Money Week Part 2: Understanding Banking and Interest Rates

ANNOUNCER:
The Agenda in the Summer with Nam Kiwanuka
is made possible through generous
philanthropic contributions from viewers like you. Thank you for supporting
TVO's journalism. NAM:
It's said that money
makes the world go round, but it can also
make your head spin. So, all this week,
the fundamentals, with economist Craig Alexander, licensed financial advisor
Shay Myers, professor and economic
policy advisor Brett House, and economist Kaylie Tiessen. Tonight, understanding banks. That's next on
The Agenda in the Summer. I think we've all heard
that expression of people keeping money
under their mattress. Yes. Oh, yeah. And I mean, I think the pandemic
showed us that you– In a digital economy,
that's really hard to do. So, Craig,
why do we have banks? Banks are financial
intermediaries. They play a really critical role in the economy, by basically taking the money
that, you know– They accept deposits
from savers, and then they take that, the
money that they get from savers, and then they extend it out through credit
to individuals that need to borrow, or to businesses
that are looking to borrow.

So, banks are the middlemen of our economy, and they basically keep
the real economy actually operating. NAM:
Well, what do banks offer
that carrying cash doesn't? Well, most essentially,
it's that matching function. That it gets people
who have excess money that they've saved
together with people who want to borrow that money
to deploy it for a new business,
to buy a home, to pursue their education. It's almost like, you know,
online dating, you know? It gets people together.
Or Craigslist or Kijiji get sellers
and buyers together.

Banks are a site that matches
savers with investors. But the thing that,
um, not irritates, 'cause obviously,
I have a bank account– But I always feel like there's,
like, a power imbalance when it comes to
banks. It always seems as if
the banks have an upper hand, but banks wouldn't exist
without our money, right? Mm-hmm. But is there that power balance? Is that intentional
or is that imagined? Or is that depending on
if you have lots of money? There are so many
questions in there. Yeah. The first thing
I would say is, just to add
to what's been said about the purpose of banks,
is generally, it's a safe place
to store your money. And it's also, then, a place
where you can access a loan. But banks can put in
all sorts of rules, and you might not have any control
over what those rules are. If you're already banking
somewhere and you have a loan and then they change the rules, all of a sudden
you get stuck with not having access to your money. And then, there is
a little bit of a power imbalance there,
for sure.

And then, of course,
we have credit unions as well on top of banks
or in addition to banks, that do very, very
similar things in a way that pools sort of community
differently. What's the difference
between them? One's not-for-profit and run by members, and then the other is
shareholder-driven. Shay? Yeah.
I would just add to or co-sign a safe place
to store your money. Also, too, you know,
if you have a savings account, you may earn
a little bit of money. It's not the best, but you know,
you're able to earn some money on your money, versus
if it was under your mattress, you wouldn't be earning
anything.

Your money
would actually be losing
its purchasing power. So, yeah. There's definitely
a need for it, but I do think there is
a bit of that, um– There is a power struggle,
but also, there are a lot of fees
that come with it, for example, and– NAM:
Just to put your money in,
you get charged for it. Exactly.
And you know, some of us may be familiar with
the famous NSF fee, where if you don't have enough money,
you get charged. Non-sufficient funds.
Is that non-sufficient? There's that–
Yeah. Yeah. Yeah. I know it. And there's
that collective of, like, well,
if I don't have money, like, how are you charging
a broke person a fee for not having money? So– And the negative
in your account.

Yeah.
So, I guess that's a downfall. But again, it's, like, okay. Where else
are you going to put it? Well, you can invest it,
of course, but outside of that,
where would you put it? It's just going to be
in your home, more unsafe, not earning anything. Maybe a sense
of security by having it in the bank,
or maybe some people think it's safer
under their mattress? CRAIG:
It's definitely safer
in the bank. Yeah. (Everyone laughing) Particularly given
that deposits in Canada are insured up to $100,000.

So, the– You know,
when we think about banks, the traditional banking model was you deposit your money
into the bank, and the bank will pay you
a certain amount of interest. And then, it takes
the money that you've given it,
it lends it out at a higher rate
of interest, and the difference between
the two is where the bank makes money. I think one of the challenges when Canadians
think about banks, particularly in recent years,
is the fact that interest rates dropped
to such low levels that, in point of fact, you weren't getting
much of any interest when you put your money
in the bank.

Mm-hmm. So, you know, when you're
thinking about– You know, you– The bank
is providing you a service, which is where we get
the service fee from, right? Like, they're providing you
with a service, so you pay something
to the bank for that. That was okay when you were getting
a decent amount of interest on the savings
that you put in the bank. But when you're not making much
in the way of savings, all of a sudden,
the perception of the bank really fundamentally
changes, right? Because it doesn't
feel like, "Hey, I'm making a return
on my money, "and yeah,
I got to pay you something for the service
you're giving me." NAM:
But do you have
a choice? I mean, you have your bank
in the– You have your money in the bank
or not? It's hard not– You know, it's hard to live
without a bank.

And in fact, one of the things
we worry about is Canadians that don't have access
to banking or are underbanked, because it actually can create
enormous problems for them. So, for example, if you
don't have a bank account, how do you get paid
by an employer? Right? SHAY:
Right. So, you absolutely need– Like, so it is an essential
service that banks provide. It's hard to do it with–
You know, it's hard to live without having
access to banking. And I think the power partly is the function of the contracts,
right? That when you enter into
a contract with the bank, right, there's terms associated
with what you agreed to. NAM:
But it's, like,
20,000 pages long that you have to sign now. Well, there, then– And there's
definitely a financial literacy
issue here… Yeah. Right. …that Canadians don't necessarily know what– You know, what the banks
are obligated to do.

They– There is a recourse if,
you know– If you don't think your bank's
been treating you fairly, you can go to the Financial
Consumer Agency of Canada and log a complaint. NAM:
I didn't know
that was a thing. There are–
Banks have ombudsmen, where you can lodge
a complaint with the bank and have
an independent assessment. Canadians actually often
don't know their rights, and that, I think, might also
contribute to the uneven power sensation
that you were referring to. NAM:
That's good to know,
Craig. Thank you. Kaylie? Well, I'm thinking about
this power imbalance, and that when
you're looking at, say, lodging a complaint against this
huge conglomerate and you're, yourself, with
an NSF charge on your account, it doesn't feel like
you have any recourse at all.

So, to know those things,
maybe even, like, when you're opening
a bank account or are going to a new bank
to ask those questions, it would probably be something
that would increase your power quite dramatically
in those situations. And the power of Canadians in
their relationship with banks is probably greater
than they realize. You know, if you look at
all the major banks, they are falling over themselves
to sign up new Canadians, either before they even
get to the country– Many of them have offices in
our major sources of immigration to try to get
people involved as clients
before they arrive here, because they know once
you're signed up with a bank, you are very reluctant
to change your bank, because there are a lot of administrative costs. There are a lot of hassles
involved with that. But if you actually do exercise
that change when you see offers
from other banks, it actually increases
the power of consumers. And similarly, right now,
as interest rates have gone up, banks are competing
with one another to a greater extent
to get deposits in, because those deposits
are what they need to finance those loans
that they make money on.

Oh. It's nice to be taken
out for dinner. Every once in a while. Or get
one of those iPads that are being given away, or… That's right. …300 bucks for
a new account. But they only give it
to new customers. I'm, like, "I've been with you
for 15 years." Yeah. Yeah. CRAIG:
Well, Canadians should– You know, if you have
a bad experience with a bank, you know,
there's nothing that stops you from taking your money out
and going someplace else. And the fact is, you know,
when we look at data, it shows that Canadians
are enormously reluctant to make that sort of change. It's a lot of work. BRETT:
It is a lot of work. It is a lot of work, but if you have a bad experience
at a bank and you threaten that
you're going to take your money someplace else, you are
more likely to get a response.

And quite frankly, if you've had
a bad experience, change financial institution,
right? You know– To your point, you know,
you had a bad experience, and you basically decided
right there and then… NAM:
Never, never, never. …you were never going to be
a customer of that bank ever again. NAM:
No. They even came
asking for more, and I was just, like,
"No, thank you." And it's not
all or nothing. Yeah. I mean, you could have business with a couple of
financial institutions. Right. You could be involved with
a credit union that's located
in your community and one of the larger
financial institutions, and you get different services
from them. You know? It's not like you have to give
all of your faith to one. The other question
that it raises, though, is the level of competition in the banking and financial
industry in Canada. We have a very centralized
financial services industry compared to
the United States, for instance,
and one of the big policy questions we debate
again and again is whether that should be opened up
to more competition at the financial institution
level, because with more competition, that would probably shift
a little more power to individuals
over how their money is treated and what terms they get
for depositing it.

Well, since you brought this up
and we've talked a little bit about interest,
can you help us understand what's the difference between
a bank and a central bank. Do you want to take it, Brett? Sure. The central bank
is a public institution. It makes big decisions about the
supply of money that's available in the economy
at any given time, and it sets
interest rates. So, the ease
or the cost by which people can borrow. Mm-hmm. And in some countries, not all, it also has a hand in regulating
the financial services industry. We've been hearing a lot of pain around inflation,
paying more at the groceries, more for everything,
more for gas. And then we heard
the central bank come, and interest rates went up. So, people had more pain
that way. At what point do policies and politics
get involved in the bank? Craig? The Bank of Canada is– even though
it's a public institution, it has a very high degree
of independence, and that is deliberate. Because quite frankly,
you don't want politicians deciding interest rates,
because they would use it for short-term…

…gain? …gains politically,
which is why there's a board of directors of the Bank of Canada. They choose the governor and the senior deputy governor of the Bank of Canada. So, they pick the two
most important positions. Now, cabinet in Canada– So, the government, the
current government's cabinet, has to ratify the person
that has been chosen by the board
of directors. You mean, vet? They have to basically say, "Yes. That person is acceptable
to us." Okay.

But the important thing is that the board of directors
of the central bank are the one that basically say, "Here's the
person we're putting forward." Right?
"This is the person we think "is qualified to do the job, "and we think
this is the person "you should agree
should be the next governor of
the Bank of Canada." Right? And then, that person has a term
of seven years. And it's chosen
seven years so that it's
long enough to– It's long enough that you're not
going to have constant changes in the conduct of policy. It emphasizes the fact that
the goal of the Bank of Canada is to preserve the purchasing power of money, and the way they do that
is by keep up– By striving to keep inflation
low and stable.

And I know that sounds ironic
in the current environment. Yeah. But if you actually look at–
since the Bank of Canada started targeting inflation in 1991, and started aiming for
the 2% target in 1995, the average rate
of inflation in Canada has been 1.95%,
up until the pandemic. Up until
the recent inflation shock. Mm-hmm. So, they've been
enormously successful. Unfortunately, the pandemic
basically broke a bunch of rules in terms of central banks
globally, governments globally, and the policy response and the breakdown of the supply chains led to an inflation shock
that we're now struggling with.

So, the Bank of Canada– I know that Canadians don't like
interest rates going up, and this can create
a lot of strain on Canadians, but in the long term, the– What you really should take away
from the current experience is how bad inflation actually is
for consumers, and we desperately need to
get inflation back down to something
that's low and stable again.

NAM:
Kaylie? Oh, I'm so glad.
(Laughing) Yeah, yeah. There's so many thoughts
that I have running through my head at this,
and okay. So, the first thing to add is
that the Bank of Canada also has a mandate that's set by
the federal government. At one time, it was strictly
about the rate of inflation, targeted between
1% and 3%. And then, I can't remember
if it was 2020 or 2021,
there was an addition made that the Bank of Canada is also supposed to focus on
full employment. So, keeping
inflation low as well as keeping Canadians
employed. So, now we're in this moment where we have seen
high inflation coming down, but essentially,
the Bank of Canada is trying to slow
economic growth. They increase
interest rates. Increase the cost of borrowing so that businesses
aren't investing, and that means that the economy
isn't creating as many jobs. It potentially means that
wages aren't going up or keeping up with inflation, and potentially means
that people might lose work if this bout
of interest rate increases ends up creating a recession. And all of a sudden,
what we've done is take the pain
of increasing prices and put it on a few people
who get put out of work.

Help us understand.
Why is that? Yeah. 'Cause it feels
as if it does–
It's counterintuitive. I don't know.
If people are struggling, then they're going to
struggle more, and that's going to help
the economy how? KAYLIE:
Exactly. That is a very good question, and it's something
that we at Unifor have been talking about a lot,
is it's kind of a– What's the word I'm looking for? Like, what a conundrum or, like,
screwing with your mind when, okay,
people are struggling. They can't afford
things. So, we're going to,
you know, create fewer jobs, and lower wages, or decrease the purchasing power
of wages, in an attempt to keep
inflation down, so that then, people
aren't struggling so much. But at the same time,
we're not keeping up to what's been extended
or what's happened. It's very, very confusing
situation.

What we would have looked for is for the government
to also step in. So, very important
for the Bank of Canada to be an independent body,
absolutely. There are also many things
that the Government of Canada could have been doing in order to keep
inflation low. Like what? I mean, you could
think of things like price controls.
So– Or dealing with
profiteering as well. We've seen profits rise rapidly,
take a much larger share of the economy than was the case
before the pandemic. But workers and wages
are the only kind of target of the interest rate increases, and no one's
talking about trying to
keep profits low. So, we could have seen
in the last budget an increase, say, dealing with
corporate profiteering. Higher corporate profit
taxes in order to redistribute
that money, and potentially stop
profiteering in the first place so that people– So that inflation
doesn't keep rising.

I know the government
gave– Like, I think it was
$500 for food, or– But I mean– There was an addition to the
GST rebate… Yeah. …which they cast as
grocery support, but it's really for
almost anything. It isn't– Right. That's, like,
a week– Anyway– (Kaylie laughing) Yeah. No. But you know, on the
conundrum that you pointed to– You know, why is
a rising interest rate useful when people are already
experiencing problems with costs? And I'd echo
Craig's point that inflation ultimately hurts people at the lower end
of the income level, where they typically
don't have assets that are protected
against inflation.

They're relying on wages
for most of their well-being. And when the costs of goods
and services is going up, typically their wages don't
go up quite as quickly, because they don't get
reset every day along with price tags
in the store. They get set maybe for
a year or two or three years at a time. But I would say the central bank
is never trying to just simply dampen
growth for the sake of doing so. It's trying to bring the demand
for goods and services and for workers
in line with the actual
production capacity of the economy.

And right now, if you look at– It's not quite a dual mandate. I would say the inflation target
still remains the principal mandate
of the Bank of Canada. But there was some verbiage
added to its mandate saying, "And take account of employment,
too." Employment is at an incredibly
strong point right now. We have some of
the highest participation rates in labour markets
that we've ever had, and some of
the lowest unemployment rates we've ever had. So, there isn't an obvious need
that we need to try to emphasize that part of the discussion,
the mandate. The real problem is inflation
still, which is too high, and undermining
the purchasing power of low-income Canadians. NAM:
Mm-hmm. And when we say– 'Cause all of this seems
so high-level. Yeah. But all of this stuff
is affecting individuals on a daily basis. It is. Shay, how do you see it? How do interest rates
affect people? So, interest rates
affect people– First, interest rates,
you can look at them as a bonus on your money if you're looking at savings
and investments, or you can look at
interest rates as a fee when it comes to debt.

And essentially,
interest rates affect the growth of our money. The growth of our money, the
growth of our debt. And a lot of people actually– You know, I'm on the ground,
actually, like, talking to individuals who need help with
their savings and debt and insurance
and investments. And a lot of them
actually don't even understand
what interest rates are and how they affect their money. So, they're putting their money
into things that aren't growing. For example,
a basic savings account. And then their debt
is super high, which– We know the interest rates
for credit cards, average, used to be, what, 19%? Now, it's probably, like,
close to 24%. So, your money is growing
at 0.01%, average, and your debt is growing at 24%. And they don't
understand why their savings
aren't growing and their debt is.
So, just understanding what interest rates are,
how they affect our money, will help us put our money
in different places, but also prioritize debt.
'Cause there's a lot of people who have
a lot of debt, and it's kind of, like, "Ah, I'll get to it
whenever." But if more of
your money is going towards debt
than savings, this is how we're not really
able to afford the things that we need to afford.

On the flip side– On the flip side, too, I think
credit cards have probably become like a lifeline
for a lot of people… That, too. Yeah. …especially during
the initial upheaval… Right. …of the pandemic,
and sometimes I feel like– I remember
when I started university. And the first week
when you go to university, there's, like, a row of banks. Mm-hmm. Yeah. "Here's your credit card,"
right? And I didn't know anything
about money. I was, like, "Oh, free money!"
Duh. No. And my credit, I'm going to
admit this on television, was ruined over $500. Yeah. Because as a student,
I didn't have $5. I put myself
through university. So, I wanted to just kind of– When we talk about inflation,
when we talk about credit cards, when we talk about
interest rates, I do think there's a lack of understanding from
the public. Yeah. 'Cause I think also,
banks are, like, "Okay.
Put your money in savings." Why not push it to other places
so people can make more money? Right. 'Cause when you sign up,
"Oh. Chequing and savings." Nothing else is really offered
until your money starts to climb
a little bit.

Right.
I think it's an overall lack of financial education,
because also, too, like, those– That situation, with people
offering you cards and stuff, like, some of them actually
offer it as a rewards card. So, even just not understanding,
like, what a credit card
could look like, or what it even is. We get, I don't know,
bamboozled, maybe, and actually think that this is a reward card
when it's a credit card. So, I think there's a lack
of transparency on that end. And then, also, too, I don't necessarily know
if the bank's job is to build investors, or to build people
who are financially educated.

NAM:
Mm-hmm.
It's a business. And so, it's–
Maybe that's not why there's education on– "Okay. You need
a chequing account. "You need
a savings account. "But you also want to make sure
you're opening up a TFSA, and this is how
you actually use it." Tax Free Savings Account. We know we get taxed on
almost everything. How do we reduce our taxes
so that our money can grow more? There's a lack of education there as well. So, I just think a lot
of it comes down to the lack of education,
right? And also going back to, like,
scarcity. These reward cards,
or credit cards, are appealing to a lot of people
because it's money. It's extra money that people
can use to spend, or money that they
didn't have, right? So– They're enticing. Hmm. It's enticing, 1000%. But on the flip side, too, when you understand
the power of leveraging money that you don't have
to buy things that are going to produce cash, that's where
leveraging debt in a good way versus just
racking up credit card debt is helpful, right? Yes.

NAM:
We're going to talk about
debt in the next show. (Laughing) BRETT:
I think a theme
that comes up again and again
over decades is the lack of investment
in financial literacy education. And that's a problem we've
talked about since I was a kid in the '70s and early '80s, and that hasn't changed
substantially.

So, one question I think
we need to reflect on is why haven't we moved
on that in the education system? You know, for family– Particularly
when financialization of people's lives
has gone light years ahead of where it was years ago. So many benefits
that government delivers, so many policies that are meant to help
low-income people, or people who buy a first home
or to save for retirement, are all delivered through
the financial system now, rather than direct
government payments or programs. And yet,
we're not providing the concurrent
education for people to really understand how to use those tools
effectively. NAM:
And the older you get, these mistakes can have real significant impact
on your life, you know? Absolutely. KAYLIE:
Right. No. Financial literacy
is really important. And having worked at
a bank, I can remember
having conversations within the bank
about the programs that it was running
to promote financial literacy.

And you know, in some cases, the
individuals I was talking with were saying, like, "Here's all the things
we're doing." And I'm, like, "Yeah.
That's marketing. That's marketing." (Chuckling) That's actual literacy,
right? That– Mm-hmm. So, we have a–
I think for many kids, financial literacy primarily
gets taught by the parents. And parents
have different levels of financial literacy
themselves. KAYLIE:
Mm-hmm. Right. And I think
that's one impediment. And then,
the second one is that– And if parents– You know, if we're going to have
that unequitable experience for kids, I think that
makes a good argument for why you might want to have
financial literacy built into the school system, because
it is an essential skill, and it can be woven into other
things you are doing, right? BRETT:
Mm-hmm. Like, it links to numeracy.
It links to math. You can put
financial literacy examples into your
primary and secondary education system… Yeah. …so that kids graduate
with, you know– Are properly armed
for those conversations when they get to university
or college, and there's the line
of business– Banks offering credit cards,
that they actually understand, you know, what they're
signing up for.

I think one of the most– The
times that I was very excited, was when the Ontario Government
announced that children were going to be taught
financial literacy in school. Anyway,
thank you so much for helping
us understand these terms. I feel more empowered than I did at the beginning
of the conversation. Thank you so much. Tomorrow we're going to be
diving into debt. What is debt and what is credit?
Thanks so much again. Our guests all this week are… Shay Myers,
licensed financial advisor and educator
of Finance for the Culture; Craig Alexander, president of
Alexander Economic Views; Brett House,
professor of economics at Columbia Business School and fellow at
the Public Policy Forum; and Kaylie Tiessen, economist and policy analyst
at Unifor, one of the unions
that represents some employees here at TVO.

ANNOUNCER:
The Agenda in the Summer with Nam Kiwanuka
is made possible through generous
philanthropic contributions from viewers like you. Thank you for supporting
TVO's journalism. ♪.

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