INTEREST RATES

Evening Post, Issue 29, 4 February 1935, Page 13

INTEREST RATES

FEAK OF SPECULATION

THE ROLE OF THE STATE

"In. his pamphlet,"-Mr. Coates summarises his expectations from the establishment .of the. .Corporation in the following words: 'It is hoped that the operations of ;the Corporation will result in' stabilising, mortgage-rates of interest at lower, levels'' arid a. section of the farming- community-is anticipating a substantial reduction in the interest rate oh farm mortgages. The committee.is unable to see.how this can be effected. The pamphlet anticipates that Mortgage Corporation bonds will carry: interest, at approximately the same rate as better-class-local body securities—say, today, 3§ per cent. If the Mortgage Corporation can issue bonds ona 3J per cent, basis, the com' mittee is satisfied: that it will require to charge its farmer mortgagors 4^ per cent interest or more. This allows 1 per cent, to coyer administrative costs and contingencies, and large-scale lenders have found this scarcely adequate. In addition, the mortgagors will have to pay the annual reduction on account of principal and the proportion-, ate amount of the contributions to the reserve fund. ;

"Even if the bonds could be sold to the public on a 3 per cent, basis, which is lower than the average market yield.of Government stocks today, it is very doubtful if the Corporation could relend to its borrowers at substantially, less than 4£ per cent. The committee would point out that on this basis the amount to be paid half-yearly by the borrower would be slightly higher than the half-yearly payment under the original State Advances tables. i "At the present time there is, the committee is satisfied, a large amount of money available for investment on mortgage at 41 per cent, per annum arid lower. ""• SUCCESSFUL ISSUES OF BONDS. "The committee is of opinion that the bonds will not find a ready sale at a low rate of interest. Unless the bonds can- be sold at a low interest rate the Corporation cannot lend at. a low rate and, prosper. "The committee is very much afraid that the Corporation will inevitably be unwieldy in size and impossible of sound economic management. We already have the example of one institution whose very size has made it unwieldy arid difficult of management. It is very doubtful whether there is available the personnel with cither the necessary vision or the necessary practical experience to handle the huge sums that will In clue

course be at the disposal of this giant Corporation, ...-.- "The committee understands that approximately £50,000,000 face value of mortgages will be Maken over. Executive officers capable of handling such a huge business! are riot' easily found. The committee would poirit, out that the Corporation will,, from'lts inception, be one;-of the largest lending institutions, in,.the jpominion. ■ > ST^TE; GUARANTEE. ■■'"In his pamphiet,- -Mr. Coates says: 'Substantial objections can be raised to' the State taking over an ever-increas-ing amount of ■ mortgages, ■ while the reactions from an increasing public debt must always, hamper and limit the operations-of the offlceV The committee considered tliis.question of such importance', that'it asked for," and was given, a definite' assurance that neither principal nor- interest of the bonds would be guaranteed by the State. • FINANCIAL OUTLOOK. "Interest rates will not always remain low, and the committee thinks: that those i;esponsible for the administration of this ,new institution, if formed,, must.be particularly on. the,ir guard against havng to refinance their bond issues ' at • high ' interest rates while the Corporation still has a large proportion of-its funds locked up. in long-term advances at low rates. "Fluctuations in; interest rates will automatically be reflected in the Stock Exchange prices of the Corporation's bonds, certainly to the embarrassment of the'bondholders and possibly also to ttie embarfass'ment of- the Corporation. "CHEAP" JVTORTGA«E MONEY. "The more successful- the Corporation is in raising cheap money from .th° public and pending it to fir.'ners, the greater-wij'l be the vety-grave risk of an inflationary increase1 in land valies. and'an'unjustified sp^cilmve boom iv land. The greatest care should be token not to .increase artificially the current market price of land."