Lenihan on Stiglitz

Lenihan’s response is a bit worrying.

Does he understand what he’s doing?

Stig simply states “let the banks go bust” as an article of capitalist faith. None of the main political parties and, as I understand it, only a minority of anti NAMAers think we should let the banks just go bust.

He suggestes that the 55B being invested should get a proper risk/reward trade off. This is extremely naive. He sees this move as some sort of portfolio investment strategy. This is a move to save the country (whether you think it will work are not). It’s risk/reward should be judged against doing nothing, or at least against some alternative. Versus doing nothing NAMA is far less risky and far more rewarding. We can debate whether there is an alternative which is even less risky and more rewarding.

This simplistic nonsense from the very top of the global economics profession must give great comfort to those who are a bit rattled by a letter written by 46 local hacks.

I’m with Stiglitz (and McWilliams): Save the necessary banking functions and let the rest go bust. It is pure madness to throw taxpayer money at the banks as they are. Give capitalism a chance!

Okay, all you diehard capitalists. Does that mean letting depositors getting toasted?

“As far as Professor Stiglitz is concerned, he made the same criticism of the U.S. bank package, which is now proved to be a tremendous success.”

Its a bit early to make that kind of judgement? What this crisis has proved without any doubt is that we should be wary of making judgements on short term upticks. Weren’t bank executives bonus schemes (based on short term results) one of the prime causes of the meltdown.
Even Nama could be judged a success on some short term measurement scale (wow look at AIB, and BOI shares go!) even before it has got off the ground! We should never underestimate the capacity for irrationality of the investment community, nor the deviousness of FF ministers.

@Graham Stull

Well stated and I agree with you.

One problem now is the malign interaction of the continuing liability guarantee and NAMA alternatives such as short-term nationalization. At a minimum, short of nationalization, NAMA asset purchase terms should be tightened drastically and membership in any renewed guarantee scheme should be dependent upon acceptance of those stringent terms. The liability guarantee scheme (and its planned renewal) is acting as an effective block on bank cleansing.

Conor Says:
October 8th, 2009 at 2:25 pm

“How can “leading economists” be so opposed to NAMA.”

With considerable ease apparently.

“ If the argument is that tax payers are taking the hit, we are. Not an option, it’s something that has to be done.”

Why are you so anxious to spend my money?

Because you’re on ridiculous Money Greg, that why. I’m sure you can spare the few cents. Joke.

Look we have to take a hit for this to work, I mean come on whewre else are you going to source 53 Billion. The tax system in Ireland is progressive. Taxing the wealthy more and the less well of on a smaller scale. It’s done so wages and wealth don’t fluctuate so much and we don’t have complete inequality in income.

To finance NAMA this taxing system had to be increased slightly. If we don’t do this now the social effects of having lingering “bad assets” and a inefficient flow of credit and an inefficient banking system will have a greater negative social impacts on living standards for years to come.

We need 53 Billion to finance our own INTERNAL problem, and it has to sourced INTERNALLY = taxpayers.

This problem won’t just disappear, it needs to be dealt with now.

I know it might not be fair but I want this to work I don’t want my kids dealing with this in years to come. No one (despite the many post by the “genius’s” on IE) have come up with a viable alternative (and having a discussion about “the crisis” in seminars in Trinity and UCD don’t count by the way.)

I will say one thing on the government’s part, there should be regulation on pricing in Ireland, in economic principle they should fall with income levels. Despite that half price offers you see in Tesco there isn’t actually any change in pricing of general products, an increase if any.

Conor,
Ths usual measure of general prices, the CPI, is down 6.5%, September to September – see front page of CSO website.

The harmonised measure has Ireland showing the largest price drops in Europe, down 2.4%, part of a general fall of 0.2%.

What has not shown (yet?) is a decrease in the published statistics on average earnings. In the ‘Comment’ part of the Central Bank Bulletin (see link in Phillip’s post of a few days ago) they suggest this could be do with the earnings profile of those losing jobs.

Conor all the regulation in the world cant force the banks to lend if they dont want to, unless you bring in a law that says they must lend. The best form of regulation in any case would be for the government to take a large equity stake in the bank. Anyway It may be all academic as the way I read it the Greens are looking for an escape route from one of the most scandalised governments in the history of the state and who can blame them. NAMA loooks like being that escape route.

Also Its funny the way people are prepared to put full trust in a gombeen fianna failer like Brian Lenihan while at the same time trying to ridicule a nobel prize winning economist with a worldwide reputation, very Irisih

Nama is the biggest financial decision in the history of the state. So before we set it up we would want to have no doubts about the process that has led to it being selected and whether it can be improved. Instead:

Have independent experts been allowed to do due diligence on Nama? No they have not. The government have deliberately released as little information as possible.

Have the Minister for Finance and other politicians conducted the debate honestly? No. I follow politics closely and I have never seen such a dishonestly conducted debate, in any democratic country. Academics who made constructive criticisms were smeared in an organised fashion.

Have the minister and his colleagues demonstrated a clear grasp of the issues? Again the opposite.

Is Nama being created by people who have proven track records and no involvement in our country’s financial collapse? No it isn’t. Quite the opposite.

Have independent experts approved Nama?
46 of them took the unprecedented step of writting a public letter against it.
David McWilliams opposes it. Joseph Stiglitz opposes it. Sean Barrett opposes it. As against that, qualified support from Garret Fitzgerald and Alan Dukes.

Has it got cross-party political backing?
George Lee, Richard Bruton, Joan Burton and all the opposition oppose it.

Is there considerable evidence for its assumptions about property market values? No there isn’t. Morgan Kelly completely disagrees. Other property bubbles have been followed by decades long busts. We are at the end of a global property bubble.

Is there considerable independently scrutinised evidence for the quality of the loans taken over?
No. And we aren’t being given any.

So the whole process that has led to Nama could scarcely be more flawed. The longer the debate has gone on the more the behaviour of the government resembles the dishonesty of the Bush administration in the lead up to the Iraq war.

Can Nama be improved?

Independent experts and the opposition have suggested many, many alternatives. Stiglitz, George Lee, Patrick Honohan and per Karl Whelan many alternatives from around the world. Independent experts have also suggested many straight-forward improvements to Nama, particularly on risk-sharing and not paying over the market value. Understandably but ominously the whole issue of transparency has been little addressed.

I have seen no evidence that the government has seriously considered the alternatives. From an early stage the outcome has been predestined. Where we thought we would end up before the summer is exactly where we have ended up. They have entirely ignored constructive criticisms and smeared those who made them.

Given the flawed process leading to it and the obvious flaws in it any fair-minded person cannot support anything but a hugely amended version.

We cannot afford to waste scarce resources at this time of economic crisis
and poison our politics for a decade or more.

Guys, please write another letter.

@ Eamonn

the McWilliams “we should leave the Euro” piece was the biggest ego-trip in the short history of our new set of economentariat (economic commentators? geddit?). It probably cost this state a couple of hundred million in long term permanently higher bond yields.

Also, Morgan Kelly, per his “house prices will fall 80%” line reckons the average house is gonna cost €62k by the end of this crisis. Anyone else actually expect this to happen?

Ah, Eoin & Conchubar O’Caolai, why am I not surprised to see you two? Where are Conor, Homer and zhou_enlai?

46 independent economists. David McWilliams. Joseph Stiglitz. Sean Barrett. Morgan Kelly.

Some of these could be wrong but all of them at the same time?
That is enough to make me stop & re-examine the entire project.

It’s simple: bank bondholders & shareholders versus the general public. We are about to embark on several years of cutbacks. Every ADDITIONAL: hip replacement operation delayed, every oncology appointment and every mental illness treatment delayed with fatal consequences, every child who leaves school illiterate & innumerate as a result of bailing out bank bondholders & shareholders is too high a price to pay.

If Nama had a fixed cost I might be able to swallow it. But give a blank cheque to the shysters who ruined the country and the people who lent money to them and bought their bonds and shares during what they all knew was a run-away property boom? No thanks.

That’s my final word to you on this thread.

@Eamonn76

Eamonn – I think it’s safe to say that a good pecentage of the medical procedures you refer to you in your post that are currently financed by money borrowed from international bond markets because the Irish taxpayers aren’t paying enough to meet the outgoings of the State.

If the Greens reject NAMA on Saturday and the government collapses, my view is that the Irish state will be plunged into a much more serious financial crisis than the one we’re in, with a drastic impact upon our ability to fund these procedures.

The bond markets like NAMA – for any number of reasons – and if we are plunged into a general election, which will lead to huge uncertainty as to how we propose to resolve our banking crisis, I believe that in the fickle mind of the bond markets we will then be relegated to Iceland status.

If the Government falls and Fine Gael lead a coalition government and decide to proceed with their ‘good bank’, how long can it reasonably be expected to take to get this good bank up and running?

@ podubhlain

Latvia’s GDP is about to fall 18% or so THIS YEAR and they’re probably about to devalue the currency by up to 50%. As bad as our situation is, it’s not at the same extreme as Latvia.

@ CoC

given that we are currently borrowing 20bn against actual tax income of 33bn, i think its fair to say that roughly 40% of those medical procedures are being financed by the generousity of foreigners. These are the very same foreigners Eamonn wants to inflict losses on via a route (sudden large scale nationalisation of the banking sector and enforcement of losses on senior debt) that no other developed country has so far attempted. Good luck with that.

This is just scaremongering. Iceland’s problems were vastly greater than Ireland. We are in the EU and the IMF. We are small & rich. If we can’t take a little off bondholders no one can.

Wipe out the shareholders. Offer the subordinates 15% (Eoin is happy with thirty so I think we can divide by two). Then take 10% off the Senior bondholders. If that doesn’t cover the gap take a bit more. We keep being told by Nama fans that the property market will recover. Great! The bondholders will lose even less as our banks will recover quickly. Any money we put into the banks should be in return for ordinary shares. The bondholders read the papers. They are financial people who were financially destroyed in Iceland. They know Ireland’s economy hit the wall.
A small hit will not spark a new world depression.
If we don’t do Nama and do a Stiglitz variation instead we have a much greater chance of a quick recovery.
We all want the lowest cost to the taxpayer?
We all want the country to recover as quickly as possible?
None of us want additional unemployment, emigration and poverty?
Then hit the shareholders & the bondholders.

@ Eamonn

and also, “we’re small and rich”? If there was a website called icelandeconomy.ic last year, im almost sure someone would’ve posted the very same comment and been equally as surprised when it turned out to mean nothing a few weeks later…

@ Eoin

I think we can only ban “scaremongering” from the pro-NAMA talking points in return for a corresponding concession from the pro-NAMA side. 😉

How about we drop scaremongering and you guys drop “no viable alternative”?

If that worked, we could look to deepen negotiations. We could see if our crazies would stop talking about developers if your guys would stop talking about free money from the ECB. Or equal risk sharing. Or international support. Or IOUs. Or “They did this in Sweden.”

And if you could stop people saying “Only Game in Town”, who knows how far I’d be willing to go?

😆

The report in the Indo http://www.independent.ie/business/irish/state-should-have-let-banks-fail-says-nobelwinning-economist-1907525.html about Joseph Stiglitz’s view that the banks in Ireland and worldwide should have been let go to the wall rather than saved also included the following:

“But his comments came as a security analyst in London said troops would have had to be deployed on the streets if the government in Britain had let large banks there fail.

“You are talking about a situation with mass disorder and panic,” said David Livingstone, a fellow at the Royal Institute for International Affairs, and a former adviser to the UK government’s Cobra crisis response committee.

“There would have been riots, pandemonium, everyone fending for themselves,” he said.

It is a year since Royal Bank of Scotland and HBOS came to the brink of collapse, one week after the same fate befell the Irish banks and the Government introduced the blanket guarantee. “You would have had unmitigated panic and a bank run,” claimed Tom Kirchmaier, a fellow at the London School of Economics.”People would not have been able to buy bread. The cost to the economy would have been catastrophic.””

This page has info on David Livingstone in case you want to see who he is.
http://www.chathamhouse.org.uk/about/directory/view/-/id/105/

This was also reported separately in Bloomberg. where the below comments were also made
http://www.bloomberg.com/apps/news?pid=20601087&sid=aMfETcYI2t7Y

“‘Contagious Effects’

“If RBS hadn’t been propped up as it was, in practice it would have been nationalized the following week,” former Bank of England deputy governor John Gieve said in a Bloomberg Television interview. “If RBS, HBOS, Lloyds had gone down, that would have had huge contagious effects throughout the rest of the world.”

The failure of Edinburgh-based RBS and HBOS would have had a domino-effect with customers seeking to take out their deposits from other lenders and causing a wider run on U.K. banks, said Vicky Redwood, an economist at Capital Economics Ltd.

“Trust in the banking system would have completely collapsed” and would have generated civil unrest, said Redwood. “People would have been rushing to take their money out of the other banks and you would have been heading back to the depression era.””

I am sceptical, given the panic that was around at the time, that we would have had the orderly wind downs of banks that some people think would have been possible.

@eamonn76

since the nama bill went to the dail. aib and bank of ireland have raised ung’teed senior debt at levels unthinkable 6-8 weeks ago. the start of the process were the govt’s contigent liability for the ENTIRE debt of the banking systems begins to get termed out.

irish sov cds has tightened dramatically and the country issued its longest dated govt bond this week (issuing almost one third of next years funding requirements in one go).

a sense of normality is pervading the interbank markets and foreign banks are reopening wholesale lines and extending credit beyond the govt gtee date to irish banks.

i dont think the greens voting no and a potential collapse of the govt will be the best thing for a fragile economy looking for a managed workout of a blown up economy. 15-20bn contingent risk of loss is very little over a 10-15 year period to protect an economy that could easily be worth 350bn in 10years time. i genuinely hope we’re not re-entering the vortex on monday. i just wanna move forward. i dont have a pubic sector job or international speaking engagement to fall back on. (and for the record i dont work for any of the irish banks)

Like Bookworm, I read that fair and balanced piece in the Indo today. It quoted Nobel-laureate Stiglitz on the one hand, and then gave equal prominence to some guy going on about tanks in the street.

So that’s our choice is it, NAMA or Lord of the Flies?

And apparently the IT tomorrow identifies the members of Anglo’s Golden Circle.

Someone remind me again why spending 30 billion euroes to bail out this financial cesspit is……

….here we go…..

THE ONLY GAME IN TOWN!

@ thomas c

“since the nama bill went to the dail. aib and bank of ireland have raised ung’teed senior debt at levels unthinkable 6-8 weeks ago. the start of the process were the govt’s contigent liability for the ENTIRE debt of the banking systems begins to get termed out.”

We don’t need Nama. Buy BOI then negotiate with AIB. The markets only want the banks fixed. It is up to us to find the cheapest, fairest way to do it.

“irish sov cds has tightened dramatically and the country issued its longest dated govt bond this week (issuing almost one third of next years funding requirements in one go).”

That’s great. We have borrowed enough to cover our needs for the next six months. The world is getting back to normality. Lets take advantage of it.

“a sense of normality is pervading the interbank markets and foreign banks are reopening wholesale lines and extending credit beyond the govt gtee date to irish banks.”

They just want our banks fixed. Give them two clean banks and they will lend like billy-o. We really are far away from the dark days of last year. Lets not give in to financial terrorists. Shareholders knew what they were doing. The subordinates got higher rates of interest to cover their higher risk. The senior debt holders in Anglo & Nationwide are unfortunately suffering from the collapse of the Irish property bubble, the more reckless local subsidiary of the global property bubble. But Nama advocates tell us of a rosy future for property so they might well make much of it back. They are in the same boat as many home owners.

“i dont think the greens voting no and a potential collapse of the govt will be the best thing for a fragile economy looking for a managed workout of a blown up economy.”

All the things you say point to a rapidly improving credit market and steadily greater confidence. Now is the time to cash in on that. Moodys(?) in their analysis thought a change of government would clear the air. Many analysts will take the same view. The unpopular government for obvious reasons disagrees.

“15-20bn contingent risk of loss is very little over a 10-15 year period to protect an economy that could easily be worth 350bn in 10years time.”

We can’t afford to throw money away. A billion a year extra for foreign aid (a lightly target for cuts) would give clean water to thousands annually, saving many lives.

” i genuinely hope we’re not re-entering the vortex on monday. i just wanna move forward.”

We can do that now. We don’t have to pay a ransom. Gerhard the Fund Manager from Frankfurt will not kidnap us and put a Luger to our heads.
We should give the senior bondholders justice by allowing them to take over AIB, Anglo and Nationwide, fire the reckless managers and pursue the developers like ACC on steroids. And by bringing in independent veteran foreign investigators. Paul Appleby is out of his league and will be trying Seanie’s grandchildren.

” i dont have a pubic sector job or international speaking engagement to fall back on. (and for the record i dont work for any of the irish banks)”

Exactly the same for myself. Where did we go wrong!

On another matter, I have read about Angela Merkel threatening us about bondholders and threatening the Czech and Polish presidents about Lisbon.
She has also gone after the US and UK over their financial services industry and is telling her coalition partner she is not going to accomodate him. She’ll end up behind the bar of The Queen Vic in Eastenders!

I think if we stand up to her now we will get a lot of support – and she will be distracted by her many other feuds.

@ Eamonn

“We can’t afford to throw money away. A billion a year extra for foreign aid (a lightly target for cuts) would give clean water to thousands annually, saving many lives.”

Ok folks, well intentioned n all as this is, the lunatics are off their meds and setting fire to the asylum cos they think they can build a better one, funded by the guys who put up the capital to build the existing one. Im outta here…

@ Eamonn

btw, “Moodys said a change of govt would clear the air”. Incorrect. Indeed, extremely incorrect. S&P said the following back in April:

“In its report downgrading the Irish economy, published on Monday, SP said it was “concerned” that a “credible” strategy would not emerge until after the next general election.

Explaining these comments on Newstalk radio early yesterday, Mr Gill said: “In order for there to be a buy-in into what are going to be inevitable tax hikes in order to stabilise the debt-to-GDP ratio, you are going to need new faces in Government . . . This is typically the case in the aftermath of an economic crisis.”

This isn’t advocating a change in government, merely that a change in faces might be needed in order to get people to buy in. It can be read in a number of ways and cannot be used as a the full on assertion which you decided to put on it.

And here’s what Moodys actually said this morning.

“Analyst Dietmar Hornung, who was in Dublin yesterday, is reported to have said that while the Green Party leaving the Government would increase political uncertainty, this in itself would not affect Ireland’s rating.

He said Moody’s ratings were related to policies, not politics.

He said that it was essential that the Government delivers on its promise to cut expenditure by €4 billion in the December budget.”

@Eoin

You quoted me as saying ““Moodys said a change of govt would clear the air”. Incorrect. Indeed, extremely incorrect. S&P said …”

I said, “Moodys(?) in their analysis thought a change of government would clear the air. Many analysts will take the same view. The unpopular government for obvious reasons disagrees”.

Where did my question mark go after Moodys? Was it subject to the massive cutbacks you want from the little people, which Nama will make a lot worse. Reading your quotes from S & P you make a good case for what I said. Looking from abroad any fair analyst would see a change of government as beneficial. The incumbents caused the problems.

@Eoin
“Im outta here…” Please post on bondholder.com. You, Brian Lenihan & his cheery property valuer will have no problem in convincing them they will make money from converting to shares in Anglo & Nationwide.

@Zhou
“Should Stiglitz’s comments about bondholders taking pain be taken as referring to subodinated bonds only?”

Well we can give the seniors the banks. That’s quite a lot of compensation. Its not like they’re getting nothing, like the shareholders. For BOI and AIB they will just get a tidy trim. Overall things are much worse here than they are in the states. We won’t be going remotely as far as Iceland.

@Conchubar
“And in addition to all that, none of what you are proposing can take place before an election.” Well, the government could change its policies in response to circumstances & enlightened criticism – it seems astounding given this government’s behaviour on Nama, but it has happened before.

“Do you have any idea of the logistics of what your are proposing?”
Some preparation work, some legislation, a constitutional amendment, a nationalisation and negotiations with AIB.

It’s not the Apollo project, it’s not even the Luas! There will be much less man hours involved. We know the banks well now. We have already nationalised one (the wrong one). Revoking the guarantee is easy. We can put in a mini guarantee for bonds issued since Sept 08. Blanket amendment to constitution. I repeat, the guarantee was given before the public knew the state of the banks and the corruption therein.

@Conchubar
“We are in the middle of a grave financial crisis”. The financial crisis has greatly eased. Read thomas c’s post. If you think this is still Sept 08 in international finance you are utterly wrong. Reread that magazine article Karl linked. That was grave financial crisis.

“Do you really think that twelve months of complete paralysis and limbo is going to improve oncology treatment in Ireland?”
Stopping Nama will save lives. I think we could do it all in 4 weeks.

An election would be another 4. But it would be worth it to get Richard Bruton as Minister for Finance, George Lee as his Deputy, Karl Whelan as his chief adviser, Stiglitz and McWilliams as consultants.

That sound a lot better then Lenihan, Mansergh and Alan Aherne.

@Homer “Okay, all you diehard capitalists. Does that mean letting depositors getting toasted?”.

Are you suggesting that the type of people who contribute on this website have still got their money in Irish banks? Streuth. I moved mine out of Ireland almost a year ago.

“Okay, all you diehard capitalists. Does that mean letting depositors getting toasted?”

Nope. Create the “State Bank of Ireland”. After bankfail, create accounts for all depositors in said failbank crediting them with the guaranteed amount and the State Bank would be assigned as creditor whatever is realised from bank assets against the prior deposits. The State Bank would not lend to anyone under any circumstances (see NAMA Mission Creep), it would merely be a way to ensure that depositors were paid their due with minimum fuss. Back in the day we could probably have leveraged the An Post bank structures to handle payments to depositors but now there would be tendering issues.

Ideally the State Bank would be the front end of an FDIC style body which would try and preempt calls on the guarantee by arranging shotgun marriages.

Now this would require a large capital infusion to set but think about it – isn’t this cheaper than trying to keep entire edifices afloat with even larger capital infusions, not least given the ECB commentary on foreign owned subsidiaries in respect of Cyprus?