guarantees.
CAMERON:
Minister, thank you very much for your time this morning.
BOWEN:
Always a pleasure, Deb.