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Michael Goldstone talks about falling interest rates

11 November 2008

With interest rates falling there are many people hoping this will be reflected in the cost of their mortgages. However I'm far from sure that this is likely, or indeed in consumers' long term interests.

Once upon a time banks behaved like banks. That is they borrowed money and lent it out again at an acceptable profit level. They had managers that had authority and the system worked and enabled people to buy homes and allowed businesses to flourish.

Then came changes to financial regulations and they not only discovered new routes to making money but vastly increased their profitability in so doing. So much so that their hitherto proven methods of making sound and sustainable profits was cast aside in favour of greed. Of course once one bank started the process, the lemming principle applied and others had to follow for fear of being castigated by the City.
(Mind you they did not need much persuasion to join the gravy train).

The money they have all made from payment protection insurance (PPI), credit card interest rates, penalty charges, writing letters, introduction fees and so on has been quite extortionate. However these methods of acquiring money by often unscrupulous means have now in the main been stopped, leaving all the banks with massive potential liabilities and limited routes to replacing their depleted profits.

Thus it is that they now need to increase the gap between borrowing costs and lending rates.
If we want banks - and certainly we need them - then we must accept that they must return to that old fashioned method of making money with a degree of genuine transparency.

Michael Goldstone
Director, BrunelFranklin.com

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