There’s been a flood of recent commentary on NAMA from opinion columnists, editorial writers and broadcast journalists. Unfortunately, much of this discussion has been premised on an incorrect but apparently appealing idea.
This is the idea that it doesn’t really matter which approach we take to resolving the banking crisis because the costs to the taxpayer are going to be about the same no matter what happens. We’ve guaranteed the liabilities, these people will argue, so basically we’re on the hook no matter what. And since all the plans are going to expose us to lots of risk, let’s just get on with the plan the government has.
Advocates of this position often explain the pricing decision facing NAMA as follows: Over-pay and the taxpayer loses, under-pay and the state has to recapitalise the banks, so the price tag is the same come what may. I first remarked on the prevalence of this line of thinking in the media back in March. However, I started to get really worried about it when Peter Bacon regularly made this point during his post-NAMA-proposal media blitz, at which point I named the proposition after its most noted advocate.
Since then I’ve tried umpteen times to explain why this idea is wrong but clearly I’ve had no impact whatsoever. Most likely, if you’re still reading at this point you’ll know that overpaying for assets by, say, €15 billion, just nails an additional €15 billion on to whatever loss the taxpayer is going to take, while paying €15 billion less but then using the money saved to invest an additional €15 billion of state money in obtaining an equity stake entitles the taxpayer to dividends and later re-sale of the shares.
It’s not really a very complicated point—the initial outlay of funds is the same in either case but the final outcome for the taxpayer will be worse off with the overpayment approach—but it’s still pretty widely misapprehended.
An example of the “sure it doesn’t matter how we do it” reasoning is the following from a Stephen Collins article in the IT on Saturday:
The main criticism of Nama is that it exposes the taxpayer to enormous potential risk. The problem is that there is no way out of the banking crisis that doesn’t put the taxpayer at risk. The “bad loans” simply have to be taken off the balance sheets of the banks to enable them to function again, whether that is done through nationalisation, a toxic bank solution or Nama.
This kind of stuff just isn’t very helpful to a public looking to commentators like Collins to inform them about the implications of policy decisions. Yes, there are risks to the taxpayer from all of the approaches proposed but it is just lazy thinking to suggest that the risks are essentially the same from each of them, so it doesn’t matter whether we pick Nama or some other approach.
Collins also went on to reassure readers that
Going on international experience, Nama has a good chance in the long run of being able to recover the money it pays over to the banks for their “bad loans”.
I’m not sure what sample of international experience Collins is referring to but I can assure you that the international record of Asset Management Companies gives no such reassurance.
Lately, I’ve also noticed newspaper stories that go beyond the “it doesn’t matter” meme to suggesting that we’ll actually be worse off if we don’t overpay. For instance, consider this snippet from Saturday’s Independent:
But if the Government pays too little for the loans, the banks’ losses would leave gaping holes in their coffers — potentially forcing the taxpayer to pump further billions into the ailing financial institutions.
The emphasis here is on the how bad it would be for the taxpayer to have to stump up the money to invest in the banks, forgetting of course that these funds have been made available by the decision to not over-pay.
All I can do at this point is admit that I have had no impact in pushing back against this stuff and to ask our readers to identify this stuff where they see it and call it for what it is.
Update: In reflecting on Brian’s immediate response to this post, I think it is legitimate to raise the question of why so much of the coverage of NAMA features this sort of misleading analysis. I suspect that it is partly to do with the journalistic desire to appear “balanced”—the sort of thing that leads to media coverage of the “Opinions on Shape of Planet Differ” variety. But, of course, as Paul Krugman noted today, this problem is by no means restricted to Ireland.