Stimulus for Development

Commentators across the spectrum have worried that the April budget will tax and cut so much money out of the economy that we will face serious deflation. There has been a shift in emphasis from the over-riding importance of minimizing the budget deficit to recognizing the need to minimize the deflationary effects of fiscal measures. We are seeing an increasing number of proposals in that regard.

This is not unrelated to a second major political shift – the re-opening of partnership discussions and the potential for working through more complex and multi-layered ways out of this crisis. I can’t see any other institutions that can put together a combination of measures to promote a growth strategy that would accompany fiscal measures.

Without that growth strategy, the fiscal measures will not achieve their desired goal. We will simply end up chasing our tails, raising tax rates on a declining tax base and promoting deflation by combining tax increases, employment reductions, spending and wages cuts in a single year. Immediate measures to restore a degree of fiscal stability and reduce the budget deficit are necessary – but require a strong countervailing growth policy to restore the economy, and even to maintain those narrow fiscal goals.

I am skeptical that a growth plan that is simply based on cutting wages (although it is clear that wages are declining already in some sectors) and waiting for international demand to pick up will work. There are, for example, significant wage and non-wage elements to increasing costs (e.g. energy costs, communications costs and professional fees) and other areas where labour costs are not the critical components of competitiveness. Improvements in energy and professional fees would benefit consumers as well as firms and would make a recovery plan much fairer than an exclusive focus on wages.

But more importantly, our industrial development is very much an unfinished project. We haven’t built the firms and industries that can be the basis of sustainable prosperity and have been struggling in that department since the momentum of the late 1990s was lost. Even with the boom of the past decade, our banking, enterprise and social investment sectors have major structural defects that will weaken the effects of any efforts to increase cost competitiveness. Any growth plan must also be a development plan – even where particularly important to competitiveness, cutting costs will be an element in a growth strategy but will not deliver the development in organizational capabilities that is required.

Is there a way to square the circle? If there is, it needs to be rooted in three crucial features of the current situation

1) The efforts to deal with the public finances must be combined with a strategy for growth in a creative multi-year approach.

2) These efforts must be located within an integrated solution, as NESC point out. This should encompass solutions to deal with the financial crisis, the fiscal crisis, the economic crisis, the social crisis and the reputational crisis. An exclusive focus on re-capitalising the banking system, cost competitiveness or public sector costs will not generate the economic or political dynamic to get us out of this mess.

3) Solutions must not only be adaptive, but also developmental – this crisis has only emphasized the weaknesses of our existing systems. If we simply restore business as usual, then we go back to banks that don’t lend to productive businesses, to a weak industrial base that is stuttering towards the ‘knowledge economy’, to weak systems of social support for workers, and so on. Institutional reforms need to be developed not only for the public sector but for the banking and private sectors.

Each of these aspects of the crisis poses enormous challenges. But each also provides opportunities. There is a chance to make reforms that can set us on a more sustainable path of development. While the current focus is on cost containment, our over-riding medium term goal should be to become a high investment economy. We have in fact signally failed to become an investment economy, just a high growth and high spending economy. This applies equally across the private and public sectors. Non-housing investment is weak and public spending, even with comparatively high public sector wages, has been well below any of the high performing small European economies.

We need a ‘stimulus for development’ plan. This would incorporate a short-term plan for fiscal restoration, linked to a serious growth strategy that will establish bank lending to growing enterprises and support those firms with an enterprise strategy that goes far beyond our excessively narrow industrial base. This should be tied together through a plan for recovery of living standards, particularly among those on lower incomes.

The plan should contain certain key elements.

The first is significant banking reforms. Simply recapitalizing banks that go back to their existing business models will do little for growth – Patrick Honohan has shown that banks contributed little to the Celtic Tiger boom of the 1990s and it is clear that their lending since the late 1990s has been speculative rather than promoting development. The property assets that are now being underwritten by the state should be carefully reviewed to assess the social purposes to which they could be put (a back of the envelope list would include social housing, enterprise centres, libraries and public internet facilities, community facilities). Bank lending should be focused – either through nationalization or regulation – upon much more significant elements of investment in enterprise development. In an era when public funds are under severe pressure, we cannot afford to get as little return from the funds in the recapitalized banks as we have in the past. Simply quarantining toxic assets in ‘bad banks’ won’t deliver this kind of reform – and will still cost us a fortune. We can have our own ‘stress test’ of banking reforms. If the banking system we design won’t invest heavily in the innovation funds proposed in the Smart Economy plan, then our reforms have not done their job.

The second element should address the economic crisis through taking the opportunity to deepen and extend the elements of enterprise strategy that we have in place that have worked in pockets of the economy. Obsessed by the search for the new Nokia to emerge from Ireland, government has neglected the overall infrastructure of learning and innovation. While spending has increased it has not caught up with the historic infrastructure deficits, nor has it kept up with the increasing population or the complexity of the demands of ‘knowledge economies’. We do have institutions that have been successful in this regard. Research council and other funding has boosted research in Ireland to new levels. State agencies have a track record not only in attracting foreign investment but in supporting the growth of indigenous firms. But we have not generalized this model and we have not built the overall system of lifelong learning and high rates of investment that support such enterprises in the more successful European economies. The obsession with big science has led us to stop asking the firms and state officials working to promote innovation across the economy what they need and what supports they can develop for this process. Re-invigorating a general enterprise strategy is something that we have the expertise to do, where we have some track record of success and which is an essential element of the competitiveness of firms and industries. We need this generalized enterprise strategy to address the structural weaknesses of Irish business, that include but go well beyond cost competitiveness issues. There are many suggestions in the Government’s Smart Economy strategy, ICTU’s Ten Point Plan and the various party documents that can contribute to this area.

The third element should be the maintenance of social investment. While we often focus on the positive stimulus effects of capital investment, in an economy when services and human capital are increasingly significant elements of the economy, social investment is increasingly important. This means placing new emphasis on services that support labour market participation – education, training and childcare come to mind and the work of NESC on the ‘developmental welfare state’ maps out a clear path that shouldn’t simply be abandoned at this point. I suspect that, if we could figure out how to estimate the effects of these ‘development services’ embedded within the broader system of public services we would find important multipliers – we know that the investments we did make in education and in industrial policy paid off handsomely.

Enhancing social investment among the lowest and middle income groups reduces inequality, tackles the inefficiencies in the waste of skills and talents in the current system, and improves the prospects of any deal being politically workable. Right now, our institutions work in highly unequal ways. Attacking that inequality will both give us greater fairness and increase efficiency. If we allow communities to become racked by high levels of unemployment now, we – and more importantly those communities – will face the consequences for years to come. The rumoured forthcoming cuts in services to the weakest will increase inequality and also cause significant long-term costs.

This involves an integration of the efforts to tackle the social and economic crises. As NESC argue, we need an economy that is embedded in society. Education and training should be a critical element of the development plan – and at the same time work to re-train those who lose their jobs and reduce unemployment benefit costs as workers end up in education rather than on the dole. The greening of public infrastructure is urgently needed, and offers the chance to re-train construction workers and build ‘green enterprises’ while tackling some of the social costs of collapsing construction employment. There are many ideas in circulation at present but the debate around making them into a cohesive strategy hasn’t really been engaged.

The reputational crisis that NESC refers to is also central to the problems we face. However, that reputational crisis is both domestic and international. A plan that addresses the need for reforms across the public, financial and enterprise sectors; that addresses the weaknesses that got us into this position; and that provides a pathway for future development that is credible and allows economic actors to plan and work out new strategies within some kind of stable expectations about the future.

Pushing funds into these areas also has the advantage that the funds are delivered through services that are provided within the economy, avoiding the tendency for stimulus funds to flow straight out of the economy through imports. It combines immediate stimulus with long-term development.

Nor does it require us to develop new skills overnight. Existing evidence suggests that government investment and non-wage consumption has worked to stimulate the economy over the past three decades. Such a strategy draws on expertise that already exists within public institutions – on enterprise development, financing of enterprises and social investment. It does not require the invention of new capabilities on the part of public agencies but on recognizing their value and mainstreaming and extending them.

Can such a plan be funded through external borrowing? Recent discussions on the importance of distinguishing the structural and cyclical budget deficits are helpful here. If we are taking action to restore the balance of the structural deficit (the underlying balance between revenues and expenditure) then cyclical borrowing to support a specific ‘stimulus for development’ will be easier to justify. We certainly need to get the structural deficit in order. However, identifying the cyclical component of the deficit also allows us to identify a space for temporary stimulus spending. It also gives us the chance to develop new institutional capabilities to promote long term development. It is costly but without it, it is difficult to see the austerity measures working.

There is also the opportunity for forming a political coalition to push this through. The fact that the challenges are across multiple areas and years and that the reforms required are institutional as well as budgetary opens up the possibility of trade-offs across these various dimensions of the crisis. The kinds of financial losses being distributed across the economy are going to be difficult to justify without clear indications that we are not returning to business as usual. But this cannot be achieved effectively through pluralist policy-making dispersed across these different policy areas nor through government fiat. If social partnership institutions fail to figure out this integrated strategy, then it seems unlikely that any other set of institutions can deliver a strategy that will work economically and politically.

17 replies on “Stimulus for Development”

Sean, thanks for a stimulating post. On a day that S&P downgraded the country’s credit rating, in large part because of concerns about growth, your focus on the importance of a growth strategy is well timed. I think many economists will be sympathetic to your call to boost the supply of productive — and particularly knowledge — resources in the economy.

I also agree with your call for caution in pursuing an overly restrictive fiscal policy. Having said that, I think you underplay the fiscal constraints facing the government. If I understand you correctly, your call for broad- based state-led investment is not meant just a temporary stimulus measure. To the extent it is sustained, it becomes part of the structural deficit and not just cyclically motivated stimulus. Unfortunately, the credit downgrade was not just due to poor growth prospects, but also due to the yawning chasm that is structural deficit. This is the quandary the government faces.

Things will deteriorate further as the months go by. Care to estimate how low things are going? Estimating on the basis of what is known is folly, given the likely outcomes. Go for where the ball will be not where it is now, perhaps? The depth of the froth on our beer will be apparent. The immediate need is for increased excise on the reliables, but of the order of 50%-100% increase over a short time. Income taxes must increase, as there will no longer be any need for “incentive”, as there will be shortages given the depth of international trade collapse, the smart worker will be working himself (gender discrimination will increase) harder despite the tax increases. The few bolt holes still open are closing. There will be less migration too! Ideology will be jettisoned along with the deckchairs. No need for economists if there are fields to be worked!
The good thing about Irish hospitals is that they tend to have higher mortality rates than others, internationally. Medical costs will drop as the state will cease to pick them up….. I foresee a campaign to “allow” the old to die peacefully. It will be a lot more subtle than my posts. Along the lines of the benefits of non-resident accounts, perhaps. Both my parents could have been kept alive for longer. Untreated pneumonia for one and untreated blood poisoning for the other. That is a structural solution!

@Pat: “Estimating on the basis of what is known is folly, given the likely outcomes.” How do you know what outcomes are likely? Do you estimate on the basis of what is not known? Are these the unknown unknowns?

Producing more in Ireland will be limited to Eurovision hits and food/biofuels in the short term. Nonetheless, the sooner it starts….
Adding value will be important but cleaning the pollution to push product into the clean organic category may be necessary. Less greed more sense? If the entire product of the country were to be moved into the organic category the rainfall would finally be of the gold rainbow type and not the “flood the cess pit overflow to rivers” as at the moment.
There will be still many super rich who will want to visit if the tour is of high standard. The poor quality has to go though. Now that mal investment will be impossible a few more months will take care of most of those.
Cut down a few more gombeen men willya? Cutting the corruption is going to be vital as equity is going to be necessary with this form of reconstruction. Mining will be a useful exercise as future proof currencies may need gold and other metals. We no longer believe that there is no mineral wealth in Ireland, as taught by English text books, do we?
And I see that someone is stirring the pot in Nor’n Iron too.
Now that is structural. Finance was 25% of the NYSE. It maybe 10% of a smaller figure, for decades to come, so the taxes employment and stimulus from this quarter is simply not going to exist in Ireland. For decades. A lot of twiddling thumbs and social welfare???

This post sets out a very interesting vision for economic development. It would be useful to complement this with some details concerning the transition ‘from here to there’. I appreciate the systemic change is not easily deconstructed into individual reforms that can be implemented independently but the classic questions about ‘gradualism’ versus ‘big bang’ approaches to reform and the sequencing issue are worth debating. While it is certainly helpful to seek consensus via NESC, NCC and related bodies, it would also be valuable to see a fully-articulated academic presentation of the proposal that is specific to the Irish situation and describes in detail the strengths and potential weaknesses of the proposal, with a schematic timeline of the transition.

There is a massive international and synchronized deflation underway. To assume that reflation will be successful in any way requires that all the major economies co-ordinate. G20 will show this is not happening. We are not getting the multipliers back…. do you agree?

All we can do now is to see what will no longer work as it requires the bubble which has disappeared. We know that construction is gone, for a decade maybe. The job losses tax losses will follow. And the multiplier for that is negative.
And the pharmceuticals may be in trouble as the patent for new product and massive profits only applies if the USA does not reform the medicare system. And that they are doing. Fewer obstacles if those with the donations are less wealthy and also dependant upon gov welfare.
And the finance sector. In some ways Ireland has good news there, as the old tax havens are shut down. That event in itself is a clue to some of how extensive this is.

These events have been predictable for a while, since the dot com debacle which demonstrated the existence of abig bubble. The extent of the defaults and where they lie with individual countries has yet to be seen, but GM may not survive. Big enough for you? Clever re-hashing of phrases from old war horse war criminals will not cut it….

There has been inflation for twenty years, mainly into assets, which secured more lending and was a self supporting bubble. It was deflating in 1999, after the dotcom mess, but then we had 9/11…. and 1% rates from the USA. So a big bubble became huge and liabilities were created in Ireland that were represented by the same old assets: private housing sold at the rate of maybe 1% pa, yet governing values, for remortgaging, for 100% of the sector.
After the dot com we should have taken measured action to avoid damage to long term structures. But we went mad on housing. And the stock exchange where 99% of stocks are always a good investment. But not now….. The entire economy was a Ponzi scheme, and dependant on the USA for the real manufac and service economy and the EU for Agric. Doesn’t look too good to me.
It is goin’ to get worse! It is goin’ to get much worse! It will not get better until the mal-investments are liquidated and then re-investment can begin again. Default on bank debt may be legally possible and economically necessary. Things are still to be disclosed but closing our eyes to what is coming down is a waste of time. We have opportunities now to restructure while the rabbits sit blinking in them thar headlamps, Brian!

@ Brian
Are you surprized by the AAA to AA+? Will you be surprized if it drops again before year’s end? Is Iceland BBB now? We won’t hit that, because we will have sold out to a mini IMF from within the EU before then. Or are they to stand idly by?

I did not mean to reflect poorly on your article which has much that is good, but deflation is inevitable and will continue beyond the Budget. Nothing that can be done in that budget will have more deflationary effect than external events. Each one would qualify as a shock but we have had so many and more are on the way.

You rightly say we failed to develop on the skills we acquired from renting out to foreign corporations. We failed, as the costs were too great, we were drowning in our own success! These cost will now reduce. This means that these are the very points for development now. And if we show our neighbours, all of them, that our social pact has legs, by a very harsh budget, we may shock ourselves into a realization that we need a fundamental reappraisal of our state, especially the economy.

There is no need for banking reform. There will be a much smaller industry and it will be better regulated. There may even be consequences. Asking for a repayment of EU1M shows how corrupt thiongs are. He was presumably threatened. That is our society. No real consequences, just gestures. Tribunals, not Garda action. All we need to do is enforce what laws we have. The Greeks knew what to do when new laws were proposed. They got the rope ready and put it around his neck.

The biggest problem for the financial sector is set out below. Ireland has problems in this area but no one person can estimate the size of them. These bets are off balance sheet, in vehicles shared with many banks and often retailed to municipal pension funds all over the world. I set out what one commentator, a pundit who has a few axes, gold being one of them, has to say about the elephant giving birth at the moment. If we don’t mention it it won’t exist…..

The ‘Dirty Little Secret’
By F. William Engdahl
What Geithner does not want the public to understand, his ‘dirty little secret’ is that the repeal of Glass-Steagall and the passage of the Commodity Futures Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global ‘off-balance sheet’ or Over-The-Counter derivatives issuance.

Today five US banks according to data in the just-released Federal Office of Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.

The five are, in declining order of importance: JPMorgan Chase which holds a staggering $88 trillion in derivatives (¤66 trillion!). Morgan Chase is followed by Bank of America with $38 trillion in derivatives, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs with a ‘mere’ $30 trillion in derivatives. Number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain’s HSBC Bank USA has $3.7 trillion.

After that the size of US bank exposure to these explosive off-balance-sheet unregulated derivative obligations falls off dramatically. Just to underscore the magnitude, trillion is written 1,000,000,000,000. Continuing to pour taxpayer money into these five banks without changing their operating system, is tantamount to treating an alcoholic with unlimited free booze.

The Government bailouts of AIG to over $180 billion to date has primarily gone to pay off AIG’s Credit Default Swap obligations to counterparty gamblers Goldman Sachs, Citibank, JP Morgan Chase, Bank of America, the banks who believe they are ‘too big to fail.’ In effect, these five institutions today believe they are so large that they can dictate the policy of the Federal Government. Some have called it a bankers’ coup d’etat. It definitely is not healthy.

To continue the last post, the problem may resoilve it self by way of counterparty failure, swapping out and cancelling so that net liabilities disappear to a fw cents on the dollar. But to do that requires mechanisms that function. And no one knows what the net liabilities are. This will require international arbitration to sort out as obviously, Iceland banks have defaulted. They will not be the only ones to do so. Given the attitude displayed by Irish banks to deposits designed to appear on balance sheet to satisfy quiescent regulators, who can gauge what is off balance sheet? What chances are there that all our bets are going to be winners given our performance to date?
You, dear reader, may ask how is this relevant to this article? Answer I: how can we fund any deficit if no one has capital left to give? And why give what little is left to a little country that has a reputation for having a lot of loose banks?
Taxes, Excise and Liberty Hall sez I! Ashes for the multitude! Sack cloth for the Gentry!


Your desire to see a fully-articulated academic presentation of Sean O Riain’s interesting proposal is understandable, but, as economists, I think we have some responsibility to use our current “moment in the sun” to advance the public interest in more concrete terms. That, unfortunately, restricts us, initially, to what the Government and Fine Gael are proposing. If elements of these proposals can be integrated sensibly to support the more comprehensive approach Sean is suggesting, then all the better.

The Government’s “Smart Economy” plan is long on aspiration and short on the wherewithall to implement it. A separate thread is commenting, in pretty dismissive terms, on Fine Gael’s recent stimulus plan. In my view, Fine Gael’s proposal, while, by no means perfect, presents a means to:

1. finance, off the Government balance sheet – and on commercial terms, a broader range of badly required infrastructure investment than the “Smart Economy” proposes;
2. provide a stimulus to counteract the contractionary impact of continuing reductions in current budget deficits;
3. reform the damaging, dysfunctional and inefficient regulation and operation of key semi-state bodies – particulalry in the energy sector; and
4. promote efficient investment and service provision in communications, IT and water supply.

And there should be scope to expand this approach into the provision of transport investment, schools, hospitals and community facilities.

This is the straw which the political system has deemed it is possible to deliver and from which the policy bricks wil have to be manufactured.

Can somebody please keep this Donnelly guy off the posts? I want to hear what proper economists are saying, not a collection of incoherent ramblings.

I do not understand the first paragraph of the post. Why do we want to prevent deflation? Since the Republic of Ireland has a 25% cost disadvantage relative to the core of the Eurozone, deflation is a good thing rather than a bad thing. We need either inflation in the Euro core or deflation in Ireland. Since we are unlikely to see inflation in the core we need to have deflation. How can Rep. Ireland become competitive again without deflation? At least, with other Euro countries (excluding UK, etc where there are varying exchange rates). Even for the important case of the UK, Ireland has no control over its exchange rate and so must use deflation to gain competitiveness. What is meant by serious deflation?

Could I suggest one area we need serious deflation is rents – both commercial and residential. There is a massive oversupply and yet rents do not seem to be tumbling. It’s time for the banks (as owned by us the tax payer) to call in their debts and put defaulters into receivership. They then sell the assets at say 30c in the Euro to those who have the money and things get moving again. The Jury’s Ballsbridge site is viable at a certain value. Sell it at that value and new developers will build the apartments for which there will be a demand at the right price. Delaying this particular inevitability seems to be time wasting to me. Taking out developers will lead to a domino effect but it has to happen before we get going again. And dare I say it it will be quite popular with the general public.

Thanks for the helpful comments and questions. Although I can’t give Philip the analysis he asks for here, let me just address a few points.

@Greg: Good points re deflation. I meant to emphasise the contractionary elements of the fiscal adjustments. Deflation may feed into this but can also be used to restore competitiveness and even jump start demand. However, my general point is that I am not convinced that will happen without some government action on the side of 1) building new capabilities within the economy (particularly through enterprise policy) and 2) expansion/ stimulus measures.

@Stuart: I would like to see some analysis of the state of the property market and which assets are lying unused/ partly developed at this point. Given that many of these problem property assets are in effect owned by the banks, underwritten by the state, this seems to be an important potential source of development resources. Perhaps there are many development properties now owned by the banks/ state that could house the many innovative companies to be located in the expensive corridor between UCD and TCD?! (sorry, couldn’t resist)

@Philip: I think we have a fair amount of evidence that
1. banks did not play a significant role in the growth of manufacturing and service industries
2. state agencies have been central to investment in those sectors (directly and by priming venture capital) and those supports have been effective
3. there is a problem with even the necessary knowledge and institutional skills for lending to business within the banks
(see this remarkable story in yesterday’s Irish Times:
4. investments in caring, childcare, education etc have long-run beneficial development effects (although not providing much in short-term stimulus)

@ John, Philip: How to get from here to there? John, you are right that if this was 2000 I would be (and was) recommending expanding the kinds of institutions and strategies that I’ve mentioned, within the context of a much better fiscal position. However, in the current context I think that we could design a major set of projects around SME support and skillnets/ active labour market policy. A three year programme of enterprise and skills development would 1) build capacities 2) inject some stimulus into the economy 3) tackle many of the immediate difficulties of small firms and laid off workers. If it isn’t working, get rid of it. If it is, either mainstream it or integrate the lessons into the existing institutions.

One advantage is that we get to engage in some institutional learning and improvement. That is obviously being highlighted in relation to the public sector (although in terms that aren’t gettiing us very far in addressing really useful reforms , I suspect) but we need a lot of work in the financial and business sectors as well.

I have focused this proposal on services as a mechanism for keeping funds within the economy while improving learning and capacity-building for development. But it could well be integrated with the kinds of physical infrastructural projects proposed by FG and discussed by Philip in his crisis conference paper. For example, investments in wiring schools, combined with tenders for usable educational technology programmes, supported by enterprise development and skillnets. Or, a programme of greening public buildings, also supported by enterprise development and skillnets.

One final point, there is also enormous scope for ‘cost-neutral’ institutional learning and reform. We are seeing attention focused on the institutions of the economy (public and private) like never before. Understandably, much of that attention is focused on identifying waste. But we also have a chance here to examine what institutions work, how they do, and how they can be built upon.

The EI-bank ‘staff swap’ (although it isn’t clear what EI gets from it) is an interesting example. It also illustrates how crucial banking reform is – if we can re-invent Irish banks so they are a force in development then one part of the expansionary strategy would be in place. This means going beyond thinking of ‘good banks’ as banks without ‘legacy/ toxic’ assets and instead constructing new business models that emphasise lending supporting the productive sector and household needs. It’s another reason to make a firm and early decision on either nationalisation or significant regulatory reform – it saves money and it gets the banks (with a lot of government money) involved in the answer to the problem.

I would like to agree with Sean that the Irish Times story about Enterprise Ireland and the major banks “swapping staff” is indeed remarkable and well worth hoisting out of comments for a discussion of its own. I thought about writing a blog post about it myself but, frankly, wasn’t sure what to say. On the one hand, it could be interpreted as an admission of incompetence by the banks; on the other, it may just be the kind of thing that governments can do to banks when they are on state-sponsored life-machines. Perhaps it’s a bit of both.

While I’m at it and perhaps have Sean’s attention, I’m reminded from one of his earlier comments on my posts that I meant to warn him to be careful about “bad bank” proposals that involve over-paying for bank development loans. It is indeed the case that these proposlas could see the government buying lots of land that could be developed for social housing, infrastructure etc. But from the taxpayers point of view, the key thing is not to overpay for this stuff, which is what some of the plans going around would entail. Yes, a positive side-effect of the collapse in property prices is that the public investment projects are going to be cheaper in the future, but that’s not a reason to overypay banks today for bad loans to developers.

@Karl: I don’t suppose it matters, but the staff-swapping scheme was (AFAIK) first mentioned by Mary Coughlan when she was interviewed by Marian Finucane on the wireless last Saturday. The IT’s quote about IP seems familiar.

Some years ago, before the banks went mad lending to builders, I learned a bit about banks’ methods of assessing applications for business loans. The focue was very much on the borrower’s ability to repay, and on cashflow rather than on profitablity. I can’t make out whether the government now wants to teach the banks to make fewer risky loans (to builders) or more of them (to businesses in other sectors).

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