Matthew Elderfield on Mortgages

Financial Regulator, Matthew Elderfield made a speech yesterday to the Harvard Business School Alumni Club of Ireland.  The speech dealt with several aspects of the ongoing mortgage crisis and can be read here (pdf here).

Two extracts worth considering are below the fold but there are lots of interesting elements to the speech. 

First on the mortgage arrears crisis in general.

Our view is that mortgage arrears are likely to continue to rise throughout 2012. Also, as I will explain, it will likely take some time before the stock of arrears cases in the unsustainable category are resolved through loan modification, bankruptcy or non-judicial settlement mechanisms. This is not a problem susceptible to quick fixes or silver bullets but is going to take more time before the exact scale of the problem becomes clearer and certainly many years before it is resolved.

While the number of arrears and restructured cases is growing, the vast majority of customers are still meeting their mortgage obligations. This is in spite of the fact that many of them are in fact in negative equity: 40% of owner occupier homeowners are in negative equity but about 93% of negative equity borrowers are not in fact in arrears. This is an important point: negative equity does not equal arrears. Affordability is the key factor, at least at present. This is important from a policy perspective: frankly the Irish taxpayer does not have the financial resources to somehow eliminate or reduce negative equity in the mortgage market, either directly or through the banking system, but it does not need to do so in order to tackle arrears. Negative equity will I fear remain an unpleasant reality for many borrowers for years to come, but it is encouraging that in the vast majority of cases where customers can still afford to pay their mortgage that they are doing so. The biggest practical problem for home-owners with negative equity comes when they need to move house; as I will explain shortly, the Central Bank intends to take action to make it easier to obtain so-called negative equity mortgages, to help those who may need to move and can afford to but who are in negative equity

And second on the issue of unsustainable mortgages.

I have mentioned unsustainable mortgages a lot – why are they so important? For a few reasons, I think. Let me start with consumer fairness. If a homeowner has a massive gap between their mortgage payments, even on an interest only basis, and what they can actually afford currently or prospectively, after taking a realistic assessment of future income and employment, then I am concerned that the very limited or transitory relief provided by standard forbearance techniques could just be putting that person deeper in debt. The homeowner may be building up a bigger and bigger shortfall, for example through interest capitalisation, which will eventually be owed when ownership of the home is ultimately lost. In other words, kicking the can down the road in the most difficult cases – where families are borderline insolvent – is unfair by adding to debt if there is in fact no realistic prospect that the standard forbearance is ultimately going to work.

For the borderline insolvent homeowner, loan modification will have consequences, perhaps such as partial loss of ownership or remaining liability for the warehoused component. Certainly there will have to be a commitment to stick to a very tight budget and to make significant adjustments to living standards. And it is important to be clear that there is no legal obligation on banks to modify loans in all cases and in some cases repossession or voluntary surrender will take place. In particular, delinquent borrowers who refuse to engage realistically with the lenders to reach and comply with an affordable modified payment plan can expect those consequences. Quite clearly this is not a question of mean-spirited lenders. The capital injected by the Government into the banks is to cover loan losses that cannot be avoided. It has not been calculated to provide for relief in respect of loans that borrowers are able to service.

38 thoughts on “Matthew Elderfield on Mortgages”

  1. Very sad , he is trying to fit the bank credit infrastructure ? around what remains of the physical economy rather then using credit banks as a tertiary utility although I have grave doubts it ever was.
    He uses the now quaint word taxpayer a few times – he fails to recognize the money supply has been socialised to protect all credit deposits.
    Tax is only a function of the money supply – it is not some sort of real good by itself – its a accounting entry.
    He looks at loan repayments on a micro level as if he was a local bank manager – on a macro level these repayments are sustaining dead assets , therefore deferring productive investment.
    And Yet Basel Faulty the III remains the hotel manager – he is at least illustrating the inherent limitations of double entry money at this extreme leverage.
    This money supply problem can now be only be solved by local CB defecit /MONEY production (although not to bail out Anglo credit deposits & the like but to finance goverment)
    The Euro destroyed itself by not accepting the destruction of the entire Euro bank bond market.
    Its time we moved on don’t you think ?

  2. Mr Elderfield is implying that the problem of arrears, negative equity and unsustainable mortgages (now that’s what I call a wicked ‘troika’) is going to be around for some time. My biggest fear is that the problem is only being more or less contained because of little choice but forebearance and very low interest rates.

    Even a 2-3% rise over the medium term while these problems persist is going to blow the whole thing wide open. Incomes will keep going down, prices will keep going up, the number in employment continues to fall and unemployment isn’t improving significantly any time soon. An interest rate rise probably won’t happen this year (unless there’s a war in Iran and oil/inflation goes through the roof) but one day, they are going to start putting interest rates back up. Watch and wait.

    I just had a rather depressing lunch with a friend who’s the CFO of a mid-sized company here. He had to go to London a while back to show the forecasts for the next 3 years. Next thing he knows, he’s being told half the company are to be cut – announcement to come later in March. Grim.

  3. @ Pr Guy

    “Even a 2-3% rise over the medium term”

    Market currently pricing in no ECB rises over the next two years, and about 1.5% increase over the next 4 years, fyg.

  4. Has Matthew finally realised the game is in fact up, and the only real long term solution to this mess is significant debt forgiveness? Not yet perhaps, but reading between the lines it sure smells like it.

    I suggested here many times that the daft Basel III rules being imposed on the covered banks at a frighteningly stupid 10.5% Tier 1 ratio – is just that , plain stupid. Given the fact that the adverse scenarios on last years PCAR are already upon us, the CB should allow the covered banks hold a ratio of about 2% and allow the debt write offs to swallow up the balance ASAP. If its not enough to cover the hole ask the lender of last resort to do their job i.e. the ECB and cough up – payback for Irealnd Inc. not welching (as we should have done) on dud unguaranteed bond holders, at their insistence.

    What ever way Elderfield wants to word his comments with regards to this issue he simply knows holding banks to that sort of capital ratio in a depression is the wrong policy response . He should have the balls to come out and admit himself and Prof Honahan have got it badly wrong on this one – another in a long list of errors by the star struck Regulator, despite his relatively short period in office.

    He continues to make that same daft conclusion that others have made and continue to make that those not in the category of distressed or adjusted mortgage repayments are fine, and should continue to bury their collective heads and work through the problem. Utter and complete nonsense.

    This is in fact the domestic economys actual problem. Far too many folk are living just on the edge of the rising water all around them and continue to be ultra good citizens, in their banks eyes, whilst all around either emigrates or closes down. Please explain how this is a productive economic activity?

    The central banks’ numbers on those currently in mortgage distress is not the issue. Its in fact those that are currently in day to day distress but not yet appearing on the CB numbers which represent the contingent liability which we know, given the policies that are coming the way of the citizens, will eventually migrate into the category that ME seeks to solve today. Any sensible policy response would ensure a potential negative contingency doesn’t crystalise – by not making the bold step and marking mortgages to a sensible LTV will guarantee these contingencies become real. Waiting for the grim reaper and not taking evasive action is stupid economics.

    We have allowed policy makers assume the debts of the Govt are problem child number one whereas in fact ME is now realising albeit very slowly that the actual problem is the debts sitting on the shoulders of the consumers. Solve the consumer debt problem and the Govt debt issue will look after itself.

    In almost every respect the politicos have being listening to the ‘advice’ of those in the higher echelons of the Civil Service as opposed to those and their ilk who will be walking in Ballyhea again tomorrow – time to wise up Matt et al.

  5. Market was also forecasting a very high probability of Anglo bonds default last summer? How did that work out for you Mr. Market?
    Nobody can predict the future. Not even the Market. All we gave is a set of guesses, some more informed than others.
    @PRGuy: I’d be careful making that bet. Looks like both the US and Eutope have decided to go full Japanification. There was a very interesting article on the head if StanChart in the Guardian yesterday. He says that policy in US&EU is simply accelerating the inevitable shift of prosperity and growth to Asia along with an attendant equalising effect on living standards. I agree.

  6. @ Garo/PR

    the banks should be trying to provide more fixed rate products to the market right now, to lock people in at these ultra low rate for the next 3-4 years. Its a complicated situation, because they obviously “hope” people somehow come off their trackers instead.

  7. @ Garo

    The head of Stan Chart would say that. It’s his job to be chirpy on Asia.
    India isn’t going anywhere. China has a lot of tough decisions to make.
    The market needs China to pull the rest of the world along as the debt party hangover gets worked out but there’s no one in charge and there are no silver bullets.

  8. seafood : Let is just say that we disagree PRGuy sly on that one. India and China have their problems and they are starting at a lower level but their growth rate over the next two decades will be much higher and that will result in a significant narrowing of the difference in the median living standards between there and here.

  9. @ Garo

    No worries.

    Do you think Ireland will be stuck in purgatory for the next 20 years ? There is no room for complacency but I think the Asia story needs more work.

    Re India- what about population growth rate ? Where is all the food going to come from ?
    How much money is trickling down to the villages? How many more people can the big cities absorb ? Delhi and Mumbai are already super saturated.

    India has superb elite universities but they only produce around 1000 graduates per year and the population is 1.2 billion.

    I would have more faith in China TBH.

  10. “Negative equity will I fear remain an unpleasant reality for many borrowers for years to come”

    I wonder what impact that will have on how people think about home ownership.

    And as PR Guy says when interest rates go up it will be a mess.

  11. @Yield

    “Has Matthew finally realised the game is in fact up, and the only real long term solution to this mess is significant debt forgiveness? Not yet perhaps, but reading between the lines it sure smells like it.”

    It seems to me he is saying that in respect of “unsustainable mortgages”.
    And of course he is right.
    ‘Kicking the can down the road’, a charlatan’s philosophy if ever there was one, may be perfectly suitable for banks executives, politicians, and soon to be be retired PS, but as M Elderfield points outs it is simply loading further debt onto the shoulders of somebody who has no chance of paying it. The can that is being kicked is in fact the debt laden mortgagee.

    Your point on capital ratios is well made. The ECB would appear to be in agreement with you. What is the point of raising the threshold of capital ratios which are clearly unnecessary as the ECB is flooding the banks with cash anyway. It would appear not to matter one iota to the ECB whether the capital ratio is 2% or 12%.
    Draghi is right on this. Unlike his moralising and agenda led predecessor, he is pragmatic and realistic. Pump money into the system. However he should charge the banks to relodge it overnight at the ECB.
    The Basel ratios are a nonsense. A fully crowned nonsense when one considers that Anglo was trying to adhere to Basel 11.

    @ALL

    re “delinquent borrowers”
    One point on the word ‘Delinquent’. I have always disliked the use of this word to describe loans in default. The word itself is very pejorative and its derivation is from the the Latin ‘to offend’. There are uglier definitions but in law the term , as I understand it, means the person is guilty of offence or felony.

    While the term may be in common use for financial defaults, why is the word default used for both companies and wealthy individuals whereas the word ‘delinquent’ seems to be applied to lessor mortals.

    @ALL

    Mr Elderfield gave his address to the “Harvard Business School Alumni Club of Ireland”.

    On balance would the majority of this group fall into the creditor camp or the category of ‘delinquent borrower’?

  12. The bottom line is that if the housing market is ever to recover it is imperative that mortgage holders under water both in terms of income and property current value have to be given the opportunity to reset the mortgage to the current value of the house. The banks will at some point have to face reality unbuffered by the Irish Gov’t, ECB and IMF. The sooner this happens the sooner the economy will get back on track.

    Essentially the banks have to take the losses that they have incurred. Crucifying under water homeowners only serves to make sociopaths feel better as unemployment and emigration continues. The longer emigration continues the lower property values will go. We have been through this before and should have twigged to what a responsible response would resemble.

  13. @Mickey Hickey
    The shareholders of the banks are now the taxpayers.What you are proposing is transferring the private debts on the sovereign.Can he afford it?

  14. Is there any chance that Irish people might begin to see housing as a means of providing shelter from the elements and a measure of personal security, ideally in a convenient location, while one gets on with the other important things in life? Or will they remain locked in this illusion that possession always trumps performance, that wealth is generated by bricks and mortar and that there is a divine right to pass it on intact within a very tight gene pool?

  15. It is ludicrous that we’re still wittering on about mortgages this far along. These idiots are answering questions about another economy and viewing this State as little more than a colony, subject totally. And this has nothing at all to do with the troika. That lot must have been utterly amazed at the levels of such well trained subjection.
    It’s gone to the point where we may as well forget about the notion of independence and revert back to the lordship for we’re being administered by fools that don’t know the difference.

  16. Re “then I am concerned that the very limited or transitory relief provided by standard forbearance techniques could just be putting that person deeper in debt.”

    The above point I find interesting both on the context in which it is meant above, but also, I’ll try to make a comment on this here, in the broader macroeconomic level.

    In the above context I believe kicking the can down the road has huge risks. It also adds to the cost of a mortgage.

    For example, deferred payments or interest only mortgages both add up to both increasing risk and adding to the long term burden of the mortgage, both for the sake of some short term benefit if, for example, this makes repayments affordable in the short term. However, there is mathematical certainty that deferring payments in this way will lead to a more expensive debt burden in the long term. There is evidence to suggest ‘reducing the burden’ in this way actually adds to the real burden.

    In Valencia, Spain, where severe rioting has taken place recently, one of the triggers along with the austerity burden imposed eg on students from schools unable to afford heating in Winter months, was a recent ratings agency downgrade of the entire region.

    The downgrade was on foot of a proposal to defer debt repayments in the region. The markets viewed this threat as a form of default. Markets do not view kicking the can down the road, debt repayment deferrals, as a solution. But what it does allow if for banks to ‘cook the banks’ to not have to write off what is on their books.

    On the macroeconomic level it appears to me that an economic model similar to that of the Chicago School led by Milton Friedman is at the root of proposals re debt deferment ‘kicking the can down the road’.

    This model has led to great social upheaval in Latin America and arguably has been the foundation of the deregulated ‘market takes care of itself, leave it alone, banks included’ economic model that not only has led to Black Mondays of 1987, but has also led to the 2008 Lehman’s collapse; that now leads to current response of the Troika and EZ to dealing with the current crisis.

    This response is characterised by a pattern of unequivocal support for the financial institutions at expense of social and democratic models and public institutions built up in EZ and previously since WW11.

    Another feature of this response is the effort to both control and to stifle debate. How the small man victim of the recent bubble gets his mortgage dealt with has huge implications for banks and financial institutions and the future of the euro itself. We should be very concerned that the model chosen to deal with these problems is not one already proven to have failed; one that stores up problems for everyone’s future, one that is not another smoke and mirrors trick to bolster banks fed by the Milton Friedman and similar toxic agenda.

  17. @ Paul Hunt

    Ireland suffers from the historical equivalent of developmental delay. We have deficits and distortions.

    We had no native towns or money until the Norse came. Following the Norman occupation, most of the native population was kept at arm’s length the from manorial, craft and trading activities in the settlements. For the majority of the population, the economic developemtns of the Middle Ages were as foreign and irrelevant as the activities of trhe FDI sector are today.

    Following the Act of Union, tenant farmers were at the bottom of a commodity supply chain. Our banks exported savings to the City of London, bypassing local business en route. Native enterprise was always starved of capital.

    In the absence of industry, emancipation was mostly about land rights. The tribal strutures continued on in the form of extended families and clan strucutres, which are still to be found at the highest reaches of our society.

    Scotland had its 16th c Reformation, its 18th c Enlightenment, and its 19th c industrialisation, while the Irish peasantry fell into the grip of the Counter Reformation. The Ascendancy model, with its emphasis on property and rent casts a long shadow here.

    The Church became the dominant force in the new southern state, and Partitiion cut off most of the industrial base. The link between property accumulation in this world and salvation in the next was reinforced through control of schools. An unholy alliance between dominant clan and dominant cleric.

    We have not yet entered the modern world. Most of our individual rent-seeking is clan based, and so morally justifiable, Sicilian style. Developer ‘endowments ‘of elite private school facilities , for example, is grand until Joe Public has to foot the ultimate bill. As Balzac said ‘Behind every great fortune there is a great crime’.

  18. @Paul Quigley,

    We’ll probably be accused of going off-topic here, but any sutainable solution to this problem will require a major change in the mind-set of many people. You’ll never find me advocating revolutionary change. I’m all for small step changes in policies, rules and procedures that may be changed if they generate unintended counter-productive consequences so that those that withstand confrontation with the crooked timber of mankind will generate benefits. But in this case, a pretty fundamental change is required.

    And, while your historical narrative is persuasive, I also think this attitude to home-ownership is something we share with our Anglo-Saxon cousins in Britain and the US – and do not share with many of our continental cousins.

    This idea of a docile home-owning, home-improving, but highly indebted, electorate is very attractive to politicians seeking to establish some degree of hegemony. It was a major of Margaret Thatcher’s ‘revolution’ in Britain. Bill Clinton bought into the provision of easy finance for prospective home-owners and consumers in the US as the quid pro quo for the bonfire of financial regulation. Spain, more Anglo-Saxon infected than it might care to admit, had its property bubble, even if its Central Bank, unlike Ireland’s bank supervisors, did attempt to curtail the inflation.

    These home-owning and property as the best investment fetishes restrict labour mobility, distort the allocation of resources and damage economic performance – not to mind the restriction on the variety and range of life experiences that being chained to land, bricks and mortar imposes.

    But changing this is a really big ask – even if provides the only way out of this mess.

  19. @Colm

    ‘..This model has led to great social upheaval in Latin America and arguably has been the foundation of the deregulated ‘market takes care of itself, leave it alone, banks included’ economic model that not only has led to Black Mondays of 1987, but has also led to the 2008 Lehman’s collapse; that now leads to current response of the Troika and EZ to dealing with the current crisis..’

    Whilst noboby could disagree that those in control of the credit markets were allowed bring the ‘market’ to the cliff edge without the required control, in many respects the same ‘market’ did in fact eventually cop itself on and corrected the valuations of those buisnesses which took the model too far.

    Equity financiers to those businesses suffered (all sorts in the case of Lehman). The error being made now is to blame the functioning of the ‘markets’ whereas in fact the so called ‘fixes’ being put in place by Govts et al are the real enemy.

    Lets be clear ALL financiers to Anglo/AIB/Nationwide etc should have got zero. And yes that includes the deposit holders. Sounds wild? I actually believe the imposition of the ‘fixes’ are by many means a worse outcome – try NAMA for instance. Jesus wept.

    We may not like to admit it but the fact that Govts intervened in the workings of the markets has been an unmitigated disaster, for all, aside from those who should in fact have suffered financially. Nobody can call this intervention a success story. The grand standing by Regulators for instance in raising the capital requirements to the covered banks to the levels they are currently at is a prime example of legislation after the fact, and rather pointless.

    So it seems to me that like Macbeth having gone through a river of blood so far it would have been easier to continue than go back. The Govts should have allowed the markets in fact do their job, and yes the consequnces would have been pretty awful but history tells us that recovery would have been swifter and importantly fairer in the long run.

  20. @ Paul
    I take your point about revolutionary change. We have seen enough blood on this island in my lifetime. The narrative which you have introduced is, I think, quite compatible with the bit of impressionistic, amateur, history which I have thrown up.

    Krugman and others have shown how labour’s share of economic growth has steadily shrunk over recent decades. The fall in wages was occluded by an increase in household paper wealth, mainly in the form of home equity. This in turn provided the collateral for a stream of credit which sustained a falsely high living standard. Now the Greenspan put has been revealed for the Ponzi that it was, the real state of the ‘middle classes’ (US sense meaning ‘ average worker’) is revealed.

    I think we have witnessed a process where we tried unsucessfully to emerge into the modern economic world. The above neo-propertarian narrative merged with the traditional property fetish.

    Irish property investors, large and small, must have felt safer than any other investors in the world when they piled in. Easy credit terms, laughable background checks, friendly loan officers, ‘helpful’ bankers, casual regulators, tax incentives, beaming politicians, and your accountant/solicitor/auctioneer going in alongside you.

    A no-brainer, as they say, and that’s exactly the problem. Thoughtlessness. But what is done is done, and as a Scots friend of mine once wisely said ‘we all default in different ways’. If there is anything which needs to be ameliorated in our national character, it’s the perfectly understandable, but frequently catastrophic, habit of groupthink. Hence the importance of this and similar boards.

  21. @Overseas Commentator,

    Re “What you are proposing is transferring the private debts on the sovereign.Can he afford it?”

    This has already happened with the state bailing out the banks. One of the unintended consequences of this was the evolving mortgage crisis currently escalating. Recapitalising the banks from a political point of view was intended to set aside provision for mortgage default. Some politicians are therefore angered that mortgage write down/write off has not been passed on to mortgage holders.

    This raises technical issues regarding the recapitalisation of the banks quite apart from the veracity of the term ‘recapitalisation’ if an anchor tsunami of mortgage defaults threaten to engulf the banks.

    From my point of view there is a simple solution to the mean minded consequence of unilateral action by the banks against individual mortgage defaulters with threats of litigation, repossession or other sheriff of Nottingham tactics deposed to divide and conquer and sever the individual away from public support, or some sort of fair collective action in favour of debt extraction at an interrogated individual level where the individual is mort vulnerable.

    The simple solution is a technical solution where in a similar solution to the BP disaster in the face of collective action by thousands who lost livelihood and money due to the oil disaster in the Gulf of Mexico, a payout of ¢6 bn was agreed in settlement. This will remove the cost and the pain of further litigation and will be divided out among those part of the class action against BP.

    If the cost of recapitalising the banks was as stated by politicians to include a provision for mortgage default, lets put a figure on this.

    Lets then formulate a policy, rules, conditions, where claims against this fund can be made by individual mortgage holders against a variety of options including shared equity in property. A determination against such a fund could be facilitated by a team of experts based on the principle of both willingness to pay and wish to pay. The fund would in the latter instance where the wish was negative and keys were handed back would set this liability in full against the fund.

    The mickey mouse messing around with this problem without the provision of adequate solutions such as the above is more evidence that the same wags who got us into the mess in banking, still remain the same tail wagging dog ruining the game for mortgage victims as before.

    Plus we now have the added mess of questioning whether ‘recapitalisation’ of our banks, was not another lie told by the banks full of sound and fury signifying nothing.

  22. @ Colm Brazel
    If I understand you correctly ,you are saying that the first bank bail-out was insufficiently funded (I agree) ,you are also saying that any general mortgage bail-out should be done in a fair and organized fashion (who could disagree?). Still the cost to the state would be humongous .Do you think the electorate has the stomach for so much more debt piled on the existing one?
    Even if they are numerous, the house owners who cannot afford to pay their mortgages are a minority .What you are asking is a massive transfer of wealth from one category of taxpayers to another one.That would be a nice subject for a referendum.

  23. @ Yields or Bust

    Entirely agree with all of your post there.

    Re “The Govts should have allowed the markets in fact do their job”

    Plus this is why I’m so against the ‘Compact’ and ‘ESM’; instead of fixing the problem, the solutions to the problems of the EMU make the problems worse.

    Unregulated out of control markets prior to 1929 precipitated the Wall Street Crash and terrible depression that lasted almost for a decade until WW11. In 1987, it was the threat in out of control bull markets that regulations to curb certain forms of financial paper derivative, curbing tax avoidance
    measures that saw the DOW drop 20% in a day.

    Similar toxic investment banking and speculative financial derivative markets caused the collapse in 2008 and is now threatening the collapse of the euro currency system. In Ireland, the finger is pointed at the housing bubble; but the real finger of blame should be pointed at the ECB and interbank lending markets under aegis of ECB that fed unregulated lending out to local central banks across the EZ.

    Make no mistake about this, the source of this lending and funding coming from the ECB came from the fiat money system itself built upon the foundation of financial changes to the monetary system going back to the predominance given to the shadow banking system since the removal of regulations,in particular Glass Steagall.

    With these new unregulated financial instruments, derivatives, since 1970, we’ve already had the collapse of 1987; print money fixed it then. Then toxic derivatives caused 2008, US response is to print money and allow some banks to fail; in Europe, policy is to allow some banks to fail and impose austerity measures.

    Neither austerity, nor printing money eg eurobonds or more US QE will fix this.

    The problem is the banking industry through the use of paper derivatives, OCD’s, has found a way to generate massive profits for itself. It has forced on the US and the global economy the false view that investment banking, the FIRE economy, is the way to prosperity. The champagne of wealth on the pyramid of glasses if poured into them will cascade downwards into the real economy and generate jobs and wealth.

    We know it doesn’t, the wealth has flown upward to the 1%, social services and democratic governments are being looted. The EU is being riven apart. A growing nationalism and fascism is taking root intolerant of dissent and out to smother debate.

    Large and powerful governments eg Germany are being coopted by the banks bribing them to support the banks with ludicrous programmes to give them greater political power eg ‘Compact’ , ‘ESM. Little minnows like Ireland are spreading political lies that supporting the above is in our best interest for future prosperity.

    You couldn’t make it up! One thing for sure though, balloons do burst, markets can’t be fooled forever. ITs time to deal with the banks and the financial services industry, same way Glass Steagal had to do deep surgery in 1933 when they established the Federal Deposit Insurance Corporation (FDIC).

    Perhaps some of the set aside money above could kick start for mortgage holders a requirement to sign up for a proper and fully funded and administered replacement insurance based mortgage similar to strong Danish mortgages which have a proven ability to withstand mortgage crises.

  24. @ Overseas commentator,

    Re “Still the cost to the state would be humongous”

    True, but this has been true right from the beginning. So, the question now turns on, what do you do about that?

    Now, I’m of the Icelandic school here. I’m out of the euro, originally of the view, banks shuda been allowed to fail, banks endanger the sovereign, Swedish model, etc. The way in capitalism this is dealt with is default, Argentina, Russia, precedents everywhere.

    But we have the euro socialism for banks model where banks and financial institutions have precedence over the sovereigns. This is not going to work. Simple.

    It is a certainty with such a model that the euro will fail. I’ve do doubt whatsoever about this. Europe with austerity will fail, pumping more bubble euros into the ESM fund for banks, will fail.

    But currently we live under the euro here. I don’t believe the ‘write off’ fund should trigger any fears re transfer of wealth. How the scheme would work provides a fail safety device to avoid that happening. It would need ingenuity.

    For example, I’m not saying a guy who bought a house he can’t afford should have his debt written off and he now lives on Howth head with 10 bedrooms and a swimming pool and owns this now at everyone’s expense.

    I’m saying, he be given a range of options eg the right to live there in perpetuity/agreed length of time at agreed rent; the state owns the property; or similar % equity stakes taken out in a property by the state. The state use such a fund for equity investment.

    Solutions on the macroeconomic model are veering more and more towards totalitarianism; rather than the protection of the democratic rights of people, democratic rights need to be set in stone not given away at a whim.

  25. @ All

    The debate on the upcoming referendum has started well for the party of common sense but so, indeed, have previous campaigns. This time, however, is different. Those “throwing shapes” to take a colloquial phrase, cannot disguise the fact that this what they are doing because (i) the treaty will go ahead, in all likelihood, with our without us (ii) if the vote is negative, access to the ESM will be precluded (a useful “credit line” as Joan Burton describes it in today’s Sindo) (iii) attempting linkages to the easing of the burden of the PNs in such circumstances clearly makes no sense and (iv) the fact that the major problem to be resolved is that of the state spending more than it is taking in.

    However, the fact of the debate itself taking place may serve to distract from the wider context.

    Merkel is having very real difficulties both with the new treaty and that on the ESM. There can be little sympathy for her situation as it is almost entirely of her own making, each step that she has taken having been tailored to short-term tactical domestic political advantage, deepening the crisis instead of reducing it.

    The crisis in terms of the German perspective on it is summed up, rather curiously, and is likely to come to a head, in the debate on the Target 2 balances. I posted this link on another thread to the view, at least informal, of the Bundesbank.

    http://www.cesifo-group.de/portal/pls/portal/docs/1/1213644.PDF

  26. @ All

    The most relevant section is the conclusion.

    “A decline of Target2 balances is expected as soon as
    foreign banks no longer seek or are able to procure
    excessive liquidity from the Eurosystem and the liquidity
    then is indirectly distributed throughout the system.
    This should happen as soon as the tensions abate
    in the financial markets and not least the euro-interbank
    money market has regained its full functionality
    so that the liquidity balancing among commercial
    banks (also international) will function once again.
    This would require that the confidence in the banking
    sector in the euro area and in the individual banks is
    restored and the problem banks are rehabilitated or
    exit the market. For the Eurosystem it is decisive in this
    context that the corresponding responsibilities
    between monetary policy and fiscal policy are preserved.
    In concrete terms this means that the shortterm
    special liquidity measures of the Eurosystem
    aimed at containing the acute crisis-like developments
    must not delay the necessary restructuring process or
    even replace it. For this reason alone a timely reduction
    of the special measures is a must”.

  27. @ Colm Brazel
    Powerful analysis.
    ‘It is a certainty with such a model that the euro will fail’

    It has almost certainly already failed.

    http://clausvistesen.squarespace.com/alphasources-blog/2012/2/28/variant-perception-a-primer-on-the-euro-breakup.html

    Draghi is, like Trichet, the bankers’ man. The introduction of LTRO is a clear signal that there will be no change in the model.

    Our mortgage crisis is our banking crisis is our peripheral sovereign crisis is the euro crisis is the financialisation crisis. As with the Irish bank guarantee, all the decisions which made the denoument inevitable were taken long before Sept 2008.

    It’s often the case that catastrophe approaches silently. Whatever way the mortgage chips fall, the ‘solution’ is going to be derailed by a Euro exit tsunami. So much fiddling while Rome burns.

  28. @seafóid:

    Do you think Ireland will be stuck in purgatory for the next 20 years ?
    Not 20 but at least until the end of this decade. After the bank guarantee was announced I told my wife that this condemns Ireland to 5-10 years of servitude and all the decisions that have been taken since then, both inside and out, serve to only reinforce this conclusion. The real pain hasn’t started yet. What was required was a year or two of hell and a long hard climb after that. Instead we have had four years of purgatory and counting.

    Re India- what about population growth rate ? Where is all the food going to come from ?

    Popultion growth is an issue but the rate continues to come down. More than food, it is water and energy right now. Of course both are required to produce food. Yes resources are a huge problem but not just for India. Competition for natural resources is getting fiercer across the world but unlike the last half of the 20th century, the developing world is now able to fight the fight. This is going to mean fewer resources for the wasteful developed world. They just haven’t got used to the idea yet.

    How much money is trickling down to the villages? How many more people can the big cities absorb ? Delhi and Mumbai are already super saturated.

    Not much to the villages. But there is a whole tier of second cities that are emerging and the best business opportunities are to be found there. You need to look beyond the four metros and “Hellahore”. Places like Pune, Lucknow etc. The need for the metros to absorb more people grows less by the day.

    India has superb elite universities but they only produce around 1000 graduates per year and the population is 1.2 billion.

    Your information is dated. You are off by a factor of 10 there. 1000 graduates per year? I presume you mean the IITs but they were producing 2000 graduates in the 90s and have expanded hugely since then. And that’s just engineering. There’s medicine, the IIMs and host of other quality institutions. And the IITs are the creme de la creme. Not everyone needs to have an MIT or Stanford class education for a country to do well.

    I would have more faith in China TBH.

    In the sort run yes they will do better as a central command economy avoids a lot of messiness that comes with democracy. But over the long run, I’d be careful of underselling India.

  29. @ Paul Quigley

    Re “Powerful analysis.” 🙂

    And I only concentrated on the fiat shadow banking aspects, didn’t mention the huge surplus/deficit differentials inside the euro between the periphery and the core; neither did I mention the castration of the peripherals now forced to austerity and denied any opportunity for Keynesian stimulus; nor made mention our budget gets debated on the floor of the Bundestag before ‘Enda’ gets to see it; nor did I mention the shallow nature of economic commentary in Ireland where debate on such matters is mean and nasty debate provoked by ‘stupid’ Nobel prize winning economists or ‘US’ economists. We’ve got third rate politicians, third rate politicians walking us all into third Reich Financial models. Lets hope this doesn’t develop into real Third Reich reruns.

  30. ‘third rate politicians’ duplicate above should be third rate economists eg ones who just dont debate on issues such as above, or simply prefer to attempt to stifle it…

  31. @ Garo

    Maybe India will change but what are they doing today to ensure they are in a different place in 20 years time ? There is all the neoliberal crap but is that enough?

    http://www.tehelka.com/story_main34.asp?filename=Ws290907The_Trickle.asp

    “But these hopes were soon to be belied when he claimed, “we are undoubtedly moving forward in the right direction.” The PM had apparently forgotten the report of the commission on the unorganized sector, released only a few days earlier, showing that a substantial proportion of Indians (77%) survived on less than Rs. 20 per day. The social function of the 9% plus growth rate that neither generates much employment nor leads to redistribution of resources or social justice, never made sense. He also did not care to recall the growing resistance of the farmers in several states to alienation of their farmlands in the name of industrialisation and corporate-controlled SEZs. At least the PM could have mentioned the suicides by thousands of peasants across the country that have put a question mark on the ‘trickle down theory’ being advanced since independence. Despite being discredited, this theory continues to guide the development model so steadfastly held by the ruling elite and backed by the neo-liberal policy framework”

    I don’t see any meaningful change in the education system. Does India have anything like the RTCs for the layer that doesn’t go to university? Which is very low. How does India compare on the PISA tests ? Do they even participate ?

    My impression is that Indian education involves a lot of “timepass”.

    And 40 % of kids are malnourished . That is a huge future burden in terms of non achievement of potential.

    I work with Indians and there are undoubtedly great minds in the country but how are the second quartile and below doing?

    And then the caste system. How many of the top 5% in India are Brahmins ? Our company has to have a Brahmin regional CEO. Otherwise the business will go elsewhere. How many Dalits or Shudras make it to third level ? Or work in the consultancies ?

    This article is worth reading in full but this bit is pertinent to India .
    And maybe it explains things about Ireland too 🙂

    http://www.nybooks.com/articles/archives/2011/dec/22/how-dispel-your-illusions/?pagination=false

    “In poor agrarian societies, such as Ireland in the nineteenth century or much of Africa today, the endowment effect works for evil because it perpetuates poverty. For the Irish landowner and the African village chief, possessions bring status and political power. They do not think like traders, because status and political power are more valuable than money. They will not trade their superior status for money, even when they are heavily in debt. The endowment effect keeps the peasants poor, and drives those of them who think like traders to emigrate.”

    If India is to take over the world then Pakistan should as well. It’s the equivalent of a mid ranking Indian state- above Uttar Pradesh but below Gujarat. And nobody rates Pakistan.

  32. @Seafóid: India, China and Pakistan are in a very nasty energy cleft. None will be able to access sufficient amounts of liquid hydrocarbon fuels to raise their respective economies much more. Yes they will advance, but in order to do so they must get their fuel supplies from those countries that use the most – and this will not happen. It would mean a significant drop in living standards, and in less developed countries may even trigger regime changes (violent ones!).

    I have been working on this energy predicament for some time. Reliable info is difficult to get. China and India have approx 2000+ million. At the last count they were consuming just over 1 liter, per day per person – and they need to raise this to 5 l/p/d at least!. That’s approx increase of 5.7 mb/d. That’s an awful lot of daily production to find – especially as global production of liquid hydrocarbon fuels has been essentially flat since 2005. Of course they need the moolah to purchase that fuel. Now where will they get that from?

    It would not matter if either of those countries (and Pakistan and Brazil and Indonesia and most of Africa) had smallish populations. They don’t. Saudi society is poised on a narrow ledge. One bad slip and its gone. They are top consumer: 15 l/p/d.

    Its very difficult to get folk to even start to understand the dangerous energy predicament that exists. So, some physical reality may be needed.

    Get some Monopoly 100 notes. Lay out 100 of these in a line (I know, its a long line!). OK, maybe 10 (but the effect is less dramatic).

    In front of the last note on the right, place a One note. In front of the next 100 to the left of the first, place 2 x One notes. In front of the next 100 to the left of the second, place 3 x One notes. Rinse and repeat!

    The 100 notes represent a barrell of oil. The Ones, in front of the 100s represent the amount of oil (not money) that is needed to extract that barrel, refine it and deliver it to the customer. The ratio was once 1/100. Its now (if you believe what you are told) between 1/15 and 1/12.

    At a ratio of 1/5 all the wheels come off an advanced economy.

  33. @Overseas Commentator

    The banks are extending and pretending doing everything except exposing the extent of their indebtedness and the poor quality of their collateral. Every report from reputable sources now refers the deteriorating collateral problem. I am not saying that the Gov’t should give up one cent but that the market value of houses where the mortgage holder is in default with the debt mounting has to be recognised. Rather than foreclosing and evicting families the banks should modify the mortgage to reflect the current value of the property. Face the music now, do not wait for a social meltdown.

    As we all know the Gov’t could not afford to bail out the banks and their bondholders but to the total disgust and shock of the rest of the PIIGS they played the lets go deeper into debt card, anything to keep the political gravy train on the tracks. Time to recognise that the banks have to be weaned from Irish Gov’t support and left to the tender mercy of their many creditors. The real issue is can the Gov’t not rectify the problem it created, particularly when there are no additional costs incurred. The large foreign banks will not resort to mugging old women on the street or breaking into vulnerable people’s homes.

  34. Wealth and worry go hand in hand. To maintain one’s real capital,one must be vigilent,skilful.bold and lucky.

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