New from the Central Bank

  • Speech by Patrick Honohan on mortgage modification here.
  • Economics Letter by Reamonn Lydon on reduced consumption of mortgage-distressed households here.
  • Macro-Financial Review here.

47 replies on “New from the Central Bank”

I’m surprised they bother making any graphics at all. If they just buried all the information in tables and reams of text, no-one would be able to figure things out. I presume someone’s confidence in their PR abilities outweighed their traditional desire to obfuscate the figures.

This isn’t the first time that the Central Bank has played fast and loose with their graphs. Basically, I don’t see why we shouldn’t assume they’ve done the same with the figures. Credibility is like that unfortunately.

In respect of ‘Sustainable Mortgage Modification’ – Concluding Remarks.

What is this ‘sustainable’ stuff? A borrower either has the necessary nett disposable income to discharge the mortgage (and all costs directly related to ownership of a residence), as contracted – or they do not. Sustainability has no meaning for the latter category of borrower. They are insolvent – period. Hence they must go bankrupt and have a major proportion of the debt written off, or be given a Jubille.

The Negative Equity category is a real, future problem (absent the necessary inflation of existing res property prices – not values!). This is improbable. So what happens when a negative equity borrower wishes to sell up? Or is dis-possessed? Who ‘eats’ the loss then? Or, how is it to be ‘consumed’? Will it be digested? Or like undigested fibre – be shat out somewhere?

I’ll read, and hopefully digest, the full briefing.

I’m amazed that such an indepth analysis of the mortgage arrears problem as Patrick Honohan’s doesn’t highlight the systemic impossibility of loan defaults.

Surely any analysis should include the fact that banks create the money they lend and as such every euro has an even higher debt.

The fact that money is canceled out of existence through loan repayments means that debt reduction does not leave other in a better position to pay their debts.

Surely it’s up to economists to look at the system as a whole, rather than concentrate on individual cases as seems to be the norm, and point out the impossibility of resolving the mortgage arrears problem under the money-as-debt system?

One other thing: In the Macro-Financial Review a footnote discusses Shadow Banking as ‘credit creation funded by leverage’. For a start all credit is created and it’s good to see the phrase ‘credit creation’ as opposed to ‘credit intermediation’ a Central Bank publication but it’s strange that they think such credit is funded ‘by leverage’.

@What goes up
The Honohan pres today featured a slide showing the inexorable rise in arrears. I was thinking of you. He also revealed that the arreared have lower average income than the non arreared. Social status is always there in the background in Ireland. They die earlier too.

I have to admit being tres disappointed in Honohan’s presentation today. The stuff about forcing banks to start dealing with the problem was fair enough, but the proposed resolution included two ideas that bothered me.

1. The idea of the split mortgage where half is “warehoused”. But til when? Til you die? Till your children die? It’s not written off – it just hangs there, and may or may not come to get you just when you think its all over.

2. Worse – the idea that you make “sustainable” payments on the other half, and then, as your conditions improve (e.g. you get a job/a promotion/ a raise?) the bank “gets to share in the prosperity too”. Oh well that’s great! Why not take away every single incentive for someone to improve their lives. Any time things get better, the bank comes back for more.

The bottom line – the bank never has to admit or write down the loss – they just hang about forever while the mortgagee is never ever free – financially paralysed forever.

Of course as Honohan said – the government/state/taxpayer ensures its investment gets the maximum return. But really? Do they? While all these other citizens are chained to debt forever. Aren’t there economic side effects from that? And isn’t it the case that the banks can veto personal insolvency thus preventing people from starting again without their permission?

I know there’s a huge problem about the banks crystalising all the mortgage losses. I know the BTLs have to be prevented from walking away from their mistakes – but it looks to me that the resolution is a case of Banks 1 Mortgage Holders 0.

Is this really the best we can do?

@ Philip my comment removed or just a technical glitch? I hope it is not the old Alma Mater network operating like clockwork? According to Morgan Kelly out at that other fabled University your former colleague made the worst mistake of the crisis. Dare anyone criticise him? I don’t quite agree with Morgan that he made the worst decision. I think he made the second worst decision and cost us 38bn. When he got the job some years ago I wished him well on this site. However, there is little doubt that he has been very bad for this country and censoring comments will not make it all go away. All though it will make it look like every thing is “normal”.


And. that ‘STATE INSOLVENCIES MUST BE POSSIBLE IN EURO AREA’. Wonder who he is thinking about?

Donal O’Donovan had a piece in the Irish Independent earlier in the week, he quoted Wilbur Ross as follows, “Ireland has proper Labour laws. Ireland did not need structural reform, all it needed was to fill the hole left by the banking crisis”. “he was not concerned by the lack of repossessions by Bank of Ireland and other Irish lenders. The fact that home owners were left with debt in Ireland even after repossession was a very powerful deterrent from walking away from mortgages.

What Ross is saying is nonsense if Ireland had proper labour laws why is it that there was systemic failure in our banking system and nobody has been sanctioned? If Ireland had proper labour laws how is is that one sector are able to go in and siphon the public purse with the help of their own unions? If Ireland did not need structural reform what was the MOU all about and why did the IMF say we needed substantial reform. Wilbur is obviously happy for Irish citizens to be put into debt bondage as long as the “hole left by the banking crisis is filled” and the value of his investment goes up.

I see the same approach that Ross enunciates echoed in the Honohan paper. There is no doubt but that the governor of the Irish Central Bank is on the side of the bankers and people like Ross. The harsh words are merely subterfuge it is what you do that counts not what you say, he has tried to say that his approach is a “European approach”. One foot over the border away from the insolvency regime agreed by Honohan, Shatter, Noonan you can be out of bankruptcy in 12 months? The fissile state of bank balance sheets is what is driving the ill advised hard line approach and with 50% of the 55bn of SME loans also under water as stated by Fiona Muldoon I can see why they are ashen faced.

There are 26bn tracker loans outstanding the banks have 9bn in excess capital but is that enough? If even 50% 13bn went bad where would the money come from to recapitalise? These figures do not include the SME loans that are in distress. Will the banks be forced to apply a haircut somewhere in their system? It would be a very brave person that says that will not happen.

@robert,great post r original one is at other tread.
Europes lost k…..
In fairness,he did say that parked split mtg.’s should not be a disencintive to earn more,so that you can lay off debt quicker….at that point I just stopped reading it……

@ Sarah Carey

Was it Acharya or Chopra or both, even, who mentioned the state of zombification where banks deleverage and shut down lending and there’s a big debt overhang and nothing happens and suddenly you have lost a decade ?

Honohan was like some shopkeeper in the Soviet Union in 1985 pimping up the contents of the shelves. It is financial purgatory and the Hail Marys aren’t strong enough.

There was no mention of the malign side of the banks either. I was thinking of Volcker’s insomnia as he lay in bed thinking of how the bankers would game whatever system he came up with.

Meanwhile yesterday’s IT had an article stating that 80% of DB pension schemes are in deficit. Many those BTL mortgages back the DC pension dreams of a sizeable portion of people in their 50s and older. It is a mess.

Ireland has just endured the greatest bank and property crash in the history of mankind. In 1998,1999,2000,2001,2002,2003,2004,2005,2006,2007,2008 when David McWilliams told Professor Honohan that there was a massive property bubble in Ireland. What did Professor Honohan do then:


That must have been Chopra.

I must say: I liked Acharya’s approach a lot, though I had loads of questions that there was no time to put.

But for those who weren’t there he addressed how classes of assets and liabilities rather than institutions need bail-outs/ins. So there are all these other shadow financial entities trading products even though they aren’t banks – which covers the manner in which the sub-prime mortgages in the US were packaged off the balance sheets of the big banks. He specifically discussed the repo market, but you could see how it could apply across a range the word products? He was really interesting.

On Chopra’s proposals he was forceful though I thought short on detail. He clung onto the “well we’re just getting the conversation going so these are just some ideas to talk about” line. Which I guess is fair enough, but if some of the “conversation points” were resolved along certain lines, it wouldn’t do much for Ireland.

Two weakness I saw were:

– the trigger points for Systemic Risk Exception. In the US he referred to the Secretary of the Treasury in consultation with the President (after the Fed and…some other institution…anyone?) being the 3 trigger points. But in Europe, where would our “democratic representation” figure in any such triggering mechanism? The first question up addressed the potential conflict: what if the peripheral country (say Ireland ) wants to trigger the SRE, over say, Anglo, but the core (represented by…the Commission? the ECB?) says “no”, then we’re screwed.
– he suggested that “expected losses” would be covered by the sovereign and “unexpected losses” by the ESM. Seems to me then that’s it pretty damn important how and when the definition of expected and unexpected losses is made/contrived. If our losses were defined as “expected” – well how much further on are we?

If these two issues were decided against us I can’t see how the headline that ESM would directly capitalise failed banks, would actually be of any assistance to us.

@Sarah Carey

There are additional elements on the warehouse proposal in Honohan’s speech (avaible on website) that he did not mention in his presenation.

1. Treatment of future increase of income
Suggests that the claw-back mechanism should not entail too high a “tax rate” on additional income; 50% is often mentioned, including in the new Insolvency Act.

2. Treatment at term of warehoused part of split mortgage
He suggests that “lenders may do well to go further by providing that, where the modified payments are fully paid, their recourse at term is limited to a fixed proportion of the property value. If this proportion is, say 30-50 per cent, it could leave the borrower with enough equity to purchase step-down accommodation”

OK, so I eventually read through Honohan’s epistle to the Indebteded. Not good. D- at best. Why, I wonder? Speculation seems useless at this juncture.

I commented upon the unsustainable sustainability idea above. Its unsustainable, no matter what sort of hinky debt warehousing is being proposed: [the context of my remaining remarks is the purchase of a residential property for the purpose of a home, to raise your family.]

1. A family home is NOT an investment. Its a damned expensive money-sink.

2. The Value-at-Risk is completely different for both a prudent lender and a truthful borrower. The lender’s V@R is a probabilistic estimate (1% or less – of default), hence low and impersonal. The borrower’s V@R is real, based on how much cash from savings they put down as a deposit, hence is high and very personal. The cash down payment must NEVER be less than 20% of purchase price and this is entirely enforecable by the lender – providing they are prudent and maintain their 1% risk exposure.

3. The maximum amount of a mortgage loan must NEVER exceed 26% of a borrower’s disposable nett income. [I am stressing this to emphasise what debt sustainability of a residential mortgage actually means in practice. Again, I stress this, since it seems to escape some dim folk.] The need to verify the precise nature of the income stream of the borrower rests entirely and fully with the lender: the lender, Prof Honohan! The lender!

Note: Prof Honohan specifically (though slantedly and probably conditionally) refers to some retrospective forensic auditing by lenders:- see: Steps to restore sustainability – The different elements of the cure process- para 1: p2.

Q: What if this forensic auditing throws up some very hinky lending practices, or even fraudulent disclosure on the part of the borrower? Picking up doggie poopies with bare hands seems apt. Or perhaps probabilistically seeking to estimate the location of buried anti-personnel munitions, whilst stomping about in a random manner, in hobnailed boots!

‘Sustainable Mortgage Modification’ is, in aggregate, quite useless. D-.

By the way, who is this Wilber Ross chappie? A new ‘celebrity chef’ from Trash TV?

@Sarah Carey

Good comment, I thought the same. I also thought that it was rather convenient that there was no real time for questions.

I think the wider point is that any resolution to the mortgage crisis is a zero-sum game.

On the one hand, the banks get more money from the public and then the government may be able to get a return on its investment in the banks (through a sale). However, in this case, (as you point out) the local economy is going to tank though a lack of demand caused by putting people in a financial striat-jacket.

On the other hand, the banks continue in their zombie state and eventually will have to be recapitalised (again), by the taxpayer.

I’m sure that efficiencies can be found (with BTL mortgages for example) to improve the general state of the banks without much impact on the wider economy, but this will really only be tinkering around the edges.

I fear it will come down to one of two things:
– owner-occupier mortgages are written down by x% and the banks are recapitalised by the ESM as part of a wider banking union deal).
– we leave the Euro and devalue/inflate our way out of the debt crisis.


“owner-occupier mortgages are written down by x% and the banks are recapitalised by the ESM as part of a wider banking union deal).”

I think this has to be the favoured method.

But it won’t happen as long as the banks refuse to acknowledge on the balance sheet the shortfall. Perhaps this is just another waiting game – stall until the banking union has been sorted out and then pray we qualify….

@Robert Brown
Great post.
So it seems 50% of SME loans of 50b are duff. We know from the central bank that 29b of Mortgages are also in arrears/non-performing. So a total of 54b in loans are problematic. With 9b of “surplus” capital to cover this huge amount of problem loans it seems quite clear that the banks will require further recapitalization even without counting the losses on the trackers. A 20% default on problem loans will wipe out the “surplus”. Maybe this is too simplistic but it seems like a no brainer.

@BW Snr.
Who is Wilbur.
He is an octogenarian vulture who has moved on to Spain to see if any luscious
Pickings can be found in the debris down there having previously picked the bones of some Japanese bank carcasses.


From the report:

“..The advantage to the lender of the split mortgage, over a permanent and unconditional NPV reduction sufficient to make the initial payment schedule clearly affordable for the borrower, is that it gives the lender some chance to share in an improvement in the borrower’s circumstances. A major issue for lenders in assessing whether to offer a split mortgage is their capacity to monitor improvements in the capacity of the borrower to make service payments. Indeed, the difficulty in tracking those improvements is the main reason why income sharing repayment schedules are rare enough in banking around the world…”


This goes back to a point I’ve been making here for some time – both the CBI and the banks still believe they are entitled to 100% of the money the banks lent into these crazy property/mortgage arrangements. They are not.

Mr Honohon suggests in the extract above that the banks should be able to participate in a potential upturn in a distressed borrowers fortunes when or if that day ever arises i.e. you need to repay the original debt back in full when you’re in a position to do so. The good Professor should be kindly reminded that it was the lending banks that broke the CBIs own Consumer Code rules not the borrowers. The regulated banks have and always had a duty of care to their customers and equally the are also expected to ensure the integrtity of the property market was maintained. Its all there folks in black and white on the CBIs own website.

The banks failed on each of these basic tests many many times over. In that scenario it would seem to me to be an illogical stance by the CBI in seeking to enforce a prior position which came into being by the banks breaking the CBIs Consumer Protection rules over and over again.

Why the CBI is never challeneged on this basic fact is really beyond me. The CBI made the rules , they have ample evidence that the rules were completely ignored but yet the CBI seems hell bent on protecting the banks capital regardless of what the banks did in breaking the consumer code rules and the above comment simply reiterates the point.

In my view Mr Honohan has gone native and needs a quiet reminder that he’s a regulator not a spokesperson for the banks or the Govt. Over the past year or so I believe he’s become confused.

Chopra said regarding bank resolution that it has to be credible and backed by enough money. It seems as though a lot of the policy responses to date have been ad hoc and sloppy.

Can’t remember who said a few years ago that it it is not a sov debt crisis but a series of banking crises intensified by inept policymaking.
The underwater mortgages are in the waiting room and will be for some time.

I had to laugh at the Bank of Ireland poster on the way out- “talk to the mortgage experts”.


“owner-occupier mortgages are written down by x% and the banks are recapitalised by the ESM as part of a wider banking union deal).”

You are right, it would be the favoured method. In addition, I would also like ice cream every day, a large salary increase and a Pony.

If you write down the right hand side, the left gets written down. a good deal of the left is now in the hands of the domestic citizen plus the ECB. Good luck with going door to door to explain why Xs deposits/savings must be haircut to reduce the debt of Y. who X thinks may be gaming the system. Good luck with explaining to the ECB how they must take a haircut now. Good luck with extracting wonga from the ESM to recap the Irish banks.
In the end as they used say about the North, some problems are not amenable to resolution in a painless manner.


🙂 ok fair point.

But that’s where I think the debt conference plan comes in (that we discussed on my show a couple of weeks ago). We need all the banks + sovereigns in the room so that the citizens + ECB transfer this to to Deutchebank and SG.


to sell the banks would involve writing down the RHS of the Balance Sheet to uch an extent that the assets look cheap. That involves the LHS taking the pain, which is owned largely but not exclusively by the domestic voter.

Any govt which attempted to haircut deposits that after raising taxes, cutting spending, cutting PS pay and pensions, legislating for the X case, abolishing turf cutting on rural bogs, banning stag hunting and using expensive loo roll would be incinerated at the polls.

@ Tull

No problem on the pony side. Just drive around the M50 til you find one.

Slightly off topic but last weekend the FT referred to RBS as a blue chip company. I suppose if RBS is then AIB must be one too.

The Honohan speech reminded me of a song by Del Amitri

“Bill hoardings advertise products that nobody needs
While angry from Manchester writes to complain about
All the repeats on T.V.
And computer terminals report some gains
On the values of copper and tin
While American businessmen snap up Van Goghs
For the price of a hospital wing
Nothing ever happens, nothing happens at all
The needle returns to the start of the song
And we all sing along like before
Nothing ever happens, nothing happens at all “

At tull

It is always a “moral hazard” if their neighbour’s mortgage is being written down but not a moral hazard when tens of billions that we will never see again was transferred to banks. I hear it all the time, “but why should I pay to subsidise my neighbours mortgage?” o.k. fine subsidise the banks instead!

Economist Steve Keen has said that banks should not have been asked, “how much do you need and handed a blank cheque”. The money should have been used to mark to market loans the recapitalisation that banks received should have been channelled through the loan accounts of bank customers. Banks would have been recapitalised, the loans would have been marked down to manageable levels. The only draw back for the banks would be that they no longer had a gun to put to debtors heads. Either way, give the cheque to the banks or channel money through the debtors accounts to them leaves the tax payer on the hook. It seems with the Irish mentality they are more comfortable giving the money to the banks than their neighbours.

These banks that we have poured tens of billions into are going to be sold for a song we are never going to recover our money and that is the shameful “plan” that the government have.

Rte reporting this evening tht Dermot Desmond told some conference today that the options available to Ireland are 1. Default or 2. Inflate away our debt.
As Jens is unlikely to allow the latter then it would appear that the former is the only option.

The 64b is now looking like it is swallowed up without any improvement in our banking sector. Cannot see the ESM contributing anything to alleviate this burden. Didn’t Chopra say they might contribute to future recapitalizations.
It appears that there is a general acceptance that the banks will need more money and also an acceptance that some form of default/ restructuring of our debt pile is inevitable.

@ Tull (any any other of like ilk):

The predicament is that private debt was ‘forced’ onto the public balance sheet – for very dodgy reasons indeed. So, a leader with a stout pair of political testicles would simply ‘force’ the private debt back whence it came. Hence, we would not be in default.

And, no: the sky will not fall in – but many insolvent private entities would. And this is as it should have been. So why not? The usual answers are pure crapola. If the taxpayer remains on the hook for this one, there will be no aggregate economic recovery: only economic regression. Is that what some folk really want?

@ Seafóid: Blue chip? More like a sh*t brick. But its all in the eye of the beholder – as they say!

@ SC: “We need all the banks + sovereigns in the room so that the citizens + ECB transfer this to to Deutchebank and SG.”

No Sarah. We need folks on the street with their pots, pans, drumsticks, loudhailers, flares and firecrackers – and political leaders who are leaders, not sychophantic disciples. The time for ‘Jaw-jaw’ is over. Its ‘War-war’ time!

I wonder how much the combined hole in the pensions industry is compared to projections in 2007 .
Including BTLs.

@ BW

RBS is like a thoroughbred racehorse now reduced to eating grass on a verge somewhere near the Red Cow. AIB is beside it.

Is the AIB international centre in the IFSC up for sale or is it another building that they are trying to flog ?

@ Fiatluxjnr

As Jens Weidman has also said “it should be possible to expel countries from the Eurozone”! Dermot Desmond knows we cannot inflate our debt away so he knows the “Default” options is the only option. Wiedman would prefer to throw us out rather than let the ECB inflate the debt away. They have already done QE by the back door of nearly 2 trillion but it is only filling holes in the banks balance sheet and none of it is making its way out of the banking system. Consequently, we are deflating.

“Forcing the debt….” is a vacuous sound bite. It is now on the public balance sheet mostly in the form of the PN and then son of PN. In addition there are probably bits and pieces owed to the IMF and the E…… So reneging on that involves default and probably exit from the EU. Ultimately, that will probably happen but be careful what you wish for. All those juicy T&Cs enjoyed by many will not be honoured.

@ Tull: Thanks for the comment.

I disagree about letting the publicized private debt go. It was a catastrophic political mistake to undertake it. So, there is no problem whatsoever in letting it go back to where it originally belonged and allowing the real owners deal with their own private property as they see fit. If those lenders made poor or ill-judged lending – then let their respective ‘markets’ deal with it; not national taxpayers and their dependents – and the dependent’s dependents. Unless you want to achieve a truly regressed economy – that looks like the 1950s in reprise. We have regressed to early 1990s so far: NeoLiberals 1: Rule of Law 0.

I believe the EU will be around for a bit yet. Though its a serious toss-up whether the USD or E goes ‘belly up’ first. Expect Fed and ECB to go for a Pyrrhic Victory (inflation; or deflation; or devaluation). The first two are in progress but show no signs of progress. Pretty ropey choices. The action at present is out in the East. So, lets just wait and see what emerges.

We borrowed the money under sov. signature to repay the famous Bondholders. They have left town to be replaced by ECB, EFSF, IMF & new Bondholders all under sov. Signature. So the only options are as DD says I) default or II) ECB inflation. I think it is default and EU exit.


You know, I still disagree. I think if it comes to it, the debt conference will come before an exit.

No real disrespect to the Governor, but all he can really do is spin this out to his retirement. They say catastrophe happens silently and the 2008 bank guarantee was a sign to any thinking person that the state had long ago been sailed merrily onto the rocks. I guess we were so distracted by the northern troubles that we failed to take care of business.

It’s ironic, and truly Irish, that this prudential, regulatory and cultural shambles was conducted by a parade of ‘heavy hitters’, so-called ‘dragons’, and ‘serious’ suits from public and private professional life. While the emperor may not be exactly bollock naked, he is ill-dressed for the wet and windy Irish clime.

Our bankers looted their institutions, with the result that the banks behaved as borrowers not lenders. No one was in charge of the shop, but the profits were only mighty, as well as thoroughly bogus. Now that the cupboard is bare, Joe Public is invited to own it. ‘Sort it our between yiz’ is the message from the departing titans.

FWIW, the finance mess, and the finance web, is universal. David Stockman, who as a participant at the highest level, describes the way in which Wall St captured the Fed and the Treasury, and frightened the Executive into a bailout of their gambling debts. You don’t get that result without spending a long time putting your people and your ideologies, in place.

@ Tull: “sovereign signature”. Bloody lovely!

Sovereigns are ‘corporate entities’, operated by political wallahs who make up their own rules as they go along – or some such. No political party which comes to government from opposition considers itself to be bound by anything done by the previous mob- unless it decides (for purely party gain) to do so. In politics, signatures are as volatile as general election promises: hardly worth a damn.

If, as the ‘markets’ alleged at the time, the Irish gov had told the financials to ‘s*d off’ (their world would have caved in), then whose world will ‘cave in’ if the Irish gov says our taxpayers are tuckered out. “They have no more discretionary moolah for you! ” Ours?

Do I have this bad suspicion, that we have ‘enjoyed’ 3 decades of faux economic growth, built on credit, with the improbable assumption that future aggregate economic activity would increment to such an extent that we could continue to borrow to fund day-to-day expenditures – ad infinitum? Hence, the mantra; “We must get back into the markets” has nothing to do with prudent fiscal behaviour, but is necessary for the incumbents to be able to retain political power? Without that market moolah, they will have to raise taxes, or reduce services, or both? When’s the next general election due? Feb 2016? Earlier?

If inflation is failing and deflation will fail (no growth) – that leaves devaluation or default. The politicians will choose whichever is less likely (at the time) to cause them electoral loss. My guess is that they will persist with inflation and deflation for some time yet. Though the latter is not looking good and the former is giving the ‘markets’ the jitters.

The macro financial review makes lively Sunday morning reading. A few things jump out.

82% of SME employees work in non-exporting firms. Put that together with the public sector. It’s obvious that the vast bulk of the domestic economy is thoroughly disconnected from global markets, except for imports. Hence the large contribution of retail and distribution, and the height of the heels on view.

The FDI sector is mainly a superimposition on a rather stagnant, in production terms, introverted, domestic economy. Mostly this is Mediocristan with as always, some honourable exceptions. No not you 🙂

Global Ireland was the tallest yarn since Finn McCool and the Fianna. Not that we are the only nation which has bought into myths.

The banks are slowly but steadily retreating deeper into the bog. Things have been arranged so that our Mediocrats merge their creaking state with their broken banks.

Whatever sorcery Wilbur and Richie can work, the way ahead for AIB is clear. The borrowers, the depositors and the staff playing musical chairs over loss allocation. A round of redundancies, followed by a ‘final’ deposit levy, a ‘tiny’ hike on variable rates, rinse and repeat, and so down the rabbit hole. No wonder most folk are keeping their deposit on demand, as per Chart 37.

Here’s a tune for the Governor

Yesterday the RTE site had the following top headlines

-€110m recommended for Aer Lingus pension scheme
– Inflation or default will fix debt issue: Desmond

Aer Lingus effectively chose default on the pension scheme.
The debt problem will probably go the same way. Much lower benefits from then on, as per the pension scheme

à la recherche du temps gaspillé

“it seems evident that placing the continuing parts of the system on a firm footing can best be done through the involvement of new foreign owners who can bring capital, risk control and other management skills…. it is not unreasonable to suppose that such investors will see sufficient franchise value in the continuing banks to convince them that attractive investment opportunities exist. I look forward to welcoming new owners of Ireland‟s downsized and cleaned-up banks.”

Extract Frank Daly’s speech to the Society of Chartered Surveyors April 2011 The Valuation Error

“The crisis in which Ireland now finds itself has, as its source, a banking implosion which was driven ultimately by a property market bubble. It would be remiss of me to appear in front of a gathering of construction and property professionals such as this without raising the question of whether, at least collectively, you could have been more vigilant in drawing attention to the enormous systemic risk which was being created. Many of you must have wondered about the sustainability of the ever-escalating upward price spiral that was developing by the middle of the last decide, a spiral driven by cheap money and by a coterie of bankers and market participants who appeared to lack a basic understanding of the dynamics of a properly-functioning market. You must have questioned whether a fourfold increase in commercial and residential property prices in the decade after 1997 could possibly have been justified given its ever-increasing divergence from the trend of economic growth over the same period.

I expect that the valuation professionals amongst you will claim that your job is to provide the best estimate of the market price of a particular property at a particular point in time. However, there is a widespread external view that your responsibilities are more extensive than that. This applies also to other professions such as accounting and auditing which have been similarly criticised for adopting a narrow interpretation of their responsibilities during the evolution of the banking and property bubbles. At a time when many lay people with no great knowledge of the property business were becoming increasingly alarmed at the disconnection between the prices being paid for properties and the intrinsic long-term economic value of those properties, could the two professional bodies not have signalled some concern at what was taking place?

I expect that I am saying nothing which has not been said by many individual members of the Society over recent years. Given your evident determination to cultivate and maintain the highest professional standards, I would suggest, as an outsider, that a critique of the performance of the profession during the evolution of the property price bubble would be a cathartic exercise for the new Society to initiate and support. The credibility of your profession would be enhanced if you could show that steps were being taken to address the mistakes of the last decade.”

You know, every cloud has a silver lining. More than half of the Donegal team are unemployed, according to MWR FM. But all that free time allows them to perfect puke football.

@ JC

You can add the procrastination error to the valuation error.
2 years ago Morgan Kelly estimated 5-6 bn as the cost for debt forgiveness of FUBR mortgages. I wonder how much he’d estimate today.

Below is the elementary property valuation error that bankrupted Ireland
Professor Neil Crosby’s online response to this Irish Independent letter
“Bubble values” 29th February 2012

“The analysis may be simplistic but unfortunately it is not flawed.
Banks ask valuers to tell them what the market value/exchange price is
at a point in time and then lend vast amounts over time based on that
simple number. The surveyor gives them that simple number and do not
think it is their job to tell the banks that the question they have been
asked is stupid on its own and what they should have asked for is the
underlying value. It was obvious in 2005 and 2006 that prices in the
property market were higher than could be sustained by any rational cash
flow analysis. But in a culture that rewards individuals for short term
performance rather than longer term perspective, it was in neither the
bankers’ nor the valuers’ interests to stop it. I cannot see anything in
what the UK regulatory authorities have proposed that makes me think
they understand the role of property valuation in driving asset bubbles
and will prevent it all happening again sometime in the 2020s.”

Neil Crosby
Professor of Real Estate and Planning
University of Reading

John Corcoran – Neil Crosby is quite right to point out the critical and corrupting role of valuers and banks in the property bubble. RICS and other property related professionals should hang their heads in shame for not raising the alarm bells and not challenging landowners, banks and homeowners about the outrageous rise in property valuations which had no relationship with reality or ‘underlying value’. Their role is similar to that of ratings agencies which were paid to sign off triple A ratings by their clients for instruments most of which related to property assets..Sadly it does not require a university professor to point this out.

Anyone with a modicum of experience in property and development knew we were headed for trouble and I am sure I was not the only person to flag it up. If these so called professionals had been held to account by their so called professional bodies ( as the General Medical Council regulates doctors) half of them would have been struck off. Their primary responsibilty should have been to the reputation of the valuation profession and not their commission. In many countries property is taxed and valuers are independent or are part of the state.

Radical reform is required or we will surely revisit this crisis again in the near future.

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