May 25, 2015
Don’t be fooled – all the banks win yet againPosted in Sunday Business Post · 98 comments ·
Many years ago, I spent a summer working in Canada, where the national hero at the time was Wayne Gretzky, the brilliant ice hockey player. Gretzky was so good that when he retired, his number – 99 – was retired from all North American professional hockey teams.
His most famous quote followed a simple question from a commentator about why he was so successful. Gretzky didn’t even think, he just responded as if it were the most simple thing in the world: “I skate to where the puck is going, not where it’s been.”
The same applies to economics. When looking at the economy, we have to be ready for where it is going next, not so much where it has been. Therefore, we should look at leading, not lagging, indicators.
I believe that one of the non-scientific but accurate leading indicators in this country is the attitude of senior bankers. Bankers’ attitudes are significant because credit made the economy buzz. I think we are at the beginning of a renewed lending cycle which will drive up asset prices as well as lubricate the economy in a way we haven’t seen since the early 2000s.
So, rather than focus on what the new regime, spun by the government as a “victory” against the banks, means for variable mortgage holders, we should interpret this move by the banks as the beginning of a new phase in the economy’s trajectory which will involve lots of new credit.
That fact that the banks are going to reduce the spread on their mortgage lending from July is a sign that their balance sheets are repaired. Had there still been worries about the balance between performing and bad loans, the banks would have dug their heels in.
They are ready to lend again. The banks are now in a race with each other for market share. Bank of Ireland will try to steal a march on its nationalised competitors in the months ahead, and the bosses of the nationalised banks will do anything they can to accelerate the process of privatisation, because they will make money from the sale. At the moment, their stock options are worth nothing, but they will be turned into cash when the banks are resold.
Self-interest is what drives these guys, so they will be nice as pie to Michael Noonan in the next few months. Expect them to reduce variable rates a little more, because it means the last political obstacle to a sale is removed. The government is playing yesterday’s game, while the banks are on to tomorrow. It is interesting that the government’s rather pathetic aim in all this is to get all mortgage rates under 4 per cent by the end of the year. But why only 4 per cent? After all, deposit rates are zero, so why should the banks make a whopping 4 per cent margin on every loan?
The banks played the government like a violin on this one, pretending to show resistance to changes in the variable rate and then walking away with a massive prize. The prize is the government’s acceptance that making a 4 per cent margin is “normal”, when it is rapacious. Worse still, it is being played as a victory for the common man, when it is nothing of the sort. It is a carte blanche to the bankers, again.
The game the banks are playing is clever, because they want to be free of government interference in order to lend as much as possible, again. Right now, I think the economy is growing much faster than people understand. The key is that the consumer is back in the game. The banks sense this.
A recent publication about credit card spending is very interesting in this regard. Last week, I spoke to the board of Visa, who were in Dublin for their annual board shindig. Visa and other credit cards are fascinating leading indicators of the economy, because activity in credit tells you what people are doing right now and expecting to do in the future.
Visa has devised a consumer index which tells you, four months ahead of official figures, what people are doing, how much they are spending on plastic and in what areas.
Ask yourself: do you use your credit cards on smaller and smaller purchases these days? If the answer is yes, then you are typical of the Irish punter because they are spending more and more on smaller and smaller things with their debit or credit cards.
The Visa indicator picks up this activity. There was an increase in year-on-year spending of 4.3 per cent in April on cards. This is interesting because up to now the idea has been that domestic demand is slow but it’s not.
According to Visa, its index showed strong performance by retail-facing categories with spending on food and drink up 9.2 per cent and e-commerce spending up by 7.8 per cent, while traditional retail spending is growing by close to 3 per cent.
One of the best leading indicators of people being confident again is spending on household goods in DIY shops. This is the territory on which DIY Declan and Deckland thrived in my Pope’s Children yarn a decade ago. They are back in business, a decade later. Last month it was up 8.6 per cent, while clothing and footwear saw an expansion of 6.4 per cent.
Parts of the economy are moving strongly now. The bankers know this, which is why they are playing ball with the state. In ice hockey parlance, the state is worried about where the puck is when it should be really concerned about where it is going to be. There is no better indicator of this than the attitude of the country’s senior bankers.
It wasn’t them who blinked first last week but the government.
Plus ça change.