Peter Lyons: We should appreciate what banks have done for us

Labour's consumer affairs spokesman David Shearer. Photo Hawke's Bay Today, Glenn Taylor

Labour's consumer affairs spokesman David Shearer has criticised the big four Australian banks for making excessive profits off hard working New Zealanders. This is unfair since mainstream economic theory teaches that the main objective of any business is to maximise profits.

A shareholder in one of these banks would understandably be upset if they suddenly decided to spread peace, love and money to all and sundry for the betterment of mankind. Mr Shearer apparently arrived at the revelation that banks seek to maximise profits when he was charged a fee for exceeding his overdraft limit. This is an unsettling admission of poor financial management by a political leader.

Banks and bankers have copped a lot of flak in recent years. This is odd given that they constantly shower us with kindly images of joyful smiling bank staff eager to provide us with the funds to live our dreams. One bank staffer that I knew used to sign off his emails with "we are the conduit to your dreams." Sadly he was let go after flying his toy helicopter around the office.

Mr Shearer points out that bank profits have surged to the point where they make well over $1000 in profit per man, woman and child in New Zealand each year. Mr Shearer has also highlighted that the banks operating in New Zealand make returns on their assets well above returns by banks in other developed countries including Australia. None of these revelations are particularly new or startling.

If Mr Shearer is wise he should buy some shares in these businesses once he has sorted his overdraft problems. Better to be the predator than the prey.

Mr Shearer makes the point that despite record low interest rates in recent years set by the Reserve bank, New Zealanders still pay an average of 17.5 per cent on their credit cards. He suggests that the banks pay lip service to competition but prefer to avoid any real price cutting in such profitable areas.

Standard economic theory also supports him on this observation. Banks, electricity companies and oil companies operate in a type of market in New Zealand called an oligopoly. In this type of market there are few sellers.

They prefer to avoid excessive direct price competition because they are aware that this cuts overall profits. Because there are few sellers they can often come to an unspoken agreement to avoid excessive price competition. The lack of movement on exorbitant credit card charges is indicative of such a situation.

People like Mr Shearer need to appreciate what the banks have done for us. They have helped give us some of the most valuable weatherboard houses in the world. Their lending in the past few decades has provided the funding to unleash the true value of our old villas, bungalows and townhouses in suburbs as diverse as Grey Lynn, Glen Eden and Mangere. It is amazing that our parents often lived in exactly the same houses but didn't realise their true value. Sadly during their era the wonder of financial markets and bank lending was fettered by government controls. Banking was boring and houses were affordable.

We may pay 17.5 per cent on our credit cards to afford our groceries , electricity, petrol, insurance and rates but at least we live in expensive houses.

Some commentators have expressed concern that the banks will not stand by our dairy farmers during these difficult times as world dairy prices plummet. History shows that banks are renown for their benevolence in lending during boom times. This tends to amplify the boom. Unfortunately their benevolence abates rapidly during the tough times. Let's hope this time is different.

Peter Lyons teaches economics at Saint Peters College and has written several economics texts.