Bacon Gives Bacon Plan Thumbs Up

Is it just me or is there something deeply odd about the way the media report things like yesterday’s NAMA report from Peter Bacon?   We are told that “the report by economic consultant Peter Bacon says the new agency has potential to bring a better economic solution to the banking crisis.”  Well, he would, wouldn’t he?  Why not report this as “Economist Peter Bacon, who drafted the proposals for a state asset management agency, released a summary of the report that he prepared for the government.”   Too boring, I guess, but why mislead the public by presenting an assessment of the plan by the person who wrote the plan as being, somehow, objective?

27 replies on “Bacon Gives Bacon Plan Thumbs Up”

In the rapidly churning news cycle the media tend to feed off each other and the ultimate sources of what they report are press releases issued by government, agencies, businesses or other non-government bodies and pressure groups. The idea of holding anyone to public account for that they author, issue or propose is long gone.

However, what intrigues me about this NAMA proposal is that it seems to be a perfect example of a Catch 22. If NAMA pays too little for these dodgy loans the banks will need further recapitalisation and the State seems to be the equity investor of last resort (both the Minister and Mr. Bacon appear to have conceded this). On the other hand if NAMA overpays and is exposed to a loss on holding or disposal a levy will be applied to keep NAMA whole. Banks will have to make a capital provision for this levy. It is almost certain that external investors will be deterred from being involved, so the State will have to intervene again as the provider of equity. Perhaps I’m missing something, but both outcomes strike me as creeping nationalisation.

Would it not be better to go for full nationalisation now?

excellent post by Karl Whelan.This false veneer of objectivity stinks and harks back to the glory days of Bertie

Could i briefly hijack this post to suggest that people stop using just first names like “John”, “Ciaran” and so on when commenting. This creates confusion. For example, I naturally think of Ciaran O’Hagan when “Ciaran” posts and Im sure at least some of you have attributed “liam”‘s comments to me. Simply adding some form of unique identification (preferably just one’s actual surname) would solve most of this.

I know what you mean Karl. I heard him on Radio 1 this morning congratulating Lenihan on a great plan – I nearly slammed my head on the wheel!
More annoying was his dismissal of nationalisation. He seemed to argue that this plan offers the taxpayer more distance from the bank and further risks. This seems a curious argument to me – is he saying that after taking the hit for them we should hold them at arms length? Thus avoiding reaping any future benefits (however unlikely) or further losses (though it appears the govt actually is ready to take another hit)…
I’m sure I’m missing something here…. I mean, I hope I’m missing something here…

@Liam Delaney – Actually I agree, it gets confusing when going through a long list of comments. Will do in future

@PaulH (See LiamD, behavioural modification works…) : the government really really really dont want to nationalise. That would be for political reasons. So the economic logic will not trump the political here.

Thank you, Brian, for the enlightenment. I suspected as much. Seems like we will get all the hassles of nationalisation and none of the benefits. Plus ca change.


What was it that George Lee said a few days back on RTE radio…

George Lee was asked what caused the current economic mess, he started his reply by saying “Thats a very difficult question to answer and to still keep working for RTE”.

Now if that weren’t a very unusual joke but a rueful comment on the national broadcaster then you have your answer as to why the small details of authorship are forgotten.

@Paul Hunt. It strikes me that they are implicitly guaranteeing bank bond holders no matter what the final outcome of the bad asset disposals while saying that shareholders are fair game should losses be incurred.

Is nationalisation being avoided due to Anstaltslast (the German idea that if the state owns a company, then there’s an implicit government guarantee on that company’s liabilities that I only learnt about from Felix Salmon yesterday)?

Don’t have an answer to this, but, as Brian Lucey pointed out, what’s going on here is politics – not economics.

Readers of the Bacon report should bear in mind his links with the Irish property boom. As reported in an article in the Irish Times, October 22, 2007, on one of the major players in the Irish property boom,

“[Seán Mulryan’s] door-opening “magic” extends well beyond Ireland, however. The key to his success in Bratislava was having the foresight to employ someone who had been familiar with the Communist-era system.
His Eurovea project was launched with a laser show at the Palace of Culture, complete with full choir, the national orchestra and corps de ballet. When economist Dr Peter Bacon, Ballymore’s director for Europe, rose to announce that work would begin the next day, there was a drum roll, upon which 40 trucks roared up the road and began clearing the site.”

The bond holder guarantee is explicit. The government has both taken out a home equity line of credit and resorted to credit card financing in order to keep the bond holders happy. The next stop will be the pawn shop. I have attempted in vain to locate any serious discussion of this issue. How is it possible that the nation’s economic efforts will be harnessed to repay those who financed an episode of which John Law would be proud? Has there been any debate on the alternative?

If the fear is that the bondholders would refuse to buy our sovereign debt out of spite after losing (capital, their reputation within their respective institutions and their bonus) from a write down of our esteemed banks’ bonds, then we need to assess that risk in an objective manner as opposed to adopting it as a truism (particularly when it has been advanced by those who have a vested interest in proceeding with the NAMA).

Government debt that is raised solely for the purpose of financing budget deficits over the next few years (as opposed to also funding NAMA and providing the inevitable equity infusions into the banks following the write downs they will be forced to take after hocking the portfolios of shopping centers, office blocks etc. at knockdown prices) would be inherently less risky and of higher quality than an alternative scenario where the government proceeds with the NAMA and allocates its remaining (and rapidly dwindling) borrowing capacity to both purchase these portfolios and provide for its expenditure requirements. In other words, bondholders will face less political risk under the former scenario. As such, in attempting to gauge the impact that its decisions will have on its current and future creditworthiness, the government needs to acknowledge that foreign investors will attach a political risk premium to our sovereign debt if they judge that the government is channeling too great a proportion of our national output towards the repayment of bondholders at the expense of the provision of health, education, infrastructure and welfare.

Sadly, rather than facing up to this reality today, the government appears set to continue with its tried and trusted approach of formulating policy on the hoof. I expect that the NAMA will be in place before the next election and that a few wise words from the mandarins in Merrion Street will deter Minister for Finance Bruton from tinkering with it. Inevitably, however, budgetary arithmetic will bring the show to a halt. At that point, following the transfer of 20 odd billion to the banks and, by extension, the bondholders, the unhappy minister will have to face reality as there will be no more “fat” to cut from the economy and our credit card limit will have been reached.

The banks have 27b equity (book value plus prefs) and c10b in tier two capital. Thats enough to meet the majority of the bad debts , but then the n-word comes into play. And for some reason (either ideological or because of hte ownership of the tier two capital) the politics are dominating here.

Good point Brian. I don’t have the exact figures but I do not believe that the government can view the 27b plus tier 2 amount as a cushion. The banks have to maintain their capital ratios at 8% (and, quite possibly higher going forward given the actions of the British government in capitalising RBS et. al.), so, as and when these ratios are approached, either directly by borrowers defaulting or indirectly by the purchase by NAMA of portfolios at prices below the current carrying levels, then the government will be forced to inject additional funding.

It would be interesting to know just who the true beneficiaries of all of this largesse are, credit insurers perhaps, hedge funds who wrote credit protection on bank debt? The tax payers should at least know who they will be working for going forward. Similarly, those voters that rely on the state for services should know which interests the government has deemed to be more deserving.

William Buiter provided a good analysis of this topic on his blog yesterday.

To be honest I don’t think the price the government pays matter all that much.

If it buys the €90B of loans for €50B it has to recap the banks by about €40B.
If it buys the €90B of loans for €70B it has to recap the banks by about €20B.
Either way leaves the total cost at close to €90B.

What really matters is how the government is going to spend €90B, or 3 years of tax.

As a taxpayer I want to know
The book value of every single loan purchased.
The purchase price of every loan.
The collateral for every loan and the current value of that collateral.
In the event of a full or a partial default on any loan, the write offs on the loan, what assets were seized and what assets were not seized from the borrower.
When you are spending €90B of taxpayers money we should know how every single € of that money is spent.

The government may claim customer confidentially law is at stake and with it our international reputation. But our reputation has primarily been damaged by cronyism and corruption and the best cure for that is 100% transparency and openness.

If the borrowers don’t like the new open and transparent rules they can take their loans and refinance them elsewhere.

My apologies for also hijacking this thread. I hope that my current assignment will distinguish me from Liam Delaney.

@ Liam Delaney. My views about the pseudo-scientific nature of the economics profession are mild in comparison to what some of your peers think.

Paul deGrauwe argues in a piece entitled “Keynes’ savings paradox, Fisher’s debt deflation and the banking crisis,” that modern macro economics is irrelevant


Similarly, Professor Buiter, in “the unfortunate uselessness of most ‘state of the art’ academic monetary economics” is scathing.

Some samples:

Indeed, the typical graduate macroeconomics and monetary economics training received at Anglo-American universities during the past 30 years or so, may have set back by decades serious investigations of aggregate economic behaviour and economic policy-relevant understanding. It was a privately and socially costly waste of time and other resources.


Most mainstream macroeconomic theoretical innovations since the 1970s (the New Classical rational expectations revolution associated with such names as Robert E. Lucas Jr., Edward Prescott, Thomas Sargent, Robert Barro etc, and the New Keynesian theorizing of Michael Woodford and many others) have turned out to be self-referential, inward-looking distractions at best. Research tended to be motivated by the internal logic, intellectual sunk capital and esthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works – let alone how the economy works during times of stress and financial instability. So the economics profession was caught unprepared when the crisis struck.


In both the New Classical and New Keynesian approaches to monetary theory (and to aggregative macroeconomics in general), the strongest version of the efficient markets hypothesis (EMH) was maintained. This is the hypothesis that asset prices aggregate and fully reflect all relevant fundamental information, and thus provide the proper signals for resource allocation. Even during the seventies, eighties, nineties and noughties before 2007, the manifest failure of the EMH in many key asset markets was obvious to virtually all those whose cognitive abilities had not been warped by a modern Anglo-American Ph.D. eduction. But most of the profession continued to swallow the EMH hook, line and sinker, although there were influential advocates of reason throughout, including James Tobin, Robert Shiller, George Akerlof, Hyman Minsky, Joseph Stiglitz and behaviourist approaches to finance. The influence of the heterodox approaches from within macroeconomics and from other fields of economics on mainstream macroeconomics – the New Classical and New Keynesian approaches – was, however, strictly limited.

To read more, go to:

Or if you’re inclined you can go to where he has some lively posts beginning with the titles Refuted Doctrine #—

Also not to worry Richard. I don’t work for the public service. I am infact one of the hundreds of thousands of low paid workers in this country who may lose my job (although it won’t be about my views), but has decided not to lay the blame at the door of the public service. Because quite simply, it is not their fault.

Nor is it the fault of those on Social Welfare, or those who borrowed ridicululous amounts of money with paltry incomes for outrageously priced homes located at outrageous distances from their workplaces, nor those who have to pay a second mortgage for the private sectors market failure in childcare provision, or those who sit on trolleys in our developing world healthcare system. There is at heart an intellectual failure: a belief that we’re not masters of our own fate, but that of some sacred entity called the markets, to which we owe allegiance and should surrender all public goods. It’s a fallacy, and a dangerous one. If you want to know how dangerous, keep looking out the window.

I am with you on this. Hence the bias in the media. They clearly could not find anyone else to agree!

They are desperate to sell this plan. It will not work but they want it to keep their backers in business.

As a tax inspector, I and my colleagues would often find a bank loan, off balance sheet, in the course of an investigation into a cheating taxpayer. This would be offered as a last resort, to explain a large accumulation of assets on a newly drawn up balance sheet. When tracked down, in those cases where the loan came from a commercial bank, (and not a bartender in New York!) there was often another asset, off balance sheet, upon which this loan was secured. Thus the statements of affairs, personal and business balance sheets, combined, for the period under investigation, would now show a dramatic increase in wealth, unexplained by the declared income and gains returned, to the kindly inspector of taxes, by the cheat. Oooops! The cheat was willing to take on a loan and pay loan interest, while depositing funds with the lender. Not tax efficient, as the interest was often not claimed, but done to hide the real source of the capital. The bank was a winner in the scenario and would be able to offer the cheat the lowest rates as it held secret security. In essence this was the infamous **** scam that was in the headlines in the 1990s. The bank had facilitated money laundering for many clients. It probably was not alone in this, as staff often leave to go to another bank….. and the failed avoidance aspect was retailed in London. Needless to say, but I shall say it, the licence of the bank was safe and staff at the bank were never threatened with prosecution, despite ample evidence.

The many backers of this government will be found to have assets in the banks and elsewhere that could be called upon to satisfy liability to the banks, that are not known to the auditors of the banks. Shadow banking anyone? Who better to carry it on than the banks!
By dumping the “known” problems into NAMA, the backers may be able to escape with assets intact, even if a violation of bankruptcy laws. Nationalization alters the rules for staff quite a bit as staff may be paid to keep quiet. Not many staff need to be involved, but a nationalized bank (but not the old ACC!) usually doesn’t facilitate money laundering.

@ Dreaded Estate
Yes. But they will spend it if they can. It is theirs to spend. You are just a sheep to be shorn.

Remember the voting machines? They were going to be used but the internet blew up the scam. Your vote may never be counted.

Great post! Very good insight. They could not get anyone else to back it? Why such an obvious lack of balance? RTE being brilliant perhaps, preferring the pointer to shanigans than any other “source”? I am sure they might have found an economist to back it. After all, there were few warnings from “economists” about the bubbles.

@ Brian Lucey
Does my explanation answer your point? You appear to assume that the banks do not facilitate tax evasion, divorce assets understatement etc.

Surely the texts on banking touch on these matters? BCCI anyone? A recent blockbuster with Julia Roberts and Clive whoever was based on true events.

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