Smart politics needed to overcome lending squeeze

Josh Frydenberg should realise he’s not going to be able to do anything about a credit squeeze from the opposition benches.

Federal Treasurer Josh Frydenberg. Picture: AAP

On the surface the Hayne royal commission merely cemented in the current credit squeeze and its dramatic effect on house prices. But there is a hidden twist to the report which, if implemented, in the longer term will intensify the credit squeeze and may even have contributed to the Reserve Bank’s sudden caution.

Albeit belatedly, I was relieved that the Reserve Bank on Wednesday February 6 finally recognised the dangers posed by the credit squeeze and its possible intensification. Better late than never.

However, those currency speculators who believed what the Reserve Bank had said just 24 hours earlier will be feeling bruised as the currency market has now concluded that the tougher times ahead might cause the Reserve Bank to lower interest rates.

The Reserve Bank now needs to study what is happening in Canada, which experienced a similar property boom boosted by liberal credit and Chinese buying.

Among the measures taken by Canada to end the boom was an Australian-style credit squeeze, implemented by much tougher lending rules.

As in Australia, housing prices are falling and the Canadian banks can see danger because their balance sheets are being weakened by the lower property values. They are pleading with the regulators to ease Canada’s so called “stress test” and so lessen the credit squeeze.

Our banks, led by the Commonwealth, are saying there is no credit crunch. As in the old wealth management scandals, they are once again in denial. Investors retreated because the lending rules changed. Residential buyers have had their loan availability slashed. It might have been at the instigation of APRA, but it’s still a credit squeeze implemented via lending rules rather than money availability. Australian bankers must learn to accept the truth—like their Canadian counterparts.

In Australia the Reserve Bank’s envisaged solution to any slowdown is to lower interest rates. But that will not be the answer if a crisis erupts —indeed it may make things worse. The only way around any severe downturn is to do what the Canadian banks are pleading for an easing of the credit squeeze by liberalising lending rules.

But the Reserve bank does not control that lever. It’s in the hands of bank regulators who have not only been instructed to be maintain their tough stand but have been handed a hidden weapon- the planned destruction of the power of mortgage brokers. Some institutions see this as a reason to be jubilant about banks shares because they will not need to pay big commissions to mortgage brokers.

But mortgage brokers are skilled in helping customers apply for loans in a way that suits the bank systems, although they have also been known to encourage the clients to tell fibs. If the mortgage brokers must charge their customers for the service and are deemed to be representing the borrowers, then the banks will need to do the work. The banks do not have the trained staff to do this on a much larger scale and anyone who has tried to secure a loan directly from most major banks knows how hard it can be.

If you encounter the wrong person or try to fill in the form on line it can be a nightmare. Dealing with banks during a credit squeeze imposed via tougher lending rules and bank staff spooked by regulators requires a skill that most bank customers do not have. That’s why brokers have such a big share of the home lending market. Not only will bank costs rise but it will be harder to gain a loan.

Thus the Hayne recommendation, in the current environment, becomes an extra dimension to the credit squeeze.

To his credit Josh Frydenberg recognises this. But, at least in the current banking climate, he seems to be politically naive. The electorate is very angry with the government over its leadership games and is equally angry with the banks. Opposition leader Bill Shorten is skillfully transferring that community bank anger to the Coalition, which Labor accuses of being mates with the banks.

So Josh, take up Bill’s offer and work with the ALP to adopt every word of the Hayne Royal Commission, including extending the life of parliament to do it. If both parties have agreed, it will not take long. Whoever wins the election, (and bookies say the ALP is certain), will have to solve the problems later.

Remove the bank issue and the May poll goes back to the main strengths of the government - the blatant discrimination of the ALP in its retirement and pensioner tax and the imposition of negative gearing changes when house prices are crumbling. And if the government can pass its brilliant small business tax appeal legislation, and working with the ALP endorse the Sims recommendations on fair contracts plus 30 day payments, the Coalition can market strongly to small business.

That gives it a chance to narrow the gap, and who knows, the ALP may stumble.

Bank hesitation will increase voter and electoral disaster for the Coalition. No one knows that better than Bill Shorten.