Comments on: Interaction Effects of the Bank Liability Guarantee and Asset Purchase Schemes http://www.irisheconomy.ie/index.php/2009/10/29/interaction-effects-of-the-bank-liability-guarantee-and-asset-purchase-schemes/ Mon, 21 May 2012 22:29:45 +0000 http://wordpress.org/?v=2.6.3 By: Pat Donnelly http://www.irisheconomy.ie/index.php/2009/10/29/interaction-effects-of-the-bank-liability-guarantee-and-asset-purchase-schemes/#comment-23281 Pat Donnelly Tue, 03 Nov 2009 08:25:04 +0000 http://www.irisheconomy.ie/?p=4527#comment-23281 I agree that policy in this area is of vital importance particularly if we insist on borrowing so much to fund deficits and Nama, all political choices that should be put to the electorate. A review is, almost literally, vital. I highlight Steve Keens recent article by showing his para on the effects of a Federal Gov multiplier. Premature use of this multiplier will destroy more capital than it protects. Waiting past the optimum moment will simply mean inflation in asset values above the proper level. Whatever it might be. All relative. As Ireland has structural liabilities where Australia has structural assets, the circumstances need to be teased out. Nama effects will still be negative for all the reasons of my previous posts. http://www.debtdeflation.com/blogs/2009/11/02/debtwatch-no-40-november-2009-have-we-dodged-the-iceberg/ "The FHV then took this additional cash and leveraged it into an additional $200,000 or so for their next house purchase. So the FHVB caused a bubble, not merely in the sub-$500,000 price range that most First Home Buyers inhabit, but right up to the $1 million range that accounts for more than 90% of Australian housing. The leverage on the FHBB was not merely seven to one, but closer to 50:1 given this flow-on effect." I agree that policy in this area is of vital importance particularly if we insist on borrowing so much to fund deficits and Nama, all political choices that should be put to the electorate.

A review is, almost literally, vital.

I highlight Steve Keens recent article by showing his para on the effects of a Federal Gov multiplier. Premature use of this multiplier will destroy more capital than it protects. Waiting past the optimum moment will simply mean inflation in asset values above the proper level. Whatever it might be. All relative. As Ireland has structural liabilities where Australia has structural assets, the circumstances need to be teased out. Nama effects will still be negative for all the reasons of my previous posts.

http://www.debtdeflation.com/blogs/2009/11/02/debtwatch-no-40-november-2009-have-we-dodged-the-iceberg/

“The FHV then took this additional cash and leveraged it into an additional $200,000 or so for their next house purchase. So the FHVB caused a bubble, not merely in the sub-$500,000 price range that most First Home Buyers inhabit, but right up to the $1 million range that accounts for more than 90% of Australian housing. The leverage on the FHBB was not merely seven to one, but closer to 50:1 given this flow-on effect.”

]]> By: zhou_enlai http://www.irisheconomy.ie/index.php/2009/10/29/interaction-effects-of-the-bank-liability-guarantee-and-asset-purchase-schemes/#comment-22896 zhou_enlai Fri, 30 Oct 2009 15:45:28 +0000 http://www.irisheconomy.ie/?p=4527#comment-22896 @Gregory Connor Thanks for that. The interraction of NAMA and the Guarantee is certainly of primary importance. @Gregory Connor

Thanks for that. The interraction of NAMA and the Guarantee is certainly of primary importance.

]]> By: E76 http://www.irisheconomy.ie/index.php/2009/10/29/interaction-effects-of-the-bank-liability-guarantee-and-asset-purchase-schemes/#comment-22793 E76 Thu, 29 Oct 2009 22:55:31 +0000 http://www.irisheconomy.ie/?p=4527#comment-22793 "Banks should be eligible to participate in the renewed liability guarantee only if they accept the asset purchase programme with fair-valued (not over-valued) pricing". Sadly Lenihan's idea of fair pricing is overpay as much as possible to avoid substantially nationalising the banks. But if the government fell tomorrow perhaps this approach would work. Given the holes that Anglo and Nationwide have become we should simply have dared the bondholders to send them over the cliff. “Banks should be eligible to participate in the renewed liability guarantee only if they accept the asset purchase programme with fair-valued (not over-valued) pricing”.
Sadly Lenihan’s idea of fair pricing is overpay as much as possible to avoid substantially nationalising the banks. But if the government fell tomorrow perhaps this approach would work.

Given the holes that Anglo and Nationwide have become we should simply have dared the bondholders to send them over the cliff.

]]> By: Aidan McGrath http://www.irisheconomy.ie/index.php/2009/10/29/interaction-effects-of-the-bank-liability-guarantee-and-asset-purchase-schemes/#comment-22753 Aidan McGrath Thu, 29 Oct 2009 16:48:38 +0000 http://www.irisheconomy.ie/?p=4527#comment-22753 The premise is also false. The guarantee is and always has been a mirage since it can never be honoured. A run on the banks could still be triggered by a realisation of it's lack of substance, or another call to the Joe duffy show. As Bertie tried to say it's all smoke and mirrors The premise is also false. The guarantee is and always has been a mirage since it can never be honoured. A run on the banks could still be triggered by a realisation of it’s lack of substance, or another call to the Joe duffy show. As Bertie tried to say it’s all smoke and mirrors

]]> By: Homer http://www.irisheconomy.ie/index.php/2009/10/29/interaction-effects-of-the-bank-liability-guarantee-and-asset-purchase-schemes/#comment-22730 Homer Thu, 29 Oct 2009 12:38:13 +0000 http://www.irisheconomy.ie/?p=4527#comment-22730 This analysis falls at the first hurdle. The bank guarantee scheme confers no bargaining power to the taxpayer. Picture the following analogy. I am flying in a plane which develops a very serious technical problem, to which I alone have the solution. The pilot advises me that if I don't supply the solution the plane will crash. Where is my bargaining power? Can I really insist on free travel for life in return for my co-operation? This analysis falls at the first hurdle. The bank guarantee scheme confers no bargaining power to the taxpayer. Picture the following analogy. I am flying in a plane which develops a very serious technical problem, to which I alone have the solution. The pilot advises me that if I don’t supply the solution the plane will crash. Where is my bargaining power? Can I really insist on free travel for life in return for my co-operation?

]]> By: Paul Hunt http://www.irisheconomy.ie/index.php/2009/10/29/interaction-effects-of-the-bank-liability-guarantee-and-asset-purchase-schemes/#comment-22726 Paul Hunt Thu, 29 Oct 2009 11:40:32 +0000 http://www.irisheconomy.ie/?p=4527#comment-22726 @Gregory Connor, Thank you for this post. I think it is of more than academic interest. It highlights the fact that, once the blanket guarantee was awarded, the State was on the back foot in its dealings with the banks. There probably was a small window of opportunity to pursue the "nuclear option" - aka Prof. Stiglitz's "rules of capitalism" - i.e., nationalisation, wipe-out of all investors, cleansing, recap and resale accompanied by a thorough shake-out of the property market, but this has long gone. If pursued it is likely it would have led to extensive external ownership and management of the cleansed banks (and of the property sector - even if a tranche of Irish net wealth held externally might have been tempted back to devour the temporarily under-priced pickings). All the international and historical evidence seems to suggest that a rapid and thorough, if painful, adjustment is more beneficial in the medium to long term. The Government set its face firmly against this approach primarily because of a failure to draw a distinction economic activities and those who perform them. The very simple economic point that seems to have been missed is that, while there is a continuing demand for them, the identity of those performing economic activities is irrelevant. Those who fail - and, as in this case, fail catastrophically - in the performance of an economic activity have no entitlement to continue. This is the essence of capitalism and competitive markets. Those who fail move on and those who envisage a prospect of success move in. NAMA is the result of the Government's desire to maintain some vestige of Irish ownership and control of the banking and property sectors and of its attempt to reduce the State's exposure under the blanket guarantee. And the bankers and developers who created the mess, to a considerable extent, remain in situ and hold the whip-hand over citizens who retain a signifciant liability. Meanwhile those who benefited least, in relative terms, from the false boom are likely to suffer the most in relative terms. Certainly not a recipe for social cohesion, democratic stability or future prosperity. @Gregory Connor,

Thank you for this post. I think it is of more than academic interest. It highlights the fact that, once the blanket guarantee was awarded, the State was on the back foot in its dealings with the banks. There probably was a small window of opportunity to pursue the “nuclear option” - aka Prof. Stiglitz’s “rules of capitalism” - i.e., nationalisation, wipe-out of all investors, cleansing, recap and resale accompanied by a thorough shake-out of the property market, but this has long gone. If pursued it is likely it would have led to extensive external ownership and management of the cleansed banks (and of the property sector - even if a tranche of Irish net wealth held externally might have been tempted back to devour the temporarily under-priced pickings).

All the international and historical evidence seems to suggest that a rapid and thorough, if painful, adjustment is more beneficial in the medium to long term. The Government set its face firmly against this approach primarily because of a failure to draw a distinction economic activities and those who perform them. The very simple economic point that seems to have been missed is that, while there is a continuing demand for them, the identity of those performing economic activities is irrelevant. Those who fail - and, as in this case, fail catastrophically - in the performance of an economic activity have no entitlement to continue. This is the essence of capitalism and competitive markets. Those who fail move on and those who envisage a prospect of success move in.

NAMA is the result of the Government’s desire to maintain some vestige of Irish ownership and control of the banking and property sectors and of its attempt to reduce the State’s exposure under the blanket guarantee. And the bankers and developers who created the mess, to a considerable extent, remain in situ and hold the whip-hand over citizens who retain a signifciant liability. Meanwhile those who benefited least, in relative terms, from the false boom are likely to suffer the most in relative terms.

Certainly not a recipe for social cohesion, democratic stability or future prosperity.

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