A Behavioural Model of the Department of Finance

For faithful members of the 46-ers*, the new government budget proposal creates cognitive dissonance.  How could a government so wasteful in its bank-bailout policies produce a general government budget proposal that seems so carefully and sensibly crafted to address current fiscal and competitiveness problems? In contrast to bank-bailout policies, the new general budget seems reasonable, balanced and fair, but as stringent in difficult circumstances as could possibly be asked. Does the Department of Finance (DoF) suffer from bipolar syndrome?  How can we understand its behaviour?

For left-wing analysts, there is no conflict.  They can invoke the theatrical model: the DoF is engaged in class war on behalf of its friends (the rich and powerful) against its enemies (the poor and powerless).  Fintan O’Toole is an eloquent, thoughtful, and nuanced proponent of the theatrical model. In the right hands, this model has some merit, and certainly carries emotional appeal. It provides a satisfying explanation for many people, but for mainstream economists it lacks veracity. I hope that we can avoid discussion of all the variants of the theatrical model in this particular thread.  It will just clog up this particular discussion and is not relevant to this thread. In this thread I want to focus entirely on something else: explaining DoF behaviour from a “mainstream” perspective. 

Do we have any consistent, mainstream-economics explanation for an excellent budget and an appalling bank bailout strategy emanating from the same government department?  Here is my simple, ex-post theory of DoF behaviour.

1.  Insider generosity vs. outsider stringency.

A basic feature of human nature and social organizations is a strong bias toward insiders and against outsiders. Each government department and its ministers, is “captured” by insider special interests.  Each department and attached ministers argues strenuously for more public resources for their department.  In normal circumstances, the Department of Finance acts as a central control. It can balance all these competing demands, and is “captured” by none of them.  That is why in most parliamentary democracies the DoF is empowered with strong central control of the entire budget. The problem for Ireland at the moment is that the DoF budget, usually a negligible sum in the overall government budget, is currently, including all direct and contingent bank bailout costs, by far the largest component of government actual-plus-contingent expenditures. While stringent and sensible toward all the other departments, the DoF has been extravagantly generous toward its own insider interest groups (the financial services industry and that industry’s clients). If Mary Hannafin, or some other “outside” minister, could control the DoF budget, and Brian Lenihan control all the others, perhaps we would not have this problem.

2.  Ireland’s insolvent large property developers are Fianna Fail’s long-term, generous benefactors.

The Irish financial services industry has benefitted from recent DoF policies, but Ireland’s large property developers have benefitted spectacularly.  Many of the large developers have been insolvent for over a year, but government policy has worked to prevent any bank cash calls upon them.  The banks have been promised a big subsidy on fair value if they cooperate by rolling over the loans until NAMA purchases them.  The NAMA plan, bank guarantee, and Anglo takeover have worked with a common purpose (unintentional?) to avoid any cash calls against Ireland’s large, troubled property developers.  The NAMA business plan builds in another three-year hiatus on pursuing large property developer debts, pushing any asset liquidations beyond the next election.  By the time NAMA moves to collect on these debts, all personal funds of the largest property developers will be located out of NAMA’s reach. The government bank bailout policies have effectively cancelled the bank debts of the large developers. One might cynically treat this, rather than stabilizing the banking system or increasing bank lending, as the government’s key policy goal.  It certainly can be justified by the theory of political economy. Large political donors tilt government policies in their favour. Reading The Builders by Frank MacDonald and Kathy Sherian, one is struck by the long-term, very close, and financially very generous relationships between nearly all the large property developers and the Fianna Fail party. This sounds uncomfortably like a conspiracy theory, but in fact it is entirely consistent with modern political economic theory.   

Where does this leave Brian Lenihan as finance minister, spearheading both the government’s excellent budget policies and its terrible bank bailout policies?  Will he be remembered in coming years as the finance minister who deftly shepherded through a tough but necessary budget in Ireland’s moment of need? Or the finance minister who wasted 15 billion euro of Irish taxpayer wealth to subsidize bankers and large property developers?   


* This refers to the 46 economists, led by Brian Lucey, who signed a letter to the Irish Times arguing against the government’s expensive guarantee-and-subsidize approach to Irish bank bailouts, advocating instead a cheaper nationalize-and-restructure approach.

41 thoughts on “A Behavioural Model of the Department of Finance”

  1. I think the “generous benefactors” card is over-played in Ireland. Campaign spending limits for elections are about €40,000 – much of it refundable – whereas a standard TD’s salary for a four year term is about €400,000. When you think that Obama spent in the order of 1000 times his salary during the US Presidential campaign, running for the Dáil not a major burden.

    In my opinion, the personal connections between TDs and their buddies are more important than the few quid they share now and again. There’s no over-riding economic theory here other than “it depends on the people involved.”

    This simplistic view fits in with how I interpret the governance of the Budget vs NAMA. Our benevolent overlords are well able to appoint Colm McCarthy to give them a few tips when it comes to income and expenditure. When it comes to NAMA, they’re out of their depth. No great theory; no great malfeasance; just sheer incompetence.

  2. Oh for heaven’s sake. What’s the great mystery? Insisting that there has to be some economic explanation for this is like insisting that there has to be a chemical explanation for it. It’s pointless.

    The budget was purely cynical political calculation of the sort FF always engage in. Namely: if we take all the money from a small minority that have been softened up by 12 months of relentless propaganda and who, in the case of social welfare recipients at least, don’t generally vote, then the 80% of the population that we absolve of paying anything at all might just find us popular. Whereas, if we had gone with the original plan of taking half of the €4 billion in taxation, we’d have the entire population against us.

    There’s also this small matter of NAMA: cutting PS pay and social welfare aren’t likely to deflate the property market whereas increasing income taxes may well (finally) take the bottom out of it. And we can’t have that now, can we?

  3. @Ernie: whether it is right or wrong, you have just provided an impeccably economic explanation! Indeed, rational politicians will not care about people who don’t vote.

  4. Other simpler explanations can be found:

    1. Your statement that the Government’s bank rescue policy has been a disaster is a matter of opinion not fact. Some might think the Government has played a pretty good game since the crisis has arisen. Unfortunately, it will be a long time before this can be analysed properly, and even there will be imponderables such as what would have happened if the Govt had refused to provide the guarantee.

    2. It is quite likely that different teams of officials have worked on the different problems. The more talented team or people may be involved in one project but not the other.

    3. Perhaps the budget was not that brilliant. Why such high praise for a budget that was low on creativity? Tough decisions were taken but ultimately the decisions were not as complex as the banking rescue. Insofar as the decisions were tough it was the politicians who had the difficulty. Once we had agreed with the EU Commission how much the deficit had to be reduced by then the next major decision was the breakdown between taxation and cuts. Am I missing some other stroke of brilliance on the part of the DoF officials (who had apparently agreed to many of the union proposals)?

  5. Is it really the case that cutting PS pay again won’t deflate the residential property market more? It was reported recently that the vast majority of mortgages being approved are going to PS workers. In January, the pay packet of an individual on 80k will be down nearly 1000 a month (net) since the previous March. This must be having some impact on loan amounts being approved, surely?

  6. @Gregory Connor

    On the first point – (1) Insider generosity vs. outsider stringency – your introduction makes the case. i.e. Gotta keep all those TASC (Fintan O’Toole et al) Theatrical Types stringently on the outside (no chance of ‘capture’ here wha!) – no real need to bother adressing their budget proposals as they lack ‘veracity’ anyway (why bother addressing them).
    If O’Toole’s analysis the other day in the IT was poor – then scientifically debunk it (I won’t clutter up thread with a discussion of the various types of ‘mainstream’ approaches that you might use – this would be ‘ungentlemanly’ (-;)

    I welcome your second point – (2) ‘Ireland’s insolvent large property developers are Fianna Fail’s long-term, generous benefactors.’ And we do need more ‘behavioural/psychological economic analysis of the networks of power whose recklessness almost brought us down. The Governor has advocated more ‘broad social scientific’ analysis – if anything is to be learned from recent past to suggest how new models might be thought through then I place no restriction on either the generation or discussion of ideas.

    Minor point: Blind Biddy down the road does not think the budget was ‘fair’ “His methods were strange – they caused me surprise – God help me I’m l blind – he threw dust in our eyes” (Biddy is very well read)

  7. This is the first thread where commentators outside the TINA concensus have been expressly asked not to comment. Honest, I suppose!

  8. Incidentally if you were to take your “mainstream economics” outside of this little island it would appear that they would be far from “mainstream”.

  9. “How can we understand its behaviour?” You a pose question and rule out a priori a whole body of opinion that might repond in a fashion not to your liking.

    Blogging seems an unnecessarily convoluted way of talking to yourself.

  10. In my opinion, FF will make no effort to form a government after the next election irrespective of the mathematics. They will go into hibernation until the NAMAbomb detonates in 2012 or so.

  11. @zhou-enlai: Two responses:

    1. I did not state that the government bank bailout policies will be ex-post disasters. That is not predictable. I stated that they are ex-ante poorly formulated, disingenuously presented, and extremely risky. See articles and blogposts by Whelan, Lucey, Ronan Lyons (other blog) and others — I will not repeat the many telling critiques of Irish bank bailout policies here.

    2. I believe that the budget compares very favourably to the typical budget outcome of other parliamentary democracies in similar dire circumstances. Also, it was very ably presented from a political perspective: the leaking of its stringency helped to soften the blows, the government worked in good faith with the public employee unions but did not capitulate to them, the government coalition was held together without selling-out unduly to the Greens or FF rebels.

    @ David O’Donnel
    I said that Fintan O’Toole was “eloquent, thoughtful and nuanced” – that is a long way from calling his argument “poor” as you wrongly paraphrase me. I have enormous respect for him but bringing that model into this separate discussion just clogs up the airwaves.

    @ Vincent Byrne
    I was thinking of “mainstream economics” as the shared toolbox and perspective of 90% of the economists at the top 50 university economics department in the world. Or better (keep in mind that I am a financial economists) the shared toolbox and perspective of 98% of the economists in the top 50 university finance departments.

    I actually do not know what TINA stands for, sorry, my ignorance.

  12. @Enda

    Sorry I meant to reply to you in the last submission above, but missed it. I think that your remark brings up an interesting empirical question (probably difficult to resolve). What is the cumulative (say 20 year) contribution of the “typical” large developer to FF, both directly and indirectly through service contributions to FF associates etc. Whatever it amounts to, it was a great investment! I do not have a handle on that amount and so will not pretend that I can estimate it.

  13. @Gregory
    “I was thinking of “mainstream economics” as the shared toolbox and perspective of 90% of the economists at the top 50 university economics department in the world. Or better (keep in mind that I am a financial economists) the shared toolbox and perspective of 98% of the economists in the top 50 university finance departments.”

    Am I to take it that 90% or 98% of the people you describe would consider the Irish Budget ‘excellent’ economically????

  14. PS.TINA was first voiced by Margaret Thatcher, you may be a fan, and means “There is no alternative” and was intended to limit debate also.

  15. @Gregory & All

    Recent evidence would strongly suggest that any one point in time it is indeed a strong probability that 90 to 98 percent of the economists in the top 50 university departments in the world could be wrong. And this is recognised by a heck of lot more than 2 percent of the general population at the moment. Where’s your humility man? (-; This is open territory.

  16. @Gregory:
    It meseemeth that there are two further points that may be relevant to a description (if not to an explanation) of DoF (or rather of MoF) behaviour.

    The first is that it is possible that young Mr Lenihan learned something between the time of the bank guarantee (or perhaps that of NAMA) and that of the budget: DoF(T1) may not have been the same as DoF(T2).

    The second is that, at the time, the bank guarantee may have seemed like the choice of a rational economic actor: after all, words cost nothing, whereas other options might have involved real expenditure.

    bjg

  17. @Gregory Connor

    I note that you did not say the bank stabilisation measures were a disaster but rather that they were wasteful. I was a bit lazy witht he paraphrasing. I have read many of critical the posts you refer to. You are right that we should leave those arguments aside. I think that it is as yet unknown how wasteful these decisions have been. I also think it is fair to say that the Minister has ably communicated the NAMA message. He has performed well in the Dail, in Committee and on TV. I put this down to the Ministers intellectual acument, his dedication to his job and his professional persuasive skills. I don’t know if it reflects the ability of the officials who are cooking up these schemes in the background.

    You may think that the presentation of NAMA was disingenuous compared to the budget.
    – The first difference is that you agree with the budget. If there something akin to confirmation bias at play? If you agreed with the approach being taken by the officials then would you think to question the psychological underpinnings of their decisions? Essentially, your starting point is that the officials have acted so incompetently and so illogically that it is valid to look for a pyschological cause. You can see how those who disagree with your starting point might be put off.

    – The second difference is that the Minister has more control over budget formulation than he did over the NAMA debate. We were not in a position to look over the officials shoulders while they planned the budget. I have no doubt that as the budget is digested, when the Finance Act is passed and when the cuts are implemented that the message will get more confused and people will accuse the Minister and other Government Ministers and backbenchers of being disingenuous.

    – Thirdly, NAMA is a massive legislative challenge. One has to deal with parliamentary draftsmen, advisory panels and so forth. One is dealing with complex issues of property rights, regulatory, competition, state aid and contractual rights between private parties rather than simply between the state and its employees/taxpayers. Ror this reason there is a much greater team of people from outside the DoF involved. It also takes more creativity and lateral thinking. Personally I have been very critical of the DoF’s inability to come up with draft legiclation on bank wind up schemes and bankruptcy reform. I think they are way out of their depth. It is a matter of competence and capacity. It is not a matter of psychology imho.

    Lastly, I suggest that we should not be so naive as to how politicians present things. The idea is to keep political momentum and stability and to implement your solutions in the emergency. I recommend reading Cicero as an education as to the theatre and disingenuous nature of political debate. A Minister or a politician would come a cropper if he sought to communicate to the public in the same way that a lecturer might communicate with his students. The successful politician’s art is rhetoric. Whatever one thinks about the incompleteness or innacuracy of the Govt rhetoric over the last while it is fair to say that most TD’s have been on message and defensible (apart from a few beauts during the NAMA debate, Frank Fahey’s theories and Willie’s questionable analysis). It is important for commentators to pull the Govt up on any inaccuracies or false impressions and that is why I admire and appreciate the effort Karl Whelan and others have put in. However, to expect politicians to communicate in the same way as a journalist, analyst or academic expert would communicate is to misunderstand the nature of politics.

  18. Brilliant – the theatrical model!!! I’d have to say that I if was looking for theatre for the past 30 years I’d look no further than macroeconomics and if i was looking for the clownery – well there’s the 90 percent – enough said!

  19. We should also note NTMA officials were instrumental in the formulation of NAMA but would have had no role in the budget.

  20. @zhou
    “… it is fair to say that most TD’s have been on message and defensible (apart from a few beauts during the NAMA debate, Frank Fahey’s theories and Willie’s questionable analysis).”

    Some other comments:

    Pat McArdle:

    “The quotation marks are used because the Government will not pay anything to the banks. Instead, it will issue them with IOUs the banks can use to get funds from the European Central Bank.”
    http://www.irishtimes.com/newspaper/opinion/2009/0904/1224253820646.html

    Mary Hanafin:
    “First of all, we’re not borrowing to pay NAMA, em to pay the banks. What we’re doing basically is giving a bond or an IOU and we’ll be getting €77 billion worth of assets in return.”
    http://www.irisheconomy.ie/index.php/2009/11/09/the-o-in-iou-stands-for-owe/

    In a section of his most recent budget speech Brian Lenihan said:

    “GETTING CREDIT FLOWING

    In light of the massive State commitment to the banking sector, I am determined that there will be a return to the taxpayers of this country in the form of credit which supports healthy Irish businesses and jobs.”
    http://www.irishtimes.com/newspaper/ireland/2009/1210/1224260421888.html

  21. @zhou
    Someone must have told journalist Renee Jones the following:

    http://www.irishtimes.com/newspaper/finance/2009/0408/1224244216694.html
    “Under the new agency, a strong credit flow will be created by transferring assets from banks to the Nama to ensure the banks have a clean bill of health and strong balance sheets, and that uncertainty over bad debts is reduced.”

    Mary Coughlan said that NAMA would:
    “… restore confidence and get investment and credit flowing again.”
    http://www.irishtimes.com/newspaper/ireland/2009/0410/1224244363033.html

    Alan Ahearne said:
    “One of the main issues identified in the article is the need to restore bank lending. This is a central objective of the Nama initiative.”

    He also said:
    “Under the Nama initiative the taxpayer is protected from unforeseen losses through the Government’s commitment to levy the banks for any losses incurred.”
    The levy has now disappeared.

    “It is also important to note that, contrary to some popular perceptions, Nama is not a bailout for developers.”
    http://www.irishtimes.com/newspaper/opinion/2009/0425/1224245377281.html
    Not many agree with him now.

  22. @Zhou
    Brian Lenihan angrily denounced others for not being sufficiently committed to the restoration of credit:
    “It has been clear since it opposed the Government Guarantee Scheme back in September, that the stability of the banking system and restoration of credit to the real economy is low on Labour’s order of priorities,” he said.”

    According to journalist Aoife Carr:

    “Mr Lenihan said the Government’s objective was to get the banks lending again so that the economy is ready to “take full advantage of the recovery that the world’s leading central bankers now say is in prospect.”
    http://www.irishtimes.com/newspaper/breaking/2009/0518/breaking54.html

    Michael Casey condemned the FG proposal because it would delay the flow of new credit NAMA would produce:
    “The objective of both proposals is to get credit flowing again from the good bank or banks.

    If Fine Gael were to try to implement its proposals – including the questionable removal of the state guarantee to the banks – the provision of credit would probably be delayed for another year.”
    http://www.irishtimes.com/newspaper/opinion/2009/0526/1224247402350.html

    Interesting comment on the NAMA timescale here and great photo of Peter Bacon with the somewhat paler Brendan McDonagh.
    “Nama’s acting managing director Brendan McDonagh told the Oireachtas Finance Committee in Leinster House that the body would hire up to 40 staff and could take 15 years to complete its work.”
    http://www.irishtimes.com/newspaper/breaking/2009/0526/breaking24.html

    Brian Lenihan also stated that:
    “the Government was using its “stake in Anglo Irish Bank, AIB and Bank of Ireland to enforce changes in their management cultures.”
    How is that going?

  23. @Zhou
    Noel Dempsey condemned criticism of NAMA as unpatriotic. As Stephen Collins reported:

    “Mr Gilmore’s sustained attacks on Nama designed to undermine the agency is playing into the hands of the many powerful vested interests who are working hard to scupper this solution to our banking crisis,” said Mr Dempsey.”

    And FF’s attitude to statements made by others they consider untrue:

    “Mr Dempsey added the international coverage of Ireland’s financial problems in media outlets such as the Financial Times had made extensive use of false Opposition claims which had damaged the country.”

    So Dempsey considered telling untruths about NAMA almost treasonous. So if you are now admitting the government told untruths about NAMA that would mean..

    Of the oppositon parties, Dempsey at the FF Ard Fheis accused them of:
    http://www.irishtimes.com/newspaper/ireland/2009/0521/1224247041074.html?via=rel
    “… Not delivering principled opposition.

    Instead, they have delivered cheap dramatics – not caring about the consequences of what they’re saying.

    Fine Gael and the Labour Party will some day regret the way they danced around a wounded economy. They will some day regret the way they happily spread a dangerous message to the world about a country they claim to love and to serve.

    They have not served Ireland well in the last few weeks.

    They have not served Ireland, and they should be ashamed of their opportunism.”

    Surely we should hold FF to the standards they set for others?

  24. @Zhou
    In case you start questioning whether we were ever told NAMA would urgently pursue developers, someone told the excellent Arthur Beesley (cool name too):

    http://www.irishtimes.com/newspaper/finance/2009/0606/1224248175567.html

    “Already the beneficiaries of significant bank forbearance, many construction and development businesses fear they will be put out of business after Nama is established on a statutory footing in the autumn.

    In an illustration of the threat they face, Minister for Finance Brian Lenihan last week said big borrowers for property assets who are in a position of “hopeless insolvency” will wind up in bankruptcy or liquidation when Nama sets about its work.”

    You erred there Mr. Beesley. FF can’t pursue mega developers – it’s as plausible as Ant murdering Dec.

  25. @All
    By June the debt rating agencies had made clear what the government continue to deny and the media are still saying very quietly:

    “Ireland’s credit rating from Standard & Poor’s has been downgraded for a second time in three months because of the sharply rirsing cost of supporting Irish banks.

    The agency reduced its rating for the State to ‘AA’ from ‘AA+’ with a “negative” outlook.

    “We believe that the fiscal costs to the government of supporting the Irish banking system will be significantly higher than what we had expected when we last lowered the rating in March 2009,” Standard & Poor’s said in a statement this morning.

    It said NAMA’s ability to minimize the cost to the Government of its financial operations “will depend on the prices it pays for the assets and their future performance”.”

    In other words the lower the price the better for us. As well as being the truth this is also the exact opposite of what most reporters – briefed by the NAMA lobby – have written.

    “Standard & Poor’s said it views as uncertain Nama’s ability to meet its financial objectives “because of the risk that cash flows from its assets could fall below its funding costs if their underlying performance worsens compared with NAMA’s expectations at the time of purchase”.

    I haven’t heard the line about this year’s cashflows covering the interest in some time. That’s not untrue as well is it?

  26. The simplest unified explanation for DoF behaviour is risk aversion. In relation to the budget, the main goal was to avoid an increase in funding risk, such that a fiscally-conservative budget was essential. In relation to the banks, the main (perceived) risk was to minimise funding risks for the banks, especially in view of the guarantee of liabilities. Since nationalisation was perceived to increase funding risk (rightly or wrongly), the goal was to come up with a stabilisation mechanism that at least deferred the recapitalisation issue.

    Now, the risk profile has shifted. The fiscal correction has lowered the funding risk for the banks (back in Q1 2009, the funding situation for the banks was infected by the sharp increase in the sovereign spread); and NAMA is providing a discovery process which is establishing a plausible range for the losses of the banking system. For these reasons, nationalisation is now less risky than was the case in the first half of 2009 and a ‘normalisation’ process is occurring by which nationalisation will be discussed as a regular, routine, natural outcome of the valuation process that is now underway via NAMA.

  27. @futuretaxpayer
    If the shareholders are wiped out they are going to demand answers. The government doesn’t want to give anyone answers. Therefore the shareholders will not be wiped out. Taxpayers will take a hit but a significant number of shareholders will be really grateful. FF will therefore doubly benefit by not fully nationalising.

    You can compare it to the British Labour party’s manifesto commitment to put the EU Constitution to a vote. They declined to hold a referendum on the almost identical Lisbon Treaty. Why? Because they would have lost it.
    The Conservatives now accept the treaty. The EU are happy. The only disgruntled people are the British voters. Any of them who utterly oppose Lisbon will vote UKIP – damaging the Conservatives. The remainder are now faced with one party which refused them a referendum and another which would (probably) have given it but now won’t. So it won’t affect their choice. Labour then have doubly (at least) benefitted by not holding a referendum.

  28. @Gregory Connor
    http://www.irisheconomy.ie/index.php/2009/02/20/anglo-irish-bank-annual-report/#comments

    “A PricewaterhouseCoopers report has found that Anglo Irish Bank has a number of very large exposures, with 15 of the bank’s customers having loans of over €500m each.”

    “It said that the bank was owed almost €12bn by just 20 customers who borrowed for investment purposes and another €6.4bn by its top 20development customers.”

    Systemic only for FF.

    http://www.rte.ie/news/2009/0220/banks.html

    Commenter Owen C makes an alarming discovery:
    “Please take note of the “Yen financing” note on page 159. Cost of switching from GBP basis to JPY basis cost them gbp156mio when they finally unwound it in January. Working off the 29% fall in GBP/JPY over the Sept-Jan period, this means a likely 500mio nominal. This is the sort of strategy used by a highly risk taking investment bank or hedge fund, not a commercial bank. Insane.”

  29. The DoFmay have had to pay off the bondholders under EU pressure and secret agreements? Remember the talk of collpase wer it not for EU help?

    If there was no element of compulsion then it was cronyism and expect secret commissions and lucrative contracts after public service a a la Tony Blair but less high profile!

  30. E65

    I don’t have the same problem as you have with the examples you have picked. I won’t go through them all but I would point out the following:

    1. The Government is issuing IOUs rather than issuing ordinary bonds for cash in the international markets. I know, I know that it is still debt but tthe statement is defensible as being accurate.

    2. A core objective of the NAMA process is to get the banks back to a position wehre credit can flow. This does not mean that NAMA will cause that to happen but rather that it is a pre-requisite. It is fair for Brian Lenihan that the banks should feel morally and politically obliged to assist in getting credit flowing seen as they are benefitting hugely from NAMA. Note Obama hauling in the bankers in the US.

    3. All the developers know that they will not get an easy ride from NAMA for political and economic reasons. Conspiracy theorists may think otherwise. There is no changing their minds on that so it is pointless to bother trying.

    4. The FG plan is more complicated and drawn out than NAMAisation and recapitalisation. Also, the Govt has said it will try to adopt the good elements of FG’s plan. Anglo may yet be a good bank. However, nothing will get credit flowing freely or cheaply in the short term and FG’s repeated calls for that to happen as part of NAMA were disingenuous. It is no wonder that the Govt started playing them at their own game by saying NAMA was crucial to getting credit back (which it is, albeit as a preparatory step).

    5. I believe that the opposition made political decision to ease off in their attacks on NAMA and the Govt for precisely the reasons Dempsey said. They may have disagreed with the policies but eventually they came around to Garret FitzGerald’s way of thinking. As it turns out, the international sovereign debt markets are very rattled at the moment so it is well for us and for the opposition that they acted responsibly.

    6. It was legitimate to hope that NAMA would allow the banks to raise private capital as other banks did. Unfortunately market conditions have deteriorated making the job of recapitalising more expensive for the Govt. The Govt said all along that they would step in if private capital didn’t.

    7. It now appears that the NAMA valuation process may well be as fair as the Minister has promised with banks revising down the amount they will be paid.

  31. @ Zhou En-Lai
    Regarding your comment excerpted below:

    “I also think it is fair to say that the Mibnister has ably communicated the NAMA message. He has performed well in the Dail, in Committee and on TV. ……You may think that the presentation of NAMA was disingenuous compared to the budget. The first difference is that you agree with the budget. If there something akin to confirmation bias at play?”

    There is merit in what you say. I agree that Lenihan has presented very ably both on bank bailout policies and on the budget. I consider this masterful presentation a good thing when the message he is conveying is truly in the public interest (my opinion on the stringent budget) and disingenuous etc. when the message is actually against the public interest (the bank bailout policies). He has to fool the public into going along with deeply flawed banking policies, and only has to illuminate them about the necessity of good budget policies. This can be a fair appraisal, or it could be viewed as my confirmation bias.

    The case of Tony Blair in the UK, a true master of political persuasion, is a telling parallel. He managed very skillfully to convince the British Labour party and British public that the UK should go to war with Iraq because of Iraq’s WMD capability, which we now know did not exist to any meaningful extent. Because of Blair’s good-political-persuasion-linked-to-flawed-Iraq-policies, he will not be president of the EU and his legacy is tarnished forever.

  32. @GC

    I see where you are coming from. I suppose the net question is are these decisions more properly explained in terms of psychology and economics rather than in terms of organisational capacity and competence. I would subscribe to the latter view.

    For the record, I believe the Government erred in the past in the weight they gave to representations from business and in other ways and that the DoF is not fit for purpose. I also admit that I am subject to my own biases.

  33. Could the problem be that the opponents of NAMA are wrong? A dangerous question to ask on this blog!

    This suggestion could be correct especially given some of the flawed assumptions on which the opposition to NAMA was based.

    1. The access of the Irish Exchequer to funds is infinite in terms of supplying the financial system with liquidity and capital, thereby, allowing a 100% nationalisation of the financial system. The State’s access to funds is most certainly not infinite given the need to adopt a budget that stabilises the public finances.

    2. 100% nationalisation has no effect on deposit levels in individual banks or the financial system. Certainly not the case given the now obvious (via reports) fall in deposits after the 100% nationalisation of Anglo Irish Bank.

    3. The assumption, no matter what was said or written, that the assets would be purchased at excessive prices. Certainly not the case, as can be seen from the general resignation/fear of the banks.

    4. There was no way the State would take over 50% ownership. This assumption ignored the repeated statements that if the losses caused by the purchase of the assets required additional state capital then it would be taken in ordinary equity no matter what the consequences.

    We must all be cautious in basing an assessment of a policy on flawed assumptions. Unfortunately the opposition to NAMA had already boxed themselves into a position before they knew the key details of NAMA.

  34. @Zhou
    I am always impressed by the way you make good arguments for terrible FF positions.

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