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.

Subprime Crisis and Japanese Banking Crisis

I am starting to worry that the Subprime Crisis in America may play out similarly to the Japanese Banking Crisis. In Japan, property prices and stock prices were rising rapidly until about 1990 when both crashed. The Nikkei 225 has not recovered to this day, as you can see on the graph above, which I obtained from Wikipedia. What this teaches is that the future is uncertain and that stock markets don't necessarily go up in the long run. One could argue that in the future the Japanese stock market will recover, but 18 years of stagnation for me is sufficient evidence to disprove the assertion that stock markets always go up in the long run. It reminds me of what economist John Maynard Keynes said: "In the long run we are all dead."

Some argue that in America the S&P500 always goes up in the long run and historical data proves this. Indeed it does, but before 1990 we could say the same thing about the Nikkei 225. Who is to say that the credit crunch in America now won't produce the same stagnation for the next 10 to 20 years that we saw in Japan?

The Subprime Crisis and the Japanese Banking Crisis were both similar in that they were triggered by a stock market and property market bubble that popped and resulting in a drying up of liquidity as banks refused to lend. The response of regulators in both Japan and the US were similar in that they both tried to restore liquidity by lowering interest rates. Regardless of the regulators' intentions to prop up the banks, most were too scared to lend.

We Wasted $100 Today!

One-hundred dollars is gone! A series of unfortunate events caused it. Firstly, I have a bank account with the Commonwealth Bank (ASX: CBA). CBA has treated me well ever since I was a little boy. My dad started up an account at this bank for me. The main problem with these accounts is that they charge $5 per month in fees. Since I was a university student these fees are waived. However, since my days as a student are numbered, these $5 will come back soon. Therefore, I tried to fix the problem by signing up for a cash management account from CommSec. I figured I might as well sign up and check it out since everything is free and there is no monthly fee for the cash management account. I was asked to transfer some money from my old CBA account to my CommSec cash management account, so I elected to transfer $10. When I did this I had about $60 in my bank account, so everything seemed fine. However, it took ages for CBA to get everything working and by the time everything was ready there was only $8 in my bank account, which meant that I was overdrawn by $2 and therefore the Commonwealth Bank will charge me $30 this Thursday after I get my pay. I'm pretty annoyed because I spent all this time trying to avoid fees and then in the process of trying to avoid fees I overdraw and get slammed with fees anyway. My brother blames me for not being organized with my cash and my dad blames me for not keeping enough cash in my bank account just in case. However, I have always believed that cash is not king and that holding money in the form of currency is a bad idea not only because of loss of investment opportunity but also because of inflation. This is why I always try to get rid of cash as soon as I get it. I wouldn't mind putting my money into the Commonwealth Bank's mutual funds (those managed by Colonial First State) but the problem is that many of them seem to have high fees. As a rule of thumb, do not invest in any managed fund or mutual fund that has MERs greater then 1 per cent.

My family lost another $70 because this week my mom got a second-hand car. It's a 7-year-old car. In order to get the car we have to trade in my mom's old car. However, my mom accidentally filled the car up with petrol and now we are going to give the car to the used car people with a free tank of petrol. One tank of petrol is worth about $70. We tried to siphon the petrol out but the car we have seems to have some mechanism that prevents that.

What surprises me is just how much pain my family and I feel when we see for ourselves the fact that we have lost money. However, both my parents and I have assets in the form of mutual funds and property that fluctuate in value wildly, and yet because all this is relatively invisible we don't feel any loss aversion or emotion.

Update 25 July 2008:
I have been paid from my employer and it seems as if the Commonwealth Bank hasn't charged me any overdraft fees yet. This is slightly strange, but maybe it's because the money transferred didn't actually go out of CBA since it was transferred between NetBank and Commsec, which are both owned by CBA.

Commsec looks interesting. They give cheap trades ($20) but I am a little bit wary about trading. I remember last year when I lost some money buying and selling on the ASX. I might dip my toes in later when I feel more comfortable.

Looking For No-Fee Bank Accounts in Australia

I am currently with the Commonwealth Bank. My parents signed me up for an account when I was little and I haven't changed since.

The Commonwealth Bank gives me a streamline account, which is where my wage goes. It also provides a savings account called Netbank Savers that earns 7 per cent per year.

The Commonwealth Bank also gives me a key card that I can use to buy things. It is a debit card that allows eftpos. I also use ATMs quite a lot to withdraw cash because every time I use a credit or debit card I have a paranoid fear that something will go wrong because of the unpredictability of technology. Handing over cash is very certain. Of course, the ATM could always stuff up when I'm withdrawing currency, but if this happens it's not as embarrassing since the problem is between you and the machine. Once I went to a Chinese restaurant and tried to pay the bill using my key card. The key card didn't work. I don't know why. It was really embarrassing because I had to ask my grandma for money. She had some cash in her wallet. All the people were looking at me while I did this.

I don't has any worries with the Commonwealth Bank. They provide excellent service, in my opinion. It is no wonder then that CBA is the second biggest Australian company listed on the ASX, just below BHP Billiton. What I do have a problem with is the Commonwealth Bank's fees. They charge $5 per month, which will start when I am no longer a student. They also charge fees for use of their ATMs.

I am therefore thinking about moving elsewhere, maybe getting the HSBC Online Savers Account or maybe getting something from Bankwest or Members Equity Bank.

Many of these discount services that have no fees usually have some catch like no ATM use. I could probably live with ATMs. I can just use my credit card all the time and then pay off my credit card before it starts charging interest. I will need good self-control.

I'll also have to talk to my employer and ask her to direct my wages to my new account.