Author: Karl Whelan

Lenihan: Economists and Our National Mediocrity

Yesterday morning on the Sunday Business show on Today FM, Minister Lenihan commented on the anti-NAMA economists (podcast here). Among his comments were the following:

What I notice about them is that there’s about forty of them. There’s about two hundred economists in all in the state. Most of the rest of them have approached me privately and said that these gentlemen and ladies are wrong. But of course they are not prepared to say so publicly because in Irish academic class, people don’t criticise other people’s books. That’s part of our national mediocrity. If you take the Irish historians and someone publishes a bad history book, you won’t find any reviews in the paper pointing out how bad that book is. If you look at the press in the United Kingdom or the United States, you’ll see robust academic criticism of others works but we’re reluctant to do it. We’re a small country, we have to meet people again, we have to go to other people’s funerals and we know and we don’t want to put the cross on someone even when they’re saying something that’s fundamentally wrong.

So Minister Lenihan is now saying that at least 80 economists have approached him privately to disagree with those who have criticised NAMA. He is stating that there is a silent majority of economists who support his approach to the banking crisis but are not willing to say so publicly because they are scared of insulting the anti-NAMA economists.

I’d be interested to hear people’s thoughts on this. Is it likely that the Minister has been receiving huge amounts of anonymous support from intimidated economists? Is the Minister’s characterisation of the absence of disagreement or debate among Irish economists an accurate one? If we suffer from a national mediocrity, are the anti-NAMA economists part of it? Is the Minister attempting to encourage debate or to stifle it?

Free Speech and the Green Jersey

Last night’s Week in Politics Show on RTE provided a fascinating illustration of how bizarre the debate over the National Asset Management Agency has become.

Presenter Sean O’Rourke introduced a report on the Dublin Economics Workshop in Kenmare (18 minutes in) by quoting Denis O’Brien’s comments about academic economists spending all of their time twittering and taking out ads in the newspaper. The report itself showed Morgan Kelly criticising NAMA on the grounds that it relied on extreme upper tail optimistic assumptions and that it would still leave them undercapitalised.

The report then showed Pat McArdle, former economist with Ulster Bank, responding to Morgan Kelly as follows (22 minutes in):

Freedom of speech is fine and we’re all in favour of it. But there are sometimes when you have to temper things in the greater interest.

Following the report, presenter Sean O’Rourke effectively endorsed this line of reasoning, immediately putting the following question to Pat Rabbitte: (24 minutes in)

Is there something to be said, and this is a theme that Garret FitzGerald has touched on in the last couple of weeks in his column, that there may be a case for people to pull on the green jersey as it were, set aside some of their more extreme doubts about NAMA and just see it through and give it a fair wind?

So this is what it’s come to. People can object to the government’s policies on the budget or health or education or whatever but objections to NAMA—an initiative that involves spending up to €54 billion of public money—must be condemned as unpatriotic.

In a supposedly open and democratic republic, this idea—that you should refrain from objecting to a government’s economic policies because this criticism runs counter to the national interest—would normally be considered morally repugnant. It says a lot about this country that this opinion is now being regularly aired by mainstream commentators in our print and broadcast media.

The programme had plenty of other stomach-churning stuff such as McArdle’s claims that Kelly had just dreamt up his criticisms of NAMA in the last week, junior Minister Dick Roche’s claims that Morgan was being “brittle” in response to McCardle, followed up by bizarre stuff about how this put him in mind of the need for more one-armed economists. And best of all, when Pat Rabbitte failed to agree to pull on the green jersey, O’Rourke told him:

But coming back to NAMA, they’re operating on the best available advice from say the head of the Department of Finance, from experts in Europe, from the European Central Bank, from the new Governor of the Central Bank.

Ah yes, the European Central Bank and the new Governor. Sean must have forgotten about Bo Lundgren and the IMF.

Hard to Deny Now that NAMA is a Developer Rescue Plan

I have been publicly critical of the idea of a “bad bank” plan in which the government overpays for bad assets since a number of months prior to the publication of Peter Bacon’s report. I have consistently objected to the plan on the grounds that it is a bailout of bank shareholders by the government, involving a large direct transfer of funds from the taxpayers to shareholders.

However, at no point have I suggested that NAMA would be a bailout for developers. I have always believed the Minister for Finance’s assurances that the developers who owed money to the Irish taxpayer would be followed to the Gates of Hell in order to get the money back. This, from the Minister’s appearance in August at the Oireachtas Committee on Finance and the Public Service, would be a pretty typical assurance:

The draft legislation also contains a number of provisions which will assist NAMA in its dealings with developers and ensure that every last cent due to the taxpayer is pursued vigorously.

Now, however, we find out how vigorous this pursuit will be. In its draft business plan, NAMA has told the public, and thus property developers, that it expects this vigorous pursuit of the €77 billion that NAMA will be owed to yield principal repayments of €1 billion in 2010 and 2011 and €2.5 billion in 2012. Only in 2013 does NAMA expect the vigorous pursuit to start making real inroads because, at that point, as if by magic, €7.5 billion per year in principal repayments start to pour in.

What this draft plan means is that the developers who owe us €77 billion have just been told that we have no plans to recoup this money any time soon. Effectively, the developers have been told that they can start paying back the money in 2013. Now we’ve been told that NAMA will haul in the developers and look for business plans and the like. However, in light of NAMA’s own business plan, it will be pretty hard for them to quibble with a developer who offers them a plan of “I’ll wait until 2013 and sure things will be grand then.”

It is with great reluctance, then, that I have to say that it’s now pretty hard to see this plan as anything other than a deliberate decision to show extreme forbearance to the property developers who got us into this mess in the first place.

Also, the following is now a fact. This government has told developers that as long as its in office (the latest date for an election is 2012) they will barely have to pay back any money. Interpret this fact how you wish.

NAMA Haven’t Seen Loan Files

From page 2 of the draft NAMA business plan:

It is important to emphasise that much of the information regarding the prospective NAMA portfolio included in this draft Business Plan is based on aggregate data which has been provided by the various institutions. The interim NAMA team has not had direct access to individual transaction records and loan files and will not be in a position to verify the integrity of the data until it carries out its own due diligence on each of the loans proposed for acquisition.

So have any of the famous forms requesting 300 pieces of information on individual loans been filled out? And if they have, where are they? When is whoever is keeping them planning to hand them over to NAMA?

NAMA Business Plan Default Rate Assumptions

NAMA’s draft business plan has many bizarre aspects. Chief among them, however, is the claim that only 20% of the loans purchased by NAMA will default, with the other 80% of loans eventually paying off in full. The plan justifies this as follows:

Over a five year period in the early 1990s, one UK bank experienced a default rate of less than 10% on its whole book. Given the concentrated nature of the prospective NAMA portfolio and the risk of a prolonged recession, a 20% default rate assumption has been made.

Fianna Fail TD Frank Fahey on Morning Ireland stated that the UK bank in question was Barclays and that this comparison means that the 20% default rate assumption was “prudent” and “conservative” and “much bigger than it needs to be.”

So the argument here is that because the default rate on Barclays’s total loan book in the 1990s was less than 10%, this means that it’s ok to assume that the default rate on NAMA’s assets will only be 20%.

I think this is perhaps the most odious comparison we have heard yet in the NAMA debate. The Barclay’s loan book being referred to (its “whole book”) included all sorts of loans with low average default rates. However, the NAMA loan book is a selected class of assets—property and development loans—specifically chosen because the losses on these loans are so large they are threatening the solvency of the Irish banking system.

The reasoning underlying the default rate assumption is akin to asserting that because only 10 percent of men are taller than six foot, it’s reasonable to assume that no more than 20 percent of a basketball team will be taller than six foot.

The fact is that NAMA only exists because this particular class of assets is performing so badly that a radical state intervention is being planned to save the banks that made these loans. Perhaps I missed it, but I don’t recall such interventions being planned in relation to the total loan books of UK banks in the 1990s.

The bottom line here is that it is patently clear that far more than 20% of these loans will fail to be paid back in full.  That this claim can be released to the public in the expectation of being taken seriously is an indication that we have really moved into cloud-cuckoo territory.

As an aside, I’d note that Fahey also stated that the banks “were borrowing the money at 1.5%”. This is the famous 1.5% that is the initial interest rate that the government is paying to the banks. Yet again, we see another example of government spokesmen who don’t even understand the basic mechanics of NAMA in the sense of who is lending money to whom and at what rate.