Reform


B Fleeton

Brent explains the many failures of our compulsory superannuation system and why it needs reform.

As our great country was founded on regulation and
government interference, to appease those scared of true free markets, I’m sure
we’ll have plenty of ‘policy wonks’ out there able to work up a list of rules
associated with this to perpetuate the need for Canberra to exist.

It surprises many, if not all those who have watched their compulsory retirement funds shrink, that the government is not held responsible for such loss. GC.Ed.

This word is as overused in politics as ‘champion’ is in sports. It’s one of those words that seemingly applies to any little change government enacts. I don’t mind the Prime Minister announcing an eight-month election campaign; it means the date-of-death for a disastrous government can be etched into its proverbial tombstone. It also, and more importantly to this punter, allows us to take a broad look across the country to prioritise areas in desperate need of genuine and worthwhile reform. One particular issue I believe needs attention is the way Australians are forced to ‘plan’ and ‘invest’ for their own retirement. While few choose to believe it, superannuation is a tax. The current ‘three pillars’ approach to retirement income is as follows:

  • A safety net consisting of a means-tested Government age pension system (this requires a separate article);
  • Private savings generated through compulsory contributions to superannuation; and
  • Voluntary savings through superannuation and other investments.

Unfortunately for Australians, too much emphasis is placed by government on the ability for the second method to generate sufficient returns for one’s retirement, and too little attention is placed on providing more power, freedom and opportunity to voluntary save through non-superannuation investments. 

Every pay-day, like millions of my fellow tax-payers, I have 9% taxed from my salary and sent to a super fund of my choice. This is as good as it gets, because from here it is reduced by entry fees and tax (and then ongoing fees), then what’s left is invested into an ‘expertly chosen’ range of poor performing managed funds. These are the funds which exist to assist in growing a nest egg that can be converted into a pension stream to fund my retirement; however a majority of these funds are struggling to meet or beat the relevant benchmark, regardless of the excess performance fees charged.

Let me begin by stating ‘choice’ is not the word I associate with this scenario.

Sure we have Self-Managed-Super-Funds but if, for some divine reason, I was entrusted by my government to prepare and invest for my own financial future outside of the superannuation environment, I’d keep the 9% tax (soon enough this will be 12% – apparently this is a good thing) and use the extra income to put in place a financial plan to purchase my first property. Please, don’t even ask about the First Home Saver Account-more government intervention in the market. Looking at my current balance in my super fund, I have enough for a sizeable deposit. Real estate is historically the vehicle of choice for Australians to accumulate wealth. Next time you’re speaking with someone who is currently funding their own retirement, inquire about the way they were able to do this. Property and direct shares, outside of super and first bought many years ago will be the answer, not industry super. Giving the power and freedom back to the individual leads to true choice: when to buy and sell; the opportunity to use profits from trades to further accumulate more wealth. By locking away (for decades) the loss of the ability to access equity now means the loss of overall growth is unquantifiable. This opportunity cost is not worth any benefit of the current arrangement. 

The current system accomplishes very few notable positive outcomes for Australians. The millions of dollars in compulsory contributions goes towards feathering the bed-lining of super fund managers, cushions the share price of listed super funds, it forces government to legislatively guarantee a minimum income for an industry that was established to build wealth for clients (but is currently failing to meet set performance targets) and the consistent legislative changes result in a very happy accounting/financial planning fraternity. 

Should the Coalition be successful in wiping away the stains of Labor on 14 September, I have faith it will stick with the promise of not touching superannuation. While markets like stability, what I hope for (probably in vain) is to see the prioritising of this issue and for the Coalition to take the tough political hit in its first term of government in order to achieve true and long-lasting reform in this area. 

Should an individual choose this path, let them use this 9% to accumulate wealth now. Should they wish to remain in the current system, fine, but the pressure on government to provide that safety-net will be markedly reduced with this plan as Australians will have considerably more wealth by the time they reach their chosen retirement age. As our great country was founded on regulation and government interference, to appease those scared of true free markets, I’m sure we’ll have plenty of ‘policy wonks’ out there able to work up a list of rules associated with this to perpetuate the need for Canberra to exist.

Brent Fleeton is a member of the WA Liberal Party Policy Committee, is studying a Diploma in Financial Planning and is the Committee Chair of Perth Young Professionals Inc.

Profligates’ progress

According to The Centre for Independent Studies,obtained
under Freedom of Information,

the National Disability Insurance Scheme (NDIS)
will cost Australian taxpayers around $22 billion a year (gross) and $10.5
billion (net) in its first full year of operation. This figure is substantially
larger than the $15 billion (gross) and $8 billion (net) currently being used
by politicians and commentators in the public debate.

Australia is spending itself into a deep hole but if you
want to see just how deep a hole can be, look at the crater Uncle Sam has dug
for itself. View here.

When Did Fiscal Conservatism Die?

Front

Keith Topolski examines how the world's longest serving conservative government has sold out-or been bought out.

With a provincial election looming by 31 May, Albertans are faced with a unique question: Will the Alberta Government become the longest serving democratically elected government in history?

The ruling Progressive Conservative party has ruled Alberta since 1971, and its predecessor, the conservative Social Credit Party, reigned from 1935.

Not for 77 years has Alberta been faced with a government that is not of a conservative persuasion.

But is that last statement actually true?

Last Thursday, the Progressive-Conservative Government, now led by Alison Redford, handed down its first Redford budget.

Ms Redford came to the leadership on the back of growing restlessness in Alberta with the big government ways of Ed Stelmach.

However, nothing has really changed.

The Toronto Globe and Mail has praised the Alberta budget as predicting 'a rosy future'.

As any true conservative would tell you, when the Globe and Mail starts praising you, your political hue more resembles a tomato than the ocean.

What is most telling about the key features of this budget is the lead paragraph from the Montreal Gazette, which speaks of 'no tax increases while spending a record $41.1 billion and recording the fifth consecutive provincial deficit'.
Note that the $41.1 billion in spending is a provincial record. Also note that this deficit is No. 5 and counting.

Redford claims that the deficit will be wiped out by an injection of funds from 'new energy revenues'.

However, the Gazette headline promised 'no tax increases'.

Now, either the headline is an out and out lie, or Redford is going to kick back and wait for the economy to grow so she can cash in on extra tax revenues, assuming it does continue to grow with the current Keystone pipeline drama playing out.

Now, one might argue that this is good politics, that letting the province grow out of deficit is a good thing.

Maybe, maybe not. However, what is not mentioned in these articles, but is left to the National Post to mention, is that the record $41 billion spend is an increase of 7% on the last Alberta budget, and Alberta now spends more money on each citizen than any other province, and even more than the Federal Government.

If you do the maths on this, if Alberta froze public spending for this financial year, the budget would have returned to surplus. No ifs, ands or buts.

This raises, therefore, the question of the ideas the Alberta Progressive Conservatives are now based on.

Is this really a party committed to conservative economic policies, or have the progressives hijacked the agenda?

This is a curious question because of the presence of primaries in Canada, combined with one of the longest surviving governments in history.

In Alberta, if it is blue, people vote for it. If it is red, people shoot it, politically speaking. Not since 1921, in fact, has Alberta had a Liberal Government (Liberal in the American sense).

This has not gone unnoticed by many in Alberta's less than sizeable progressive community.

Instead, progressives have now signed up to the Tories, not because they agree, but because they know the only way to be a politician with credibility in Alberta is to wear blue.

This hypothesis is often queried, but the numbers don't lie.

In the 2006 leadership race, the most economically conservative candidate, Ted Morton, polled 15,000 first round votes and 41,000 second round votes before being eliminated as part of the instant run-off.

Last year, the same Mr Morton polled just 7,000 first round votes, and last year featured just one economic conservative.

Credit where it is due to the left, they have infiltrated and succeeded.

However. This raises the question of political apathy on the part of Albertans. Given how strongly the PC party has dominated for the last four decades, what will it take for Albertans to change their government?

History is as important as ideology in this instance.

Throughout its history since 1906, Alberta has elected four governments.

No, that's not a typo. Only four separate governments have controlled Alberta over the last 106 years.

Henceforth, when Albertans decide to change their government, there needs to be a major problem for them to act.

Politically, though, as indicated at the last Federal election, Albertans are still attached to their conservatism.

Of the 28 ridings represented in Ottawa, only one is not blue.

So, what happens in there is no conservative alternative?

Well, one is created.

The Wildrose Alliance, headed by Danielle Smith, has almost moved itself into official opposition status.

It takes much searching through the history books to find a political party in any Canadian election which sat to the right of the PCs.

However, this is now reality in Alberta.

And this reality comes with a 'zero-budget' plan as espoused by the Alberta PCs, which has Smith and her classical liberals seeing red, no pun intended.

This 'zero-budget' system sees a budget built from scratch, each year, without any regard for spending limitations or deficits, although this deficit ignorance is not noted officially in the plan.

This is on top of some incredibly dodgy spending from the PCs.

I will let the article carry the words:

Earlier this month, cabinet ministers went on a taxpayer-funded tour to hear from Albertans at a cost of $100,000.

Tory backbencher Lloyd Snelgrove, long disenchanted with the direction of caucus under Redford, labelled the exercise a cynical photo-op and quit to cross the floor and sit as an independent.

That was followed up last week by a $70,000 taxpayer-funded Tory caucus retreat to a Rocky Mountain resort near the ski-getaway town of Jasper.

Critics, including the Wildrose, noted that Tory election candidates who are not in caucus were in Jasper as well. While those candidates paid their own way, critics said their presence turned the Jasper trip into a publicly-funded Tory party election readiness session.

Whether this PC Party situation speaks more of long-term governments or the merits of the primary process where 'recruitment' (Glorified branch stacking might be a better term) is indicative of a good leader remains to be seen.

However, what cannot be disputed, as written by Kelly McParland, is that 'The richest province in the country, which doesn’t need sales taxes because it has oil and natural gas, is running a deficit and siphoning money from its trust fund to pay for short-term spending bonanzas, with no guarantee the money will still be there down the road.'

Will the mix of social conservatism and economic socialism presented by the PCs triumph, or will the classical liberal, almost libertarian, policies, economic and social, of Danielle Smith win the day?

While most will ignore this election as just a small time provincial election, this could present a valuable case study into what people find more important in their politics: economic security, or social values.

Keith Topolski is a former member of the NSW Young Liberal Executive and is studying Communications.

Joe Hockey, Political Lies & Bank Regulation

JJ1

Economists Dr. Joe Clark and John Humphreys analyse Joe Hockey's economically illiterate calls for the RBA to 'act as referee' on bank interest rates, and conclude that they really, really hope he's lying and doesn't mean what he says:

We hope that Joe Hockey is a liar. We can understand why a politician would want to bash banks, and we can understand why a politician would want to promise more regulation to control the “naughty market”. Both of these are populist positions which hit the political funny bone, and score cheap points.

It is no surprise that Wayne Swan regularly complains about evil bank profits, and we’re sure the Greens (and other assorted reds) would eagerly agree to more regulation. But while we can understand the political desire for populism, when it actually comes to managing the rules for our economy, we can only hope that Hockey is not serious about his stated desire to have the RBA act as referee on interest rates.
We already know that Joe Hockey wanted to introduce a psuedo-national bank, and he wanted more regulation to ensure that banks gave more risky loans, and also gave fewer risky loans

Now the issue is whether banks should be able to set their own prices for loans. To be fair, Hockey has only suggested that the Reserve Bank of Australia (RBA) should nudge banks, but given his track record on not understanding finance it’s a dangerous start. It hints very much towards government regulation of interest rates, which is price fixing of some of the most important prices in the economy.

If you’re like many other non-economists (ie normal people) then you might think that the government already does set interest rates. If you’re half an inch more informed, you might think that the independent RBA sets interest rates. That’s not quite right.

The RBA effectively does set one specific interest rate — the “overnight rate” for collateralised loans to major banks. There is a big argument about whether they should even be doing that, but that’s a topic for another day. The overnight rate is an important price, but — and this is the most important thing to learn from this article — that is just one interest rate among thousands. All of the other interest rates are set by banks (and other money lenders) in a competitive market, following the laws of supply and demand.

 
As it should be.

 The law of supply and demand can be frustrating sometimes. So can the law of gravity. But in both instances, you cannot legislate your frustrations away. When the government tries to “fix” the naughty market, there are three possible outcomes. Either the government sets the price too low and we end up with shortages (so banks will only lend to the privileged few) or the government sets the price too high and we have excess supply (ordinary people can’t afford to borrow), or the government sees a divine vision from the Virgin Mary, sings kumbaya with Mary Popins, and magically picks the perfect price, even though they have all the wrong information and incentives. What do you think is more likely?

We have learnt from 100 years of trial and error (mostly error) that the government is not good at setting prices. At least, that is what we should have learnt.

Some lefties and Bob Katter still want to set prices for things like milk and vegetables, and that is silly enough. But the idea of the government (or RBA) setting interest rates is another level of crazy. The reason, as we said above, is that there are thousands of different interest rates — depending on the reason for the loan, the collateral available, the length of the loan, the size of the loan, the liquidity of the consequent financial asset, the funding profile of the lender, degree of risk aversion and time value of money, the credit rating of the applicant, and many other variables.

You could try to find a benchmark or average interest rate, but that doesn’t really help our busy-body regulators. Getting the average right means nothing… just as standing with one arm in the fire and one arm in the freezer might give you a good average temperature, but it’s not a good idea.

Specifically, some financial institutions aim at a particular market, that might be more or less risky. That means they will have a totally different strategy, with different interest rates. Will the government be micro-managing their business strategies too, or just guessing at them?

And just to make it all worse, the public choice consequences of interest rate price fixing are also quite dangerous. Instead of being driven by competition, bank strategy and prices will increasingly become political footballs. That will mean some banks will reap windfall profits by playing good politics, while other banks will be sent to the wall due to bad politics. And the lack of price competition will mean less innovation and more lobbying and rent-seeking. That’s not how we want any business sector to work, least of all the all-important financial sector.

This is not good. As we said at the beginning, we can understand why populist politicians promise to run and ruin the economy. But what we really care about is whether they mean it. The two options are that they are liars who spruik populist c**p and then become responsible when in power… or that the politicians have actually drunk their own cool aid, and plan on destroying our economy. We hope they are liars.

Joseph Clark and John Humphreys are Brisbane based economists. All of the nasty parts of this article were written by Joe, and all the witty and wise parts were written by John. Except for this paragraph.

The Politics of Currency Manipulation

 

CW

Christopher Whittaker argues that the U.S's failure to act upon China's currency 'manipulation' is of severe detriment to the U.S. and world economies:

 In an obvious display of double standards the US Treasury has recently failed to label China as a currency manipulator but chided Japan for attempting to halt the Yen’s rise. The Obama administration’s failure to acknowledge China’s blatant currency manipulation highlights the sensitive diplomatic relationship between the two countries and the growing soft power of China.

US Report on Currency Manipulation

In late December the US Treasury released it’s Report to Congress on International Economic and Exchange Rate Policies. As usual, the Treasury stated that the US laws covering a designation of currency manipulator ‘have not been met with respect to China.’ The report simply states that the current appreciation of the Chinese currency (known as the renminbi or yuan) is ‘insufficient’.

Conversely the report blasts Japan, which unilaterally sold Yen twice in the foreign exchange market in August and October. These sales were conducted when currency exchange markets were operating in an orderly manner. The US rightly did not support these interventions. Japanese authorities need to radically improve the competitiveness of Japanese industry to kick-start growth, not artificially manipulate currency values.

Defining currency market ‘manipulation’ is a tricky business. A commonly accepted definition is that manipulation involves intentional interference with the forces of genuine supply and demand. This problematic definition suggests that manipulation involves a value judgment based on the ‘genuineness’ or legitimacy of the transaction.

It is important to recognize that no national Government has clean hands on this issue. Last year the G-7 countries stepped into currency markets in an effort to stabilize the Yen following the devastating economic consequences of the March Tsunami. While this involved creating an artificial stabilized price contrary to market forces, the US Treasury did not label it as manipulation as markets were apparently acting ‘disorderly’. Conversely Japan’s later incursions were slammed as illegitimate manipulation as markets were one again ‘orderly’. The problem with this type of Keynesian economics is that it applies arbitrary categories like ‘disorderly’ to justify Government sanctioned manipulation. A manipulation-free currency market is the best instrument to enable an economy to adjust to new challenges. Government should play by its own rules.

 

Economic Truth or Real Politic?

What makes the Treasury report so insightful is that diplomacy appears to have overtaken reality.  Fear of a negative Chinese diplomatic reaction to the label of ‘manipulator’ appears to have spooked the Obama administration. That and maybe the fact that China holds $1,134 billion of US treasury instruments.

Treasury Secretary Timothy Geithner has said that the report is a poor tool to push Bejing to free the renminbi from state control. If the U.S. Treasury officially finds a country is manipulating its currency under current law, it must launch bilateral talks and take China to the International Monetary Fund for a scolding. The US prefers to argue for change forums like the recent APEC summit in Honolulu. There President Obama took the unusual step of accusing China of ‘currency manipulation’ but added a caveat that he would leave it to Treasury to determine the official designation. The Treasury report’s failure to use the word ‘manipulation’ has overruled the President.

 Diplomatic niceties aside, there can be no doubt that China manipulates its currency. Ever since the Chinese economy was opened up in the 1980s, the renminbi has been systematically undervalued to improve the cost-competitiveness of Chinese exports. The resultant growth rates of the Chinese economy have enabled the People’s Bank of China (PBOC) to obtain a staggering $3.2 trillion in foreign reserves which are used for further manipulation. That’s equal to 54% of China’s 2010 GDP or about US$2,400 for every Chinese citizen.

Some may point to the recent rise of the renminbi (up 7.7% since dropping the peg against the greenback in June 2010) as evidence that the currency is not manipulated. The US Treasury took this and Beijing’s commitment to improve currency flexibility as sufficient conditions not to bring out the manipulator tag. Yet the Peterson Institute for International Economics has estimated that the renminbi remains undervalued by 24% against the US dollar. The US Treasury’s own report included the shocking revelation that despite the recent appreciation of the renminbi, the real effective exchange rate remains persistently misaligned and substantially undervalued having hardly moved since the end of 2001!

It would be a mistake to think that ordinary Chinese households benefit from the Communist Party’s currency manipulation. By denying Chinese households their proper purchasing power, efforts to refocus the Chinese economy onto domestic consumption instead of sluggish global demand for Chinese exports has been frustrated. Further, to sterilize inflationary pressures caused by manipulation, Chinese banks are paying out negative real interest on household savings forcing Chinese households to save even more. By obstructing the rise of the renminbi, the Communist state is depriving China (and the global economy) of the powerful Chinese consumer’s full potential. At a political level, currency manipulation actually impedes the growth a politically assertive middle class in China. Milton Friedman famously claimed that economic freedom leads to political freedom and a free society. China still does not have this first condition.

 What to do about China’s currency manipulation is playing a major role in US politics. The US trade deficit with China continues to reach new heights even with the ‘managed’ rise in the nominal value of renminbi. Last year the US Senate passed a bill that would require the Obama administration to slap penalties on Chinese imports if it failed to adopt market-based exchange rates. While this made no progress in the lower chamber, it demonstrates mounting US frustration at the perceived unlevel playing field currency manipulation creates. While mindful of these concerns, the solution is clearly not tariffs, which create further distortive effects and will ultimately harm the US households. 

 

Econ

 

 Aspiring Republican nominee Mitt Romney has stated that he would declare China a currency manipulator on his first day as President. Further, Romney has shown signs that he would be prepared to take China to the WTO. China’s response to such suit would indicate whether it is prepared to grow up and play by global rules. The former US ambassador to China Jon Huntsman was also prepared to use the ‘m’ word. Huntsman, the former aspirant nominee with the most substantial foreign policy credentials of the republican race, noted that the currency manipulation issue needed to be seen in the wider context. The US needs the Chinese Communist Party’s cooperation in regional security – think North Korea, Iran and Pakistan. That point is an acknowledgement that the US needs China so much right now that it is prepared to deny China’s continued blatant currency manipulation to the detriment of the US, Chinese and global economy.

Clearly, the diplomatic importance of Chinese cooperation on many important international issues has sealed the lips of the US Treasury. One thinks a truly robust international relationship would allow both parties to be honest without jeopardising all they have worked towards. The Obama administration failure to acknowledge the truth has the frightening consequence of tacitly endorsing the Communist State’s deprivation of the purchasing power of 1.3 billion people.

Chris is the Policy Director of the Australian Liberal Students Federation and the Immediate Past President of the University of Wollongong Liberal Club. Chris’s first class honours thesis addressed the regulatory and legal frameworks dealing with financial market manipulation. The views expressed in this article are his own. Footnotes availiable upon request.

Bailed Out…And Then Some.

A newly-released study from the Congressional Research Service bolsters claims that the nation's largest banks profited off the Federal Reserve's financial crisis-era programs by borrowing cash for next to nothing, then lending it back to the federal government at substantially higher rates.

The report reinforces long-held beliefs that the banking system in essence engaged in taxpayer-financed arbitrage: They got money for free, then lent it back to Uncle Sam while collecting juicy returns. Left out of the equation are the millions of everyday borrowers, like households and small businesses, who were unable to secure loans needed to tide them over until the crisis ended.

The Fed released records under pressure in December and March that showed the extent of its largesse. The CRS study shows for the first time how some of the most sophisticated financial firms could have taken the Fed's money and flipped easy profits simply by lending it back to another arm of the government.

The report was requested by Sen. Bernie Sanders (I-Vt.), who likened the crisis-era emergency loans to "direct corporate welfare to big banks," in a statement. The cash likely was lent back to Uncle Sam in the form of Treasuries and other debt "instead of using the Fed loans to reinvest in the economy," Sanders added.

In all, more than $3 trillion was lent to financial institutions from the Fed, and terms were generous. Junk-rated securities were pledged as collateral for taxpayer-backed loans. The Fed did not provide conditions for how the money was to be used.

As part of one Fed program, on 33 separate occasions, nine firms were able to borrow between $5.2 billion and $6.2 billion in U.S. government securities for four-week intervals, paying one-time fees that amounted to the minuscule rate of 0.0078 percent.

In another, financial firms pledged more than $1.3 trillion in junk-rated securities to the Fed for cheap overnight loans. The rates were as low as 0.5 percent.

During one three-month period in 2009, Bank of America borrowed more than $48 billion at rates ranging from 0.25 to 0.5 percent. Meanwhile, the largest U.S. lender tripled its holdings of Treasuries and other taxpayer-backed debt to about $15 billion — securities that yielded 3.5 percent.

During the third quarter of 2009, the bank borrowed $2.9 billion from the Fed through a program that charged 0.25 percent interest. In that same period, Bank of America increased its holdings of taxpayer-backed federal debt by $12 billion, according to the Congressional Research Service. Those securities yielded an average of 3.2 percent.

"Bank of America provided vital support to the economy throughout the financial crisis and we continue to support businesses and individuals today through our lending and capital raising activities," spokesman Jerry Dubrowski said in an email.

In another period, JPMorgan Chase, the second-largest bank, swelled its holdings of taxpayer-backed federal debt by $20 billion, which yielded 2.1 percent, while at the same time borrowing $29 billion from the Fed at a rate of 0.3 percent.

JPMorgan did not respond to a request for comment.

In contrast, during the first year of the Obama administration, small businesses shuttered due to lackluster sales and a lack of credit, foreclosures surged, and credit contracted at one of the quickest rates on record.

"Why wasn't the Fed providing these same sweetheart deals to the American people?" asked Warren Gunnels, senior policy adviser to Sanders. "The Fed was practicing socialism for the rich, powerful and the connected, while the federal government was promoting rugged individualism to everyone else."

At the time, Fed officials said its bailout programs were necessary to restart the flow of credit. If money couldn't flow to lenders, households and businesses would be next. Even more layoffs and foreclosures could have ensued, officials argued.

Lending, however, decreased, according to Fed and Federal Deposit Insurance Corporation data. Mortgage rates dropped, but mortgages were harder to come by. Credit card lines were slashed. Loans were called in. New financing plunged. In 2009, outstanding credit to U.S. households declined by $234.5 billion. For non-corporate businesses, credit plunged $296.1 billion, Fed data show.

Sanders said the spread between firms' borrowing rates and their lending rates to Uncle Sam amounted to "free money." For Bank of America during the third quarter of 2009, the spread was nearly 3 percent.

Dubrowski countered by pointing out that Bank of America "extended $184 billion in credit to individuals and businesses" during that time.

The author of the CRS report, Marc Labonte, cautioned that "correlation does not prove causation."

"There is no information available on how banks used specific funds borrowed from the Federal Reserve," he wrote.

The Federal Reserve declined to comment.

Via the Huffington Post

Andy Semple

Speak without fear and question with boldness.

Banking on Big Government

Cory-BernardiSenator Bernardi questions whether it is the big banks or big government that should be blamed for high interest rates. 

Wherever I go around the country people raise their concerns about making ends meet. The cost of food, utilities, transport and housing are putting pressure on the family budget, which, for many families is near breaking point.

That's why the decision of the Reserve Bank to lift interest rates, and the big banks to raise them by even more, has sparked such a public backlash.

The banks seem fair game for attack from all sides because they make billions of dollars in profits and so many families are already struggling financially.  Now I am not in the habit of defending banks but I will always support their ability to make a profit for their shareholders.

Sometimes it is easy to forget that banks that make money are always superior to those that don't. As long as they are conducting their business in a fair, legal and competitive manner then they can price their products as they see fit. A strong competitive banking environment will ensure that consumers get a fair go in their dealings.

Consider for example the current deposit rates on offer. In some advertisements, at call deposits can attract in excess of 6 per cent – even though the official cash rate is 4.75 per cent. That suggests to me that the banks are paying a lot more to access money than many people think they do.

Such high deposit rates are a boon to many with surplus cash and little or no debt but are the bane of those struggling to pay off mortgage and other loans.

And this is the problem that confronts Australia today.

We have a two speed economy with some sectors (such as mining and construction) booming but many regular families struggling to pay the bills. Every interest rate rise, whether official or not, dampens a little of the exuberance but drives a stake through the financial heart of many families.

Media reports suggest that the cost of living for employees was 60 per cent higher than the official inflation data because of their reliance on consumer credit and mortgage interest charges.

For some time I have suggested that interest rates would be significantly lower if the government hadn't injected so much borrowed money into the domestic economy. Labor’s unprecedented increase in money supply has put upward pressure on interest rates and threatens future inflationary pressure.

Had the government pursued a more measured fiscal stimulus program, it is likely that official interest rates would be much lower than they currently are. This would have helped those now struggling to meet their weekly commitments, kept business costs down and provided for a more sustainable, long-term economic environment.

Of course, such simple conclusions are lost on the advocates for bigger government who demand increasing intervention in almost every aspect of our lives.

So while it may be convenient to 'beat up the banks' and insist the government do something to reduce the financial pressure on many families, in this instance, we would all have benefited had the government actually done less.  It is an important lesson for all of us.

Senator Cory Bernardi is the Shadow Parliamentary Secretary Assisting the Leader of the Opposition and a Senator for South Australia. This article is courtesy of his personal blog which can be found at http://www.corybernardi.com.