No Connection Between Bank Bailouts and Budget Crisis?

An additional point to consider is the likely loss to the exchequer of other taxes that would normally be expected as a result of repayment of the ‘investments’. Corporation tax is likely to be lower from the banks. From the looks of the NAMA bill, NAMA will not pay VAT or any other taxes. This is a loss to the exchequer that, for example, a firesale of properties by the banks would not entail (as VAT and other taxes would still accrue on the firesale price).

The government is lending to Peter so Paul doesn’t have to pay tax to him.

Earth to McArdle: They are linked. Tax money going to the banks is money that could be used elsewhere e.g. day-to-day running of the country. How is that financed? Borrowing. If we take bank bailout money and apply it to “normal” government spending, we won’t have to borrow as much.

@Cleitecloch
If you take the view that the public finance problems stem from an unhealthy reliance on transaction and income taxes fuelled by a property bubble and also take the view that the insolvency of Irish banks arises from the same source (that is the property bubble), then you can for sure link the two.

The banks were key agents of provision in the property bubble, playing both sides of the game – funding developers (asset providers) and funding purchasers. It was in the banks’ interests to lend the maximum amount to a borrower as they often had equity stakes in the developments – either personally or institutionally. Some of the banks lobbied for a move to net income ‘affordability’ criteria rather than gross income multipliers. Some of them lobbied for 100% mortgages with attached top-up loans. Some of them lobbied for 40 year mortgages. Some of them set up sub-prime operations (as if their current lending wasn’t sub-prime enough).

Out of each an every loan that was given, the government got its slice – CGT, stamp. Out of every house built, the government got VAT, PRSI, income and corporation taxes. And government facilitated all of this – interest relief for investors, FTBs, and owner-occupiers. No stamp duty on new houses. No stamp duty for FTBs. Vast reductions in stamp duty. Self-administered pension schemes permitted to leverage themselves. Rent relief. And the biggest lie of all, light-touch regulation. Anything possible to keep the number of transaction high and the gap between incomes and debt as high as possible.

The more that comes out, the more trapezoidal it becomes.

@yoganmahew

I agree with every word of your post. Of course the banks were major players in getting into the current mess. The point raised in today’s IT is forward-looking: i.e. the unavoidability of significant medium-term fiscal adjustment, regardless of what is done with the banks (though as many have observed what is done with the banks may make the fiscal position a lot worse over the long haul).

@Cleitecloch
Yep, fair enough.

There is, though, the point that continuing to rescue the banks will result in a crowding out of available funding for rescuing the economy. Rather than bread and circuses, we are being as to choose. It appears that the government have chosen circuses… send in the clowns!

Brian Lenihan: An Apology.

From a speech by the minister in Oct 08:

“But the banking sector must also play its part. The Government, on behalf of the community at large, has performed a major service for the banking community. The onus is now on the boards and senior executives of the banks to meet the legitimate expectation that now exists that they will see as their first priority the goal of ensuring that the flow of finance is channelled appropriately to support and underpin sustainable economic activities on the necessary prudent, responsible basis that is clearly in the interest of both the bank, the borrower and the wider economy”.

From an Irish Times story in Dec 08.

“It has emerged that the Government increased the size of its planned investment in Anglo by half in the final hours of talks. Mr Lenihan was offering €1 billion up to lunchtime on Sunday but raised the offer to €1.5 billion in the face of tough negotiation by the bank””.

Mr Lenihan, I wish to withdraw my description of you as a Vader type character. Since Oct 08 you have been trying to get the banks to lend.
You guaranteed their liabilities. Now you are buying their toxic assets at an official premium of €7 Bn – in reality much larger. Yesterday after all you have given them and are going to give them they publicly declared that they are already lending enough and will not lend more after NAMA. One year and one month on from your speech it is clear that you are only Vader when it comes to PR. In reality, the banks have exposed you as their harmless, ineffectual sugardaddy. Shovelling tens of billions to them while leaving their managements intact.
When it comes to the banks, you are the gift that keeps on giving and expects nothing in return.

@E43 BILLION
Whatever about the lack of change in the banks’ management, it does nobody any good if the banks lend money to unviable enterprises – that’s how I’d understand what Eugene Sheehy said

Jack–
Fully agree.
. I was surprised at Richard Bruton yesterday bemoaning that he felt there were still some SMEs being refused new loans; of course there is and will be refusals if the Busioness Cases dont stand up to scrutiny. Otherwise Banks would be just continuing to dig in the holes they are in.

The ability to be taken for a dupe is directly related to your intelligence, (or so I am informed). Plain vanilla folks are not taken in or confused by snake-oil salespersons. But the ‘intelligent’ are. Funny that!

B Peter

Interesting extract from the ECB Sptember bulletin re Eurostat and off-balance sheet AMCs:

“Beyond its immediate impact, the financial crisis and the severe economic downturn may also affect public finances with a delay. This further pressure derives from three major risks. First, considerable risks associated with the bank rescue operations still affect both the asset and the liability sides of the government balance sheet. On the one hand, loans may not be (fully) repaid or acquired bank assets may have to be sold at a loss in the future and, on the other hand, state guarantees provided to the financial sector are contingent liabilities that may ultimately be called. Second, the true fiscal costs of the financial rescue packages are still subject to considerable uncertainty. In particular, on 15 July Eurostat published a decision which implies that certain public interventions to support financial institutions and markets during the financial crisis will not – at least in the first instance – be statistically recorded in general government accounts. However, irrespective of their inclusion in the general government accounts and the timing thereof, the risks for public finances related to these operations need to be closely monitored in a transparent manner. For this reason, Eurostat also announced its intention to publish, as from October 2009, supplementary tables related to the activities undertaken to support financial institutions (e.g. government guarantees, special purpose vehicles and temporary liquidity schemes). Third, the current sharp contraction in economic activity may be followed by a prolonged period of subdued economic growth, which would result in a lower structural level of tax receipts. To avoid a further rise in deficits, governments therefore need to adjust their expenditures appropriately to the new macroeconomic conditions and, in particular, reverse the sharp rises in government expenditure ratios as soon as possible.”

http://www.ecb.europa.eu/pub/pdf/mobu/mb200909en.pdf

[Repeating my post from 10 November 2009]

Am I alone in finding too much “play the man and not the ball” on this website?

The fact that Pat McArdle used work for Ulster Bank doesn’t affect the validity / non-validity of his views. I happen to disagree with McArdle on much of what he says, but I have worked for a bank too. I thought McArdle’s comments to Morgan Kelly down in Kenmare were quite mistaken.

But I think that his views can be dissected without him being defamed.

References to a “parallel unverse”, “Earth to McArdle”, “spokesman for pyramid scheme sellers”, “Pat McArdle in a booth” don’t assist clear debate … they muddy it and are a discredit to this site.

Cormac
I think the issue is that people are mad as hell ,but alas will continue to take it anymore.
Back in June I suggested that given the fiscal situation pouring money into anglo was immoral, and reargued this again (note: money, so long as there was shareholdr/subbie money in the game). Patsy has more or less said that Frank Fahey is right – sure this is free money from the ECB and isnt “real” borrowing at all at all at all. the 46 signatories piece state in middle august “Thus, by overpaying, the State will wind up transferring to private individuals a sum close to the entire tax take across all tax heads.
In a period of fiscal collapse this is surely not a decision that should be taken lightly, if at all”. It has been stated time and again, to general politica derision, that NAMA would not, could not, release credit. Now the bankers are telling us that tis is the case.
One wonders if ever we will see one of hte handful of prominent NAMA-philes saying “we were wrong”. What would it take? What will it take?

Bank resolutions are invariably expensive, so the trick is to minimize the damage. As has been persuasively argued by many on this site, NAMA will instead entail an excessive worsening in the government’s balance sheet. But even if a magic wand were to reduce the cost of sorting the banks to zero, there would be still be a large structural fiscal deficit needing to be fixed.

@Cormac Lucey – I agree with your comment on playing the man not the ball.

@ M.B

“But did anybody believe that NAMA was a mechanism to get Banks lending again. …..

It will not work but it will have cost us and the next generation before it is twigged.”

I think MB that is has been “twigged” by the many here and elsewhere. The fact that this and other records state the fact is just that, a matter of record.

Yes there is opinion some of it unfounded. You know, just a hunch here or there. I am guilty of it. But then I and others had a hunch that the object of NAMA was the clean up the bank balance sheets in order that they could lend to SMEs stressed by a lack of credit was just a gigantic piece of PR.

It is on the record prior to the banks admitting it.

It is disgraceful that Brian Lenihan has not made a statement.

Your anecdotal evidence that the banks are consolidating loans into new term loans and calling them “new” seems further evidence to me.

I do hope you didn’t give the bloodsuckers any more security.

– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

A debtors’ revolt is not out of the question.

@Karl

It is unfortunate that one item in Pat McArdle’s Irish Times piece (his dubious assertion that the government’s injection of €4 billion capital into Anglo Irish should be treated akin to a capital investment) should overshadow another point which I think is worth discussing. Pat makes the point that all the focus is on the EBR not least because the government publishes monthly exchequer figures and it is the focus of the annual budget presentation, whereas what really counts is the GGD, the general government deficit.

One of the lessons of this crisis is that we need to seriously overhaul the mechanism of economic policy-making in this state. One step in this reform agenda should be to overhaul the archaic system of budgetary accounting inherited from the British so that it becomes a more inclusive measure such as the GGD.

it is not an argument against this proposal that the GGD concept can be manipulated. This has been true also of the EBR, where it has long been the practice to either delay or bring forward payments so as to present the figures in the way most suited to the government.

@Cormac

I agree with you that some regular commentators on this site think it is awfully clever to lambast the man rather than the ball, though when I made this point recently on another thread I was roundly condemned for being an academic elitist. I wish you better luck in your campaign. To show that it is perfectly possible to express a contrary point of view in a manner which is courteous to the person holding the other view people could do worse than refer to the interventions of Michael Burke and Michael Taft. I intend to return to the substantive point they make on another occasion.

Does anyone really think that pouring money into Anglo is an investment in any real economic sense? As in will return more than its cost ? Right, then it should NOT be treated as such, an should be treated as a government expenditure. Its the same as the NAMA borrowings – statistical trickery allows us to say that its not really government borrowing, but nobody anywhere believes that.

One core principle : cash rules. We have poured cash into the banks, cash we could have used for other things. To pretend otherwise is frankly wrong, imho. We can debate the alternative uses but not, i feel, the reality.

Alan, i think the coments on the other thread were for your perceived support for a suggested closing of the open nature of the blog. We can no longer pretend that we

@ MB
“What are they going to do, sit on the money for 20 years while we slowly repay our super duper mortgages.”…….what, like Japan? Surely not. I mean, we have NAMA…

@Brian

Thanks, if that was the implication some people took from my earlier comments, I am glad of the opportunity to reiterate my view that of course this should be an open blog. And the point of an open blog is to have a debate. My point is simply that you are not going to get people to join a debate if your opening gambit is to slander their objectivity. I am in favour of passion, not vitriol.

@Chris
Do you have a view on the EBR/GGD issue – would it improve economic policy-making to have a more modern and relevant presentation of the budget?

@M.B.
“Can somebody please tell me how an economy can surrvive without credit.”
When that economy is not dependent for employment/exchange on companies that look to domestic credit providers. Name me a MNC in Ireland that relies on an Irish credit institution for credit? Name me a major Irish retailer that is irreplacable? (because it couldn’t get commercial paper for stock).

Now, if you are asking how an economy can survive without a banking system, that is a different question. I doubt that it could. But that is a plain retail banking system. It doesn’t have to be Irish. There is no reason why Ireland could not become an adjunct of another euro clearing system. Already there is no charge for transferring money between an Irish euro account and an account in a different bank in a different euro country. With most transactions electronic, the only issue would be keeping the cash machines filled (a function of a security company) and providing a single point branch service (I’m sure An Post would be delighted with the business).

So ask not what the state can do for the banks, but what the banks do for the state? (i.e. the people of the state).

Karl

While the exact classification and treatment of Anglo’s recapitalisation (as either general Government spending or a financial investment) and its impact on the deficit is uncertain, there is no doubt that the interest costs on the extra borrowing used to finance the recap will be counted as government spending and will worsen the deficit next year (probably by about €200m in 2010 for the €4 billion recap earlier this year and add to that the interest costs of additional debt taken on to finance the next recap). This is an additional factor that Pat has ignored in his analysis.

Andrew

Andrew

@ Cormac

as i suggested and had confirmed to me on this site, the opinions of anyone, and i mean literally anyone, who was in the even remote recent past (lets says 5 yrs or so) involved with either of the following – the government, someone who worked for the government, an Irish retail or commerical bank, an international investment bank, a stockbroker, a consultancy that has had a government contract, any ex FF/PD politician or even remotely FF/PD-leaning commentator – has an opinion that should at best be treated with massive suspicion or more likely disregarded with almost immediate effect. Indeed many of these people have now been labelled as “government spokespeople” on account of their opinions. Always wonderful to have such open and broad-based debates…

I agree with the commentators who have the view that fire needs to be fought with fire. My god. The first shoe would be swiftly followed by a deluge. Is it still possible to understand what is going on around us as attempts to save an economy? I don’t think it is.

@all
Miriam Lord had an excellent article today.
http://www.irishtimes.com/newspaper/ireland/2009/1126/1224259485690.html
She compares what the bankers said in July 08 to what actually happened.
“Richie Boucher, before his big promotion, was present back in July of 2008. “Unequivocally,” he declared, “we do not believe there is a Northern Rock lurking in Ireland.” (Correct. There was a whole shed load of them.)”

If Boucher knew the truth why did he say this to the Oireachtas?
TO OUR ELECTED REPRESENTATIVES. If he didn’t know the truth why is he now leading BOI??? Only in Ireland. He must have been another believer in the amazing power of positive thinking – and positive talking. Morgan Kelly would use a ruder word.

@ Bond. Eoin Bond

You sound a little peeved Bond. Are you shaken or stirred?

“Earth to McArdle: They are linked.”

Is that ad hominem? I don’t think it is. I think it is humour. “Earth to…” is a common phrase. It just means that the person using the phrase perceives the object of the phrase as being “on a different planet”. It is not a personal attack on the object of the phrase.

“I have an image of Pat McArdle inside a little booth”

This also is humour.

“I too read McArdle’s piece with astonishment, but we’ve heard this spoofing from others as well.”

A declaration of astonishment is not an ad hominem position.

A declaration that an individual believes that someone else is “spoofing” is not ad hominem. It is merely a statement that the one making the assertion of “spoof” does not personally trust the manner in which the argument is presented. PR spin is another way to look at it.

“Any hope of a rebuttal to McArdle’s nonsense in the Irish Times?”

This also is no ad hominem. The person writing simply believes that McArdle has spoken nonsense. It is of course open to response (by you should you chose or by McArdle himself, he knows this blog exists). The person writing it asks the question (given that they believe it is spoof & nonsense) whether the Irish Times (the paper of record) will allow rebuttal. Not unreasonable.

With €70bn at stake Bond we need either a sense of humour/satire or a little latitude in the discussion.

Nobody has assaulted the character of McArdle in this thread. Nobody has attacked his person.

I personally believe the McArdle piece is a pre-emptive strike against a NAMA argument when the budget makes the poor take the pain. He not doubt would disagree. Which is fine. He has the Irish Times as a platform. Personally I can’t be bothered writing a strongly worded letter to the Irish Times. I only read (bits of) it because it’s free on the internet.

I do not attack his character. I do not undermine his opinion piece by attacking his character.

But you must understand Bond. McArdle wrote an opinion piece. The Irish Times allows him do so. It is called freedom of expression.

When you’ve finished that Martini shake yourself another one. You might even appreciate that satire and humour are essential methods to understanding complex issues.

– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

A debtors’ revolt is not out of the question.

@ Garry

Dubai?

http://www.ft.com/cms/s/0/554a5c30-da50-11de-9c32-00144feabdc0.html?nclick_check=1

But the decision to ask bondholders of the company and its most troubled subsidiary, Nakheel,
to extend maturities from December to May 2010 was a bombshell. And the Middle East’s most
glamorous and creative emirate will pay the price of its decision for a long time to come.

http://www.ft.com/cms/s/0/5ad63b00-da79-11de-9c32-00144feabdc0.html

Next year, the emirate needs to repay $13bn-$17bn to banks and bond holders.
“Dubai can’t keep pouring money into the sand,” said one banker.

http://www.ft.com/cms/s/0/e3da189c-da63-11de-9c32-00144feabdc0.html?nclick_check=1

I think Dubai decided to take the piss out of Mr Bond.

Gold @ €1190. Something’s afoot. Reserve currency losing credibility?

We live in interesting times.

What are bonds now?

– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

A debtors’ revolt is not out of the question.

On one level it’s probably correct to say that “whether we had to fund the banks or not, we would still have to cut €4 billion from the budget,” as the €4 billion is to reduce government expenditure, which could be seen as an altogether different task than bailing out our bankrupt bankers.

But on another level the two issues are linked and this is the main reason why there is so much anger developing in the country at present. Close to half a million Irish people currently have to exist on €204 a week social welfare payments. The majority of these people are in the unemployment lines through no fault of their own, they are more than willing to work and all through the past decade they showed that they are excellent workers.

They now see the government talking about cutting their meager €204 per week on the one hand and that same government giving reckless bankers, who ran their companies into the ground, €50 billion and watching those same senior bank executives retire with millions in bonuses and gold plated pensions.

To those half a million Irish people existing on €204 per week, there is no difference between the €4 billion and the €50 billion because it’s all being paid for by the Irish people and for those of you who think the views of that half a million don’t have to be taken into account, because maybe they don’t understand economics, I say to you WAKE UP, because those people won’t remain docile forever and the day may not be too far off when you will be forced to take their views into account.

It’s well documented in Shane Ross’s book the role the bankers played in bringing about this dreadful situation and those people standing in dole queues around the country may have no work and no money but they are smart clever people and they know all about the role the bankers gambling debts have played in the demise of the Irish economy.

Let me then deal with statements like; “There were I suppose many reasons why the cowboys lost the NAMA debate, … but for sure without a viable, credible alternative that ticked all the boxes, the anti NAMA’s were always going to lose the argument.”
The only reason ‘the cowboys’ lost the NAMA debate was because the Green Party ‘sold their souls for penny rolls and lumps of hairy bacon.’
From the very beginning Brian Cowen was not going to be swayed by reasoned argument in relation to what should be done about the banks which had been run into the ground and he made that perfectly clear when he announced “I’ll write whatever cheques are necessary for the bankers.”

There were many workable alternatives put forward by people like Dermot Desmond and Richard Bruton, but they were never even considered and the reason they weren’t was that Brian Cowen and Brian Lenihan had a voting majority in the Dail and that was the only reason.

All this talk about “the cowboys lost the NAMA debate because they plucked some of their figures out of the air and thereby made it so very easy for the Indians to run rings around them” is propaganda which is being swallowed by an ever smaller group of delusional people in this country.

Then there was the repetitive mantra “there is no alternative to NAMA.” Sheik Mohammed had no problem telling his bondholders yesterday that they could wait for their money until Dubai was good and ready to give it to them. Unfortunately there are no men of steel like that in our government.
No, all that’s required in this country is for the bankers to take some of our politicians down to the K Club for a feed of porter and the job is OXO.

The true state of affairs in relation to NAMA is becoming clearer by the day and the appearance of Mr. Sheehy and Mr. Boucher before the Oireachtas Committee yesterday was very illuminating in that regard. Only a fool would now be in any doubt as regards the intentions of the bankers who are hoping to dump their gambling debts on the Irish people and then head off to explore new pastures.

But, there is still time to stop them, the government has not yet made the Irish people legally responsible for these gambling debts and there is still time to pull back from the abyss. There are many alternatives to NAMA, but time is running out.

Fianna Fail has done a lot of good for Ireland since the foundation of the State, but all of those good works will now be washed away and forgotten if Mr. Cowen and Mr. Lenihan are allowed to drive our children into penury.

Next, let me deal with all this clap trap about ‘playing the man and not the ball’; if Mr. McArdle has a problem with criticism I am damn sure he is more than capable of looking after himself and he doesn’t need anybody else to fight his corner for him. But if he can’t stand the heat he should get out of the kitchen and stop writing silly articles in newspapers.

Anyway, Karl is absolutely correct in identifying the kernel of this whole issue in saying;
“The bottom line here is that substantial amounts of public money are going into the banks at the same time as taxes are being raised and public expenditure is being cut. The public may not understand ESA95 but they know what they are seeing with their own eyes.”

Chris
I am well aware that we lost the debate – I felt that we we had lost sometime back in August. So why persist, in a courteous manner? Two reasons
a) I at least can look people in the eye and say “you were told”.
b) Civil discourse is always preferable to otherwise.

The problem here is that the role of public intellectual discourse is to inform and educate – the role of politicians is to transform public debate into policy, if needs be by dirty fighting. While one person can in theory be both its not easy especially in a very party political arena. Here as in so much else we have been let down by our political class. FG and Labour had a choice to make : did they want to be doctrinally , party sectarian, correct (as they were) or did they want to stop NAMA by getting behind a single pragmatic alternative (of which there were a few).

We also need to ask ourselves if we could have done more – there are many senior economists (to note just the present group) in academia who decided to “sit the war out”. Im presently rereading Jenkins magisterial biography of churchill, and its very interesting. Many powerful people in the middle and late 30’s were very dubious of emergent european trends. However, a combination of mistrust of the leaders of the opposite view, a feeling that they were not in europe so not their fight, a dash of fear of the opponent and some feeling that the fight was lost so why stick ones neck out better to be on what was to be the winning side, all these conspired to make the task facing churchill much much harder. We are not churchills an this is not an existential crisis (yet) but I suspect all these and more acted to keep people off the pitch.

This is not to forget the vast lobby fodder of the backbenches one of whom stated to me (on another issue) “sure I know theyre wrong but I have to vote the party. I will never vote against the party regardless”. Thats the level of abrogation of national and individual responsibility we are dealing with there.

@Chris\Brian

I read a lot in the comments these days about how the academics who opposed the government’s plan “lost the debate.” I don’t view it that way.

I think that our arguments convinced a lot of people. Certainly, they had more substance to them than the “only game in town” rubbish that most of the pro-NAMA politicians and many lazy journalists ended up peddling. My guess is that if put to referendum (I’m not saying it should have been!) the NAMA bill would have been heavily defeated.

But life is not the L&H or the Hist—in a parliamentary democracy, you don’t necessarily get your way even if you convince a majority of people you were right. At the end of the day, a government with a majority that is steadfastly determined to push through a piece of legislation can do so.

That was the reality of what happened. Anyone who thinks the legislation passed because the government won some sort of debate or because some academics weren’t tough enough (or because some particular number in a particular column was open to question) is, in my opinion, losing sight of how democracy works in practice. Academics can give advice. Governments don’t have to take it.

@COD
“The true state of affairs in relation to NAMA is becoming clearer by the day and the appearance of Mr. Sheehy and Mr. Boucher before the Oireachtas Committee yesterday was very illuminating in that regard. Only a fool would now be in any doubt as regards the intentions of the bankers who are hoping to dump their gambling debts on the Irish people and then head off to explore new pastures.”

So true.

@Karl/Brian
This leads me to say to you that we may have lost a battle but the war is stll to play for.

@ B P Woods

Its Harry Lime.

Tried posting a youtube link but it didn’t get through.

Type “The Third Man Theme” into youtube.

Definitely in my Top 10.

@ Brian.

Thanks for your, always interesting, observations. But I disagree with you on NAMA. I’m not a NAMAphile but the alternatives don’t convince me at all. Essentially they are:

1. let banks go bust – we saw the impact that has on lending rates for international banks in the wake of Lehman’s failure. Could/should an Irish government take the risk of a similar event here risking funding for the remaining Irish banks to evaporate? Note, even with NAMA, funding for Irish banks is highly problematic as evidenced by current CDS swap rate premia (of about 2.5%) and by Irish Nationwide advertising withdraw on demand deposit rates of 3.75% while ECB rates are just 1%.

2. have the State underwrite bank lending (the approach advocated by Dermot Desmond) – this would still risk a race by banks to liquidate weak property loans ahead of their competitors. A precipitous race to the bottom could ensue. Debt-deflation would be the result. Note, even with NAMA, steep commercial property price falls have already happened and continue.

3. engineer a debt/equity swap at our banks (the approach advocated by Morgan Kelly) – but why would any bank swap low-risk debt now guaranteed by the Irish State for a bank equity position of uncertain value?

4. establish good banks / bad banks in each major financial institution (the FG approach) or essentially create a mini-NAMA (bad bank) for each financial institution – this adds a layer of individual bank accountability to the NAMA project but seems otherwise similar and given that all bank shares and managements have been wholly devalued already, I’m not sure what, other than complication, this would actually add.

So I support NAMA for the same reason I support democracy. I’m not a devout admirer but both seem a lot better than any alternatives.

I hear your argument about the immorality of NAMA. And you’re right. The sector that started the fire is the first sector to be rescued by the State. And it will probably be the only sector to enjoy a full rescue.

And I hear your arguments about the premium NAMA will pay to acquire loans from the banks. I think that that is a mistaken attempt to (a) ward off possible legal challenges from the banks and (b) give the banks a capital increase.

But view matters from the government’s position: a functioning banking system is a pre-requisite for a functioning modern economy. Even with NAMA, the functioning of our banking system is at risk. Consider the following:

a. Brian Lenihan has admitted (based on his own very optimistic figures) that NAMA will pay €7bn more for property loans than it thinks they are now worth.
b. AIB and BoI will contribute 52% of the loans going into NAMA.
c. Assuming proportionality, AIB and BoI might therefore be getting a gift of circa €3-4bn from the State.
d. The combined market values of AIB and BoI right now (Friday 9.30am) are just €3.1bn.

Implication I: ex the effects of the NAMA gift, the market is attributing a NIL value to the main Irish banks.

Implication II: it will be very difficult for Irish banks to raise equity from the market.

Implication III: the banks will probably have to resort to the State for fresh equity pushing them into majority State ownership.

Conclusions
* McArdle is wrong. If the State devotes resources to bail out the banks, it will have fewer resources for other purposes.
* IMHO, NAMA is the least bad policy option (although there are elements with how it’s being done with which I disagree).
* The banking system here is in a much weaker state than most wish to admit.
* No policy prescription listed here addresses the issue of the mismatch between Irish banks’ deposits and loans. Irish banks need to reduce their lending by over €130bn (or about 30% of total lending) to restore the relationship between (a) loans and (b) capital plus deposits which existed in 2002. Implication: even if NAMA works in saving our banks, the supply of new loans will be extremely limited.
* No policy prescription listed here addresses the EMU interest rate swing that will cause EMU interest rates to be too high for our needs over the coming years. Taking a Taylor Rule approach shows that EMU interest rates were too low for us for the decade 1997-2007 because our inflation was higher than the Eurozone average while our spare capacity was lower. Now our inflation is lower than the Eurozone average while our spare capacity is higher. Implication: we have moved from a period where EMU interest rates were structurally too low to one where they will be structurally too high.

We face a decade of deleveraging, sub-par economic growth and economic pain.

Cormac
Elequent as usual. I think that what irks me most is that we will, probably, end up with effectivly nationalised banks that are semizombies. We could have at least revived them if we had taken the clean route of writedown, recap and restructure back in feb/march. And that was an option that Karl, Constantin and I suggested time and again, congruent with economic principles and feasible, as well as morallly the right thing to do (skin the subbies/equity).
There is I suggest no policy that can or should address the deleveraging issue- that has to and will happen, but what we can and should expect is honesty. AIB has given us some, belatedly, and now we await some from Merrion St.

@Cormac Lucey
Our banks told the Oireachtas that they are lending out all that they wish to do already. If making them strong has no benefit leave them weak.
They are not going to go bust while we guarantee their additional borrowing. Why is a massive reduction in property prices and rents so bad?
If we don’t deflate them it’s a slow, long grinding reduction of wage and other costs through mass unemployment. Is this preferable?

“3. engineer a debt/equity swap at our banks (the approach advocated by Morgan Kelly) – but why would any bank swap low-risk debt now guaranteed by the Irish State for a bank equity position of uncertain value?”

My suggestion: repeal the guarantee. It’s legislation. Repeal it. Anglo and Nationwide were deposit taking property developers and AIB and BOI were hugely exposed to one of the world’s longest lasting property bubbles. Pass a constitutional amendment to indemnify us against any law suits if necessary. Guarantee only the banks borrowings after the guarantee.

NAMA is a €54 Billion cost (likely loss now €40 Billion) that by stopping the benefits of reduced rent and property prices will damage our economy. It will also save the corrupt elite who did this to us. Keeping them around is another huge cost to the economy.

There are striking parallels between FF’s treatment of the Catholic church
and their treatment of the banks. FF’s guarantee to the Church was going to cost us €1 Bn, until public pressure after an investigation reported forced the church (not the government) to repudiate it.
FF’s guarantee/NAMA to the banks is going to lose €40 Bn. No wonder they are only investigating one of the banks, Anglo, and are doing that very slowly. They have learned from the outcry after the comprehensive church investigation that if the public learn the full truth they will rebel.

I agree largely with Cormac Lucey’s conclusions (ecept NAMA being the least bad alternative) but his list of alternatives leaves a lot to be desired. Point 3 in particular is very very weak. If the government announces tomorrow that they are not going to extend the guarantee after 2010, you’ll see a line of debtors willing to do a swap. in fact, you don’t even need to make an explicit announcement, just drop hints. The problem is that this government has consistently undermined its own negotiating position from day one as it lurched from mini-crisis to mini-crisis, lie to lie. They were always putting out yesterday’s fire and creating conditions for a bigger one in the process.

If they had not given a blanket guarantee, or even just guaranteed BoI and AIB as systemic things would have been a lot lot better. The guarantee was the original sin that nobody seems to talk about today and even Cormac Lucey is taking as a given.

@Paul McDonnell
I think it is the case that because people in the US get less from government they demand more justice against people who commit financial crimes and cheat on tax than European social democracies do.
Ireland’s justice system of course never jails politicians, bankers or tax cheats. In this one we are not even Berlin. We’re Moscow.

@ Karl

“The fact is that the banking crisis has substantially narrowed the options for the Irish government on the fiscal front.”

The flip side of this is, of course, that if we hadn’t been running an 8%+ structural deficit, then we probably could’ve been more agressive with the banks in terms of not having to worry as much about what potential buyers of Irish government debt would think. As such, the ballooning budget deficit crisis also substantially narrowed the options for the Irish government on the banking/bondholder front.

The point, as i think Pat McArdle was trying to say, is that the budget deficit and the banking crisis are intertwined for many reasons, but very few of them are being admitted to by the Unions, public sector, PAYE workers etc (and no im not saying they caused the banking crisis). Like everything, its far more complicated than a snappy tagline about bankers causing the PS cuts.

E43Bn lost and no extra lending Says:

“How much permanent extra lending are we getting for our €40 Billion NAMA loss?”

When did this happen?

So we haven’t lost anything as yet and still won’t know if we will or not for ten years or so.

Thank God for that, I thought something had happened while I was having my dinner.

I’ve been told lots of things, but I don’t believe the half of them.

As you’re happy to come to conclusions about a 51.3 billion project on the basis of a sell off of a block of apartments in Newbridge, I really have nothing to say to that and I’ll leave you to it.

@ JMS

I presume you’re talking about NAMA.

Can you explain where you get €51.3bn for the “project”.

I haven’t seen that figure anywhere.

How much do you think NAMA will “lose”?

JMS
Its not just that the house prices are probably down by a lot more ; take for example the DDDA site (irish glass bottle) that is down 85%. There are dozens of examples of property portfolios that are down 50% plus. If you truly think that NAMA will make a profit , great. I have a bridge in brooklyn I need to sell…..

@JMS
Given the hobbling of the risk-sharing, and the huge oversupply in a property market that has not stopped dropping, the paying of an LTEV is simply gambling €7 Bn on a really long shot. I wish that Minister Lenihan had delivered on his multiple promises to be open to amendments:
“The minister is directed to enter a casino in Monte Carlo wearing a white tuxedo and to put €7 Bn on red.”

It is disturbing to see how many people in the NAMA lobby – most recently Brian Cowen – believe that our economic difficulties can be solved by positive thinking and a ban on negative expert commentary. They still see falling property prices as a temporary misfortune soon to be reversed.

Once our government squandered billions trying to prop up the currency.
Now they squander it propping up property prices. Will our elite never learn?

“If you truly think that NAMA will make a profit , great. I have a bridge in brooklyn I need to sell…..”

It will take a good deal more than smart arse remarks to sustain the claim of a 40 billion loss for NAMA.

@Greg
I think JMS is deducting the bogus risk-sharing of €2.3 billion from the €54 Bn. He shouldn’t.

http://www.irisheconomy.ie/index.php/2009/10/29/risk-sharing-and-accounting-issues/

“Even as it was announced, there were strong rumours that this risk sharing element would represent a tiny change to the original plan. This has now been confirmed.” (Karl Whelan)

http://www.independent.ie/business/commercial-property/development-land-at-an-agricultural-price-1952705.html

Another prediction fulfilled … or is it two? The value and the new developments competing with NAMA!

Wunnerful lil cuntry!

@ JMS

Here are the rules according to Bond.

Rule 1. The bondholders are made whole.

Rule 2. See Rule 1

@ JMS

Property prices have fallen 25-30%.

Where are you posting from Melbourne. This is an Irish site and property prices here have fallen 50-80%.

The estate agents who turned developer in this country may still be advertising 25-30% reductions as great value, and bargain basement but nobody is buying unless the reduction is at least 50% and then only in places they would like to live or know the would get a rent.

In fact an accountant relative of mine recently valued 24 holiday home development with 16 finished houses at zero. Nothing. Nada.

Notice how close the word NADA is to NAMA.

@ JMS

“I want to know where you get the figure of €51.3bn from.

Do you have an answer?”

– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

A debtors’ revolt is not out of the question.

@ JMS

The ESRI figure are not up to date figures. My information is not just anecdotal.

I am a small business owner actively involved in my local chamber. I am talking to estate agents everyday.

The reports they are giving would make your toes curl. All property in this country has taken an enormous reduction.

50-80% is the norm. Rents are plummeting and at the moment in my town there are 16 empty units all of which were occupied 2 years ago.

The esri are dealing in figures presented by Banks and large estate agents. Right now I would trust the church with babysitting services and Bertie with my cash before I would trust either of the other two to tell the truth.

@ Brian Lucey I have been of the view that NAMA is the only game in town. NAMA-phile? Admit I have been wrong? – absolutely no? I have consistently argued that NAMA is not a silver bullet. Lenny was a bit rash in giving the impression it would be.

What I ask the NAMA-phobes is do they really think we would be better off today if we had never given a bank guarantee, never recapitalised, never came up with a plan to detox the banking system?

@Brian Woods:
Your assertions are wrong. It is not a binary either/or situation. To be specific:
1. We would have been better off if only BoI and AIB had been included in the guarantee plan.
2. We would have been better off if we had recapitalized but asked for a bigger share of the banks. At the moment, we have zero equity in AIB or BOI only preferreds and warrants.
3. We would have been better off if we had say adapted a more sensible plan such as Honohan 2.0 to detoxify the banking system and removed all the senior executives who caused the problem in the first place.

So there, your arguments are incorrect.

@Brian Woods II
Too easy: NAMA is nothing to do with the guarantee or recapitalisation. Irish banks do not have ‘toxic’ debts, in the sense that that term is conventionally used. They have bad property loans, something quite different. NAMA critics always demanded cleansed balance sheets and taxpayers money to be used. They mostly asked, as well, that tax payers not be ripped off, that they should not be ranked behind shareholders and bondholders, as decreed by NAMA.
We would be better off today with a NAMA-like plan that simply did it right.
‘The only game in town’ is intellectually lazy, politically dishonest and the ultimate rip-off of the taxpayer. It won’t deliver what itis supposed to.
This, I think, is the simplified version of the alternatives laid out by the good guys on this site. Remember this when NAMA fails to deliver on your promises.

@All
Those questions on NAMA:

Who made the initial decision that the options were risk insurance or a bad bank? Can we see evidence of their analysis of the options?
Also, was there an appointments process for Dr Bacon?
Was there an appointments process for the interim head of NAMA?
Will there be one if he is confirmed?
On what basis did the minister direct the hiring of Merrill Lynch?
Was there a tender process?
Who was putting Michael Sommers under pressure to put money on deposit with Anglo?
Who did he tell about his serious reservations about Anglo?
What did they reply?
The minister directed the NPRF to pour €7 BN of the nation’s pension fund into AIB and BOI. After doing so, why did he leave the boards of AIB and BOI virtually intact and allow the appointment of insiders as chief executive, especially to AIB?
Also, I talked before about the acutely incestuous process relating to government bank director and Anglo chief executive appointments.
How does the appointments procedure work for directors who are watching our huge “investments” in Anglo, AIB and BOI?

Further example from Shane Ross involving the current chairman of a bank which we wholly control NOW:

http://www.independent.ie/business/irish/anglo-chairman-oconnor-picked-drumm-for-top-job-1957892.html

Ross, who is rapidly becoming the Van Helsing of the Irish banking horror story, also had two other excellent articles.

I was simply answering Brian Lucey who seems to think that now that we are told that credit will not freely flow and that we will not live happily ever after, that NAMA supporters should commit suicide.

Without NAMA or its equivalent we would have zombie (or actually dead) banks totally incapable of seeing us through and out of this crisis. But we still have a crisis, a chronic government imbalance, a totally wrong currency, a steeply declining economy, a far too generous social welfare and public pay platform, a hugely indebted populace. NAMA is the best chance to solve one of our problems, a collapsed banking system, but it is not a panacea.

@ Brian Woods II

Banks that dont lend to an economy ARE zombie Banks.

And they will not be able to see us through our current crisis. They are zombie Banks soon to be dead Banks walking.

There is no way our Banks will be able to withstand the level of Mortgage default coming down the tracks.

These Banks will fail or be taken into state care. How much they will have cost us in the meantime because of the self preservation that is going on at the moment is our next big worry.

@34 billion

Gormley would have taken a lot longer than 25 mins. I heard that he is still waiting on the rape seed oil powered vehicle he had dispatched from our embassy in Cape town

@Brian Woods II
As someone who has had a close (blood) relative commit suicide, thats a blow as low as i have ever had directed at me. And I wont take it from you or anyone else. So back right off now.
Apart from the hideous insult to anyone who has suffered from suicide, its a gross and mischevious misrepresentation of my position. And please, if you have a shred of honour or decency, dont email me privately to apologise, do it here.

@Brian Lucey
This phrase is another thing we have to thank Bertie for. Economists tend to quote it when pointing out the official response those who questioned the boom faced. Although it is a brilliant illustration of this I don’t think they should quote it directly. The poster was wrong to paraphrase it. I assume he did it innocently so I don’t see why he should not gracefully withdraw it.

Yep, it’s all the Govmints fault.

Economics site, my arse.

@ Brian Lucey and E43Bn

E43Bn, you are of course totally correct, it was a take off of Bertie, thanks for your input, as coming directly from me it would possibly not convince.

I am utterly unaware of any of BL’s personal background other than he is a professor at UCD (I think).

Let the remark be withdrawn, for sure, and I apologise for any hurt to BL. But to apologise for making the comment in innocence, no that would be unwarranted and disingenuous.

Brian Woods II
Apology accepted . Even if you put me in UCD……