Sunday, 13 December 2009

Westpac Defends Rate Rise with Banana Smoothie Story

Westpac has been criticized for increasing interest rates above the Reserve Bank's rise in interest rates. In response to the criticism, the bank released an ad that explains their actions. Watch the ad at Westpac Banana Slip. The ad talks about how a storm that destroys banana crops would result in a rise in the price of banana smoothies. Likewise, the storm of the global economic crisis reduces the amount of money banks can lend and hence the price of money (interest rates) rise as well.

Many have criticized the bank's ad, saying it is patronizing. Even Kevin Rudd claims Westpac did the wrong thing and criticized the ad: "(They are) talking about people’s most basic things in life - a mortgage, an affordable mortgage, to underpin things as basic as a home."

I happen to think the ad is very good since it explains why interest rates rose very well. Kevin Rudd's claim that a mortgage is needed to underpin a basic thing like a home, but the reality is that although accomodation is a necessity, most people have gotten more home than they can afford, and that is the reason why they are complaining. If you save up, put down a large deposit, and buy a cheap home in the outer suburbs, a minor interest rate rise will have a negligible effect on you. However, if you saved up little and purchased an inner-city mansion, you really only have yourself to blame. When you sign a contract with the bank consenting to variable interest rates, that is what you do. It is silly then to complain about something you agreed to. If you don't like the volatility of variable interest rates, why did you sign up to it? It's like with any other good or service in life. If you don't like it, don't buy it.

I am also not a fan of the bailouts the government gave to banks as it rewards poor behaviour, and certainly the financial sector in Australia may be better off with greater competition, but there are other places you can get a home loan besides Westpac or the the other Big Four.

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