The Great Interest Rate Con.

Reserve Banks or whatever their equivalent in countries around the world is orchestrating the biggest confidence trick ever known to mankind.

The great gullible public are told that interest rates have to rise and fall to control a country's economy to avoid inflation. We are told that we can't go back to the bad times of the depression. THE DEPRESSION, THE DEPRESSION, it's like using a dirty word and we are being reminded that we must avoid it at all cost.

Of course we must. But using interest rates to control the economy causes many problems that could be avoided.

In Australia the Reserve Bank have raised interest rates six times in the last few years. Consequently, the commercial banks have passed the increases on. Why because the economy is going gangbusters, there is full employment on good wages, commodity prices are good, exports up, and household incomes reflect the generally good times.

So let us get this straight, the prime interest rate is set to control the economy and not because of normal commercial factors. Under the free enterprise system, the cost of a commodity plus a profit usually determines the price. If that is the case and we're told it is, then someone along the line is taking the extra profits when rates go up and not as much but still making a profit when rates go down. Surely the actual cost of money to Reserve Banks doesn't vary that much.

The alternative to adjusting interest rates is to control an economy by regulation. That works by only allowing banks to lend to a certain level to avoid overheating the economy. By taking money out of the system and not raising interest rates it achieves the same result. However it creates a huge demand for money and allows the unscrupulous to find ways around the squeeze by finding alternative sources of funds.

The first casualties when interest rates are raised are families out in the suburbs. Young borrowers have struggled to put the money together to buy a house only to have their budgets blown away by faceless men and women on the boards of reserve banks. One wonders what would happen if these people faced struggling mortgagees and said something like we are sorry you are going to lose your house but it's for the good of the country. If I were that young family I'd say stuff the country, find another way.

Raising interest rates is a penalty for doing well. Countless businesses suffer because they are capitalising on good conditions and the faceless people tell them no way you doing too well and we are going to stop you. That has to be wrong and it says the only way for the country to survive without inflation is to put many people out of their homes and send businesses into bankruptcy.

There has to be a better way. The faceless people need to put more effort into working through the problem without making huge sections of the population suffer to avoid inflation.

While we're on the subject of great bank cons, what about the ability to raise interest rates after the loan has been completed. For instance, if you borrow money at a certain interest and it is funded, the bank has advanced the money and we assume it has borrowed it at a certain interest rate and passed it onto the borrower at a higher rate. The deal is done finished. How come the bank can say interest rates are now higher so you have to pay more? But, the deal is done you are not borrowing more money you borrowed when rates were lower. The bank is not borrowing more money for your loan so how come they can charge extra rates. Sounds like a con to me.

Spare a thought for John Howard's Liberal Party. The country is doing well the economy is good but he is likely to lose the election because the Reserve Bank keeps putting up interest rates making the mortgage belt of the major cities angry. They have to blame someone and the faceless people have avoided scrutiny so the Government takes it on the chin.

It hardly seems fair.

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