Governments Do Not Work for Your Financial Well-Being

Governments do not work for your financial well-being. I say this because right now the natural thing to do for most Baby Boomers is to seek financial safe havens like banks to deposit any cash they might have. They want to leave their money there until the financial turmoil works itself out and use it to live on if they have to.

Initially governments supported this as they worked to avoid millions of people withdrawing their savings from the banks. A promise to guarantee all or part of your bank deposits stopped that panic.

Now however all governments support Reserve Banks around the world lowering interest rates to stimulate the world economy. This is despite the fact that previous interest rate reductions of late have not really worked.

Don’t they know people are scared? Business and the consumer have too much debt. People are worried about being able to keep paying their mortgages. People need to pay off their credit card debt. People want to have some money put by in case things get really bad.

So what do governments do, in cahoots with the reserve banks? They start to aggressively reduce interest rates and offer incentives for people to take on more debt. It is a desperate attempt to make the consumer save the economy. What is really criminal though is that in Australia they are aiming the incentive at first home buyers.

They say we must protect the Australian building industry at all cost. Why? That industry has made mega-bucks in the last few years off inflated house prices. If they didn’t put some money aside for the inevitable down-turn then let them fail.

The more rational thing to do is to protect the money these first home buyers have been saving to buy a home? The responsible thing for governments to do is to advise first home buyers to hold off buying for at least 6 months until the government has a better handle on what is happening to the world economy. Isn’t this what you would tell your child?

If house prices fall back to more reasonable prices then the first home buyers will get a much better start in life and will be better able to manage their mortgages going forward. They would not need their Baby Boomer parents to use their nest egg to bail them out either.

Right now there is a good probability that house prices in Australia will go down if unemployment rises. See this article on First Home Buyers risk going backwards;

“Property experts warn that if unemployment climbs towards 8 per cent, then even those voters who claim the first-home owner grant at the right time, and in the right city, may find their mortgages harder to service despite lower interest rates.”

To me it is just plain stupid to take on $300,000-$400,000 or more of debt even if the government hands out $21,000 as a bribe. Everywhere you look businesses are finding it hard to do business. Well-known companies are going broke. Banks have cash but are reluctant to lend it, even to long term businesses with good track records.

Is it really fair to ask 150,000 first home buyers to prop up the building industry and save our whole economy? Better still will it work this time?

House prices falling 10% in the next six months is a much better option for first home buyers. Patience is a virtue, so tell your kids to keep their money in the bank.

Reserve Bank Board members don’t live in the real world. They are unlikely to lose their jobs. Their employment package is likely to include a low interest mortgage. They really do not have a worry in the world.

The same goes for government representatives who keep telling us we’ll get through this. There is no other option BUT to get through it, or mankind will disappear or revert to the dark ages. That’s not the problem. It’s the damage governments do along the way with their meddling for the public good that will destroy family wealth.

Why lower interest rates when the banks are not lending money to anyone anyway?  Why lower interest rates before you see how the stimulus packages work out. Have they ever heard of keeping their powder dry? Why destroy the bank deposit savings unless it is to try and force people to risk this money or spend it when it is financially irresponsible to do so.

I have to question why the Reserve Bank increased Interest Rates just before the last election and now cannot lower them quick enough. Is there a bias here?

What advice would a Prime Minister or a Reserve Bank governor tell his child who wants to buy a house right now? I am assuming they are ordinary citizens and not government employees with secured income for life. I’d like to know the answer to that question.

The most efficient way to stimulate the economy is to lower taxes. That way a dollar doesn’t get sent to the government as tax so 50-70 cents of it can be handed back as a stimulus to favoured sections of our community many of whom do not create wealth. Lowering taxes is the fastest way to get money to the consumer too.

The best way to protect the economy against a decline in consumer spending is for the government to take up the slack until confidence returns. There are plenty of roads, bridges and schools  to repair. Big projects can be started but there is plenty to do right now that would help the economy.

On what basis do governments think that a one of stimulus package to pensioners and people with young children is going to turn an economy around in this credit crisis? The deserving pensioners are likely to have to spend their handout, so that may give a short term stimulus.

Those consumers living off the public purse are likely to buy the Big Screen LCD’s for Christmas and wait for the next stimulus. The consumers who have large debts are likely to save the handout or pay off debt.

In Australia do they really think anything they do is going to avoid Australia having a recession if the rest of the world has one? If our trade with the US is 10% of our GDP and only 1% of theirs and they cut our trade by half to 0.5% in their recession, we take a 5% hit on our GDP. I’m pretty sure that’s how the maths works here. It’s a problem we can do nothing about.

Governments keep talking about the business cycle. They are happy to let it bubble but fight like hell to stop it tanking even when they know it is a cycle and must be played out. All they do is make it longer and possibly worse.

What governments should be doing is help all us consumers save our money for now and let business down-size if they are good business and fail if they are bad. Then when the business cycle turns up there will be plenty of cashed up consumers to lead the charge to happy times once again.

Right now it seems economic levitation is in vogue as the world financial system is kept in the air with no visible means of support.

It’s rather like those spinning plate acts I used to see as a kid. The performer (in this case Mr Paulson)  slowly adds more and more spinning plates (bailout and stimulus packages) and has to keep running around giving each one a spin (more money)  in order to keep them all spinning together.

He might managed to get many plates all spinning together. At some point no more plates can be added because Paulson will not be able to keep them all spinning.

That point will surely come and when it does make sure you should have cash in easy reach. No one knows how long this financial turmoil is likely to last so cash is king.

Leave a Reply

CommentLuv badge