Fix wine prices


Bob Brown wants to regulate banks so that mortgage rates track the cash rate. Meanwhile Richard Denniss from the Australia institute is quoted in today’s Age newspaper as saying that “It’s [banking] like making hamburgers. If meat accounts for a third of your costs and the price of meat goes up 10 percent, you shouldn’t be expected to put up the price of the hamburgers by 10 percent.” Now I had thought that all this fuss about mortgage rates was due to the fact that Australian households (read the median voter) is way overgeared. But now I’m thinking otherwise. I like this hamburger logic. I think we should apply this to all goods. Take wine. Grange Hermitage has been increasing in price by double digits for decades. The price of grapes has not. Penfolds are clearly scumbags. The price of Grange and all other wines should be a simple markup on table grape prices.  Say $3/bottle. And what about petrol? Buggar petrol watch, just a straight 5% over Singapore crude ought to do it. Ferraris surely can’t cost that much to build? By year end everyone in Australia can be drinking Grange and driving a Ferrari – and we can all afford the petrol. All courtesy of the Greens.

11 Responses to "Fix wine prices"
  1. I’m not convinced by the Greens’ proposal either, but your analogy mischaracterises their proposal and misses out some crucial points about the failings of the current mortgage market.
    The Greens proposal doesn’t fix the price of anything.  It requires that the banks offer mortgages where the rate is calculated as a margin over their cost of funds.  The margin is then fixed for the life of the loan.  However, nowhere does the proposal say what that margin has to be.  If a bank wants to offer a Penfolds Grange loan with a margin of 25% over cost of funds, nothing’s stopping them.
    As to the current state of the mortgage market, essentially, a mortgage is a contract to buy money from a lender.  However, the terms are very heavily loaded against the buyer.  Can you name another contract  where the seller is allowed to change the price on a whim, and the only choices the buyer has is to a) pay up, or b) pay a very considerable fee to break the contract and buy their money from another supplier?
    The fact that none of the banks are offering an alternative (you can’t get a fixed-rate mortgage in Australia that’s fixed for more than a fraction of the loan duration, IIRC) suggests to me that the market that the mortgage market is broken.

  2. Mark,

    it is all about recovering costs. something you should understand given where you work.

    The banks are saying they are merely recovering costs when clearly they are not.

    your Grange analogy is very stupid and not at all revelant as you would know

    By the way I do note Ireland is living proof of your bizarre belief that austerity breeds growth.

    Still no mea culpa

  3. @KB Keynes,

    Banks are not social services. They will charge whatever price the market is willing to bear. (And in Australia, the desire for home ownership is powerful enough that willingness-to-pay tends to be high to the point of distress.)

    If you regulate bank interest margins to serve a notion of “fairness” then why not regulate other goods and services on a cost-plus basis? Who decides “fairness”? For example, would it be a popular referendum or a government department? (Irony is a terrible thing to misplace – Grange aside.)

  4. I agree Robert, but the risk has to lie somewhere. Bob Brown speculated on a margin of 2% over the cash rate (not 25%). Imagine that liquidity tightens again (not hard) and banks offshore funding costs increase significantly, which is not hard to imagine. Then our banks are stuffed. Individuals do have the option of insurance against interest rate rises at least for 5 years (fixed rate loans). At that point it is possible to refinance and fix again. Longer term fixed rate loan load all of the risk onto the banks – maybe they can bear it better than individuals, though US experience isn’t clear on that. And with fixed rate loans the banks get the first story on a current affair when interest rates fall, with teary stories of punters still paying high fixed rates. If banks remove or significantly reduce exit fees then borrowers will have the option of moving more easily which doesn’t give the banks all the bargaining power. That does seem sensible. But interest rate regulation, and the obsessive focus on whether bank margins have increased by 10 basis points is mad. That is a very poor measure of whether there is enough competition.  I imagine in 30 years time when we’re all old and dissaving the complaints will be about interest rates not going up enough. I wonder which year will be the year when this tips the other way?

  5. DP, who is talking about regulation or even fairness

    Only you!

    I am merely asking for some transparency from the banks in terms of running their busienss something that has ecaped you and Mark.
    Mark is obviously has less time examining the booming Irish economy!

    Peter Martin has some interesting information on margins today!

  6. Ireland was doomed once bank obligations were taken on by the government. As with Iceland. Fiscal policy was irrelevant. I don’t see the US economy booming on the back of their fiscal policy if that’s what you’re after KB. It must be nice to live in such a simple world where government is always the answer. By the way, who taught you grammar?

  7. Mark, read the Greens policy again.  They don’t require tying the mortgage rate to the cash rate.  They require tying the mortgage rate to the cost of the bank’s funding, as determined by APRA (IIRC, may have been another government authority).  So if a bank’s cost of funds rises faster than the cash rate, so do mortgages under this policy.
    I’m not entirely keen on this – for one, it creates incentives for banks to figure out a way to pump up the nominal “cost of funds” and somehow get a kickback.  Secondly, it complicates things, because there’s no way for the average punter to tell which banks are likely to have lower costs of funds into the future.  And, finally, there’s  the risk of perpetual bunfights between banks and the regulatory authority over what the real cost of funds is.
    But, assuming that the regulators are moderately competent, it doesn’t transfer huge additional risks on to banks.  What i

  8. Thanks Robert. That’s not actually what Bob Brown said on ABC radio the other morning. Which is another problem. This is policy on the run, rather than thinking about whether there is a competitive issue, whether there is a reason to limit bank profitability, and whether there is an issue with mortgage costs.

  9. fiscal policy irrelevant?

    Ireland are in a minor depression because of fiscal policy you claimed would be expansionary.

    As for the US the stimulus wasn’t large.
    must be good to live in such a simple world and ignore the evidence the IMF produced that contradicts such simple beliefs.

    By the way if you pop in to marketing you wil learn how and why Penfolds charge what they do for Grange.

    If you enjoy wind then a Rosemont Balmoral is a much better wine and at a far better price.

  10. KB – is it always and only fiscal policy. You should read something other than Keynes.
    As for wind, I am a golfer, not a sailor.

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