Every day a golden egg

When doing time in economics classes, I was taught that if I wanted to sell the item with the highest gross profit margin, I should sell cups of coffee. The substance needed costs about 2 cents to buy and you can sell it for $3 because you mixed it up with free water and kept it warm. Sell $3’000 worth and you’ll have $20 cost of goods sold, or in other words a profit margin of 99.33%, which equates to 14900% mark up.

That is indeed impressive. Not many retail items can claim such lucrative attributes, as a matter of fact I can think of only one other, bank fees.

Erwin Fletcher wants to put aside some money, build up a deposit so he can buy a family home. The idea is that every fortnight, shortly after Erwin's employer deposits the wages into his normal savings account, a certain amount, say $200 dollars, are transferred to a special saver account. So he goes to his bank branch and asks the staff to set up an automatic transfer every fortnight. No problems Sir.

It all goes well for months and months, but then one fortnight he did have only $180 in his regular account, just short of the $200 that is routinely debited. The bank charges him a $30 fee for not having had enough money in the account to do the transfer.

Let’s keep in mind that no bank employee had to move a finger. A computer tried to move money between accounts, but an IF statement in its program stopped the transactions as there weren't sufficient funds. What was the cost to the bank? Nil. But they charged Erwin $30 dollars. The fact that Erwin’s account did not have sufficient funds to be transferred did not inconvenience anyone. He didn’t borrow money from the bank or any third party. A computer program simply did what it was designed to do and not transferred an arranged sum.

The cost of this attempted transaction by the bank’s computer amounts to $0, sold to the customer for $30. Happening thousands of times a day across the nation. This, ladies and gentlemen, is one of the many rip off mechanisms the banks employ to make the obscene profits they are known for.

I guess it takes a banker to defend one, and so the Chief of all Australian bankers, Reserve Bank governor Glenn Stevens, had the following to say at last weeks hearing at the House of Reps committee on Economics:

"While I know, in some ways, people feel aggrieved that banks are highly profitable, there are other banks around the world that are bearing large losses and because of that, they're not in a position to make loans," Mr Stevens said.

"If you assess what's more preferable, the banks we have are far more preferable."

Whilst it is true that it is preferable to have banks which don’t make losses, apologists like Glenn Stevens translate this into banks must reap exorbitant profits.

The banks RBA governor Stevens is referring to, the ones who are currently under liquidity pressure, are not in dire straits because they failed to charge their customers enough bank fees, they are suffering big write offs due to their overpaid management teams not doing their homework and chose to invest borrowed money in crappy repackaged US housing loans, and are now called up on it.

And it’s not, as Stevens seems to imply, that only “other banks around the world” were sucked into the vortex of greed and are now bit by bit spat out at the other end with monster losses, there are potentially plenty of them right here at home. A couple of weeks ago I pointed in a post at the dilemma the Australian banking sector might be facing. According to some analysts, the risk exposure Down Under could be far greater than widely admitted, with the chances being moderately high that the current global liquidity crisis will also be forcing Australian banks to bring out their dead over the next two years.

Businesses, not unlike farmers, know that you gotta make hay while the sun shines, but banks, being masters in the art of cashing in, have figured out a way how to stuff their money sacks no matter which way the weather turns out. The only thing that could change that, is when asset prices are falling. And that is essentially what is happening in the US.

Our bankers know they are not immune to being caught in the global wave of balance sheet write offs due to the contracting US economy and its consequent deflating housing bubble. And so, with an approving RBA governor Glenn Stevens confirming this, Australian banks are already passing on their as yet unidentified but plausible losses to the customers in any shape or form they can. Be that with interest rate rises above the official rate or through ridiculous fees and charges just to have a computer program tell you how much money you allegedly have or don’t have.

Every time someone misses a mortgage payment or hasn’t got enough money in the account to cover an automatic transfer, the banks earn money, not even asking, they just deduct their fee out of your balance. What are the cows in the steeple aka the customers gonna do? Switch banks? They all do it. Massive sums are being raked in that way Australia wide:

Committee chairman Craig Thomson said annual bank profits had climbed to about $4 billion, up from about $1 billion five years ago.

That means quadrupled in 5 years, across the industry, all competitors in unison. Are there four times more customers in the world? No, banks making a packet is due to existing customers simply being milked more intensely. To get an understanding of the banks profit curves, I chose one of the larger banks, one with a pretty consumer friendly name, the Commonwealth Bank, the one that doesn’t like Mad Max koalas in its advertising, which in their eyes makes all the difference.

On the right is a graph I put together on how the CBA's net profits have developed over the past 10 years. And yes, this was your money once, at least if you are CBA customer.

According to the Reserve Bank’s March 07 Financial Stability Review, Australia’s 5 biggest banks made in 2006 a combined after tax profit of 24 Billion dollars. As a comparison, that is 10 times the amount of the federal government’s annual cash surplus, or close to being twice of what Australia spends on defense.

Profits are coming out of their ears, and yet, even in times when growing sections in the Australian housing market are experiencing some kind of mortgage stress, they have no scruples whatsoever to increase interest rates above RBA figures and mushrooming the earnings from fees & other charges.

The real idiocy about it is that banks are actually playing us all for fools and continuously get away with it. Supposedly their role is to be the middle men between the saver and the borrower. B deposits money with the bank, which A then loans, with the bank earnings being the difference between interest earned and paid. That however is not how the scheme is designed. I mean ask yourself, have you ever received a letter from your bank saying your deposited funds were unavailable for the time being because they lend it to someone else?

This is what someone who knows a little bit about the plot had to say:

"Banks lend by creating credit. They create the means of payment out of nothing."
- Sir Ralph Hawtrey, Secretary of the British Treasury during the 1930’s

This magic trick has a name, its called fractional reserve banking. How it works and what it means for Erwin Fletcher, is worth its own post. Hopefully I will get around to it in the not too distant future.

On wars, banks and love

For years I've been dreaming of going to war with some poor country rich in petroil, you know, making sure there will be enough juice for me and my fleet of cars, but with being stuck in our economic boom times, my work schedule simply didn't allow me to start one up. Now that I finally got to the point in my life where I could take some time off, I find out that I also need shit loads of money. According to latest developments, wars need to be paid for.

Iraq, Afghan wars costing $US3 trillion: experts

With the fifth anniversary of the start of the Iraq war just days away, its cost is becoming clearer.

Ahead of that anniversary, two prominent US economists have come up with a new estimate on the cost to the economy of the wars in both Iraq and Afghanistan. That figure is $US3 trillion ($3.22 trillion)….

The estimated cost so far of Australia's involvement in Iraq and Afghanistan is roughly $3 billion. But Robert Ayson, the director of studies at the Australian National University's Strategic and Defence Studies Centre, says he expects that figure to rise significantly.

Damn, trillions.... thats how many zeros? I'd be mighty surprised should my master card allow me that much. Not with the current global lending crisis anyway, so I guess my war/invasion of target country X has to wait a while, at least until I manage to save up enough dough for a deposit.

I hope you understand that I can't give you exact details about which nation I have in mind. Chances are the country's spies would find out about my invasion plans, their armed forces then propping up their defenses, which would make my job so much harder when its finally time to strike. I can reveal though that it is on an axis of sort, which makes it a very dangerous country.

Lucky here in Australia we had 11 consecutive years of Liberal Party rule, and as every privately schooled kid knows, a Lib government means fat times. So saving up the necessary deposit for my war should be a breeze, with business roaring and interest rates as high as they are. The Australian consumers are loaded, cashed up with real estate equity to a degree that they need to be restraint with rising interest rates. Rivers of honey and milk flowing everywhere.

We don't have no bubble, we won't get no trouble, oh yeah yeah yeah
Let the good times roll, Resources 'R Us
From aluminum to zinc, we got every thing, oh yeah yeah yeah

Wouldn't want to save up for my war chest anywhere else but in Oz, least of all places in the USA. Across the ocean the cogs in the economic wheels are creaking, creating this distinct grinding sound investors dread. It comes therefore as no surprise that Lady Prosperity decided she'll move out for a while.

The other noise thats starting to deafen US Americans is that of chicken coming home to roost. No point in pretending that their dilemma isn't home made, pissing against the wind requires that one changes pants from time to time. In the case of the US this means the entire financial system needs a new outfit, probably even a nappy change.

From riches to rags, the ol' classic. Once the most affluent nation in the known universe, today a banana republic where the Federal Reserve Bank has to resort to having helicopters hovering above Wall Street dropping cash on the nearly bankrupt. Providing massive loans to troubled financial institutions in return for nearly worthless mortgage securities.

Economist Professor Steve Keen, from the University of Western Sydney, made the following observations in an interview on the ABC's World Today:

ELEANOR HALL: What's your view? Is the United States already in recession?

STEVE KEEN: I'm sure it's in recession right now. It's a question of how deep it goes down, and I expect an extremely deep recession. And I'm noticing that quite a few commentators are now coming around to their view. They also suspect a severe recession to occur in America, and we have similar forces afoot in Australia.

We are benefiting from the highest terms of trade in our history at the moment. We're simultaneously running an enormous current account deficit, which is really a crazy combination.

So, we're very heavily reliant upon those prices remaining at unprecedented levels, and they will fall if there... actually there'll have to be a fall in those prices if America goes into recession, and then feeds through to China's demand for our resources and so on. That'll be very problematic for our currency and for our economy.

ELEANOR HALL: When will that hit, do you think?

STEVE KEEN: It's got to be in the next two years. Timing that's any more accurately than that is simply impossible because the whole timing depends upon when we turn around from accepting more debt to trying to pay our debt levels down.

Uhh Lordy, if I understand him right then Keen suggests that Australia will face a similar carnage to what the US is experiencing at the moment, all within the next two years. A world wide economic downturn, triggered by the unfolding US economic collapse, will reduce global demand enough to send commodity prices to lows not seen for quite some time, hitting Australia right in the export eye.

But lucky Australian families were smart enough to stash away their hard earned cash during the fat years, handing it over to people they didn't really know, but who have slick haircuts so expensive looking that who ever sported one had to be a financial mastermind. They tend to work in multi-story high rises, the biggest buildings in town, Australian banks and finance companies.

The really smart bank employees, who not just have expensive haircuts but also wear posh suits and swishy shoes, who have proper titles on their office doors, are normally found from the fourth floor up. They need to be high enough above ground to escape the blaring masses, coz when you make difficult financial decisions - like how to invest your clients’ money – you want to be able to concentrate as much as possible.

Those men and women are pedigree financial planners, making sure Australian retirement eggs and people’s savings are safe and sound. Just how secure Australian banks and their investments really are was illustrated in The Australian last week, when Adele Ferguson wrote a noteworthy assessment titled “Gambles in the balance”. Here an excerpt:

All the banks play the derivatives market. The latest Reserve Bank bulletin reveals that the banks' derivative exposure has more than doubled from $5.4 trillion in 2002 to $13.2trillion in December last year. Given the banks' total shareholder value is less than $100 billion, if even 1 per cent of these $13.2trillion derivatives contracts default because third parties get into trouble, the whole shareholder wealth would be wiped out and our banks could be broke.

To put it into perspective, Australia's annual gross domestic product is just more than $1 trillion and the total budget estimate for federal government expenditure in 2006-07 is $200 billion. Remember the Reserve Bank in its quarterly bulletin estimates that the total risk is $140 billion which, again, is more than the banks' total shareholder value.

What do you say to that? The global economy tanking and Australian banks up to their eyeballs exposed to risky debts. Great, a lose/lose situation. With banks leveraged to the degree they are, fat chance of them giving me the credit I need to pull off my planned invasion. On top of that, should the nation's economy really go as pear shaped as the author of the above article assumes it will, I wouldn't even be able to save up the needed deposit. How on earth am I ever meant to pay for my war?

The new Joint Fighter F-35 Lightning II costs around $200 million a piece, and my military adviser told me I need at least three of them. Plus plenty of cash for rockets, guns and bribery. All these figures confuse the hell out of me, so I made an appointment with my accountant.

We met last week in his office and discussed the plans and strategy. He was quite fond of my idea to kick of the invasion with a big bang, followed by more bangs, and promised me he would have a look into the costings of such an operation. Today he e-mailed me an excel spreadsheet with a recommended budget.

Far out brussels sprout, my jaw dropped to knee height when I opened it. The bottom figure, the one that is double underlined, had so many zeros I have to assume it is a trillion. And then, the comedian he is, he left me a footnote telling me that he reckons that with the current liquidity crisis and all I will have a hard time financing my war. As if I wouldn't know.

Where is Prescott Bush when you need him? He'd love to help me out, I am sure.