Saturday, December 21, 2013

Retirement Savings, Superannuation and Bank Deposits

The Australian Federal Government has set up the Murry enquiry to look at bank deposits, insurance, retirement savings and home loans, and the key issue seems to be the role of deposits versus other sources of funding.

Bank deposits have risen from around 40% in 2008 to 60% in light of the crash and slow thaw in wholesale money markets. Superannuation savings have grown to more than A$1.7 trillion and half of that has been invested in shares in the absence of a pathway into tax effective interest bearing deposits.

So curiously, we are at a stage where the banks themselves may lobby for a much larger real deposit backed lending process, drawing on the superannuation funds, and a move away from creating loans backed by the borrower's future access to wealth (- see the earlier blogs).

This would be a very good thing. In the short term the interest rate paid on deposits would fall or flat line due to the increase in funds available, but long term the depositors would start to demand better returns, and while this would raise the cost of borrowing, it would also raise the level of consumer demand for goods and services.

But more importantly, it would base investment on already generated wealth of the lender instead of mortgaging the future generation of wealth of the borrower.  And it would free to borrower from living up to the model of the future envisaged by the lending institution.

This may sound a little odd, but that is one problem with the current ability of banks to lend more than they hold in real deposits. That phantom money becomes real when you agree to borrow it because you are agreeing to give the bank your ability in the future to generate wealth, but the future you are signing up to is that that suits the bank - a future that they think will be favourable for them to make more money. This is why housing, property and development get such favourable rates, and ethical and sustainable projects struggle. The banks may not be especially mean over this, it is just that they can not model a green future, so they can not accept such an unknown future.

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