Author: Karl Whelan

Solvent Green Developers

Every week now, the Sunday newspapers compete with each other for overyhyped stories on the implications of NAMA.  This one from the Sunday Tribune about the plans of a wily group of “solvent developers”  has to be the best so far. Titled “Solvent developers to compete with Nama”, the story goes as follows:

Some of the country’s cash-rich developers are putting together war chests and are planning to compete with the National Asset Management Agency (Nama) when it tries to buy their debts from the bank.

At least two development groups have put funding of between €200m and €300m together as they don’t want their investment property loans in particular transferred to Nama, and hope to be in a position to buy their own loans at a significant discount.

Buying the loans, said a senior industry source, would effectively mean that the developers would take control of the properties at today’s prices rather than ones agreed at the peak of the market.

Most likely, this “plan” is either the product of the overactive imagination of said industry source or perhaps has been misinterpreted by the intrepid Tribune reporter.

Still, if there is any chance that this plan could be put into effect, let me be the first economist to recommend that it be extended beyond developers to the whole Irish public.  I’m solvent and I’d love to get my mortgage cut in half (i.e. buy my loan at a significant discount.)  I’m sure our readers would too. Perhaps we should set up a lobby group and get a senior industry source to brief the Tribune about it?

Note: The Merriam-Webster online dictionary defines solvent as “able to pay all legal debts”.  (I’m assuming the Tribune aren’t referring to the second meaning of the word, which is something “that dissolves or can dissolve” but now that I think about it, I’m not so sure.)

Unemployment Rate up to 11.8% in May

Today’s release shows that the standardised unemployment rate, which is based on the Live Register, rose to 11.8% in May from 11.4% in April and 11.0% in March.

As I wrote last month, it’s tempting to be relieved at seeing increases that are less than the huge jumps recorded at the start of the year.  But a four-tenths increase in the unemployment rate implies an annual rate of increase of almost five percentage points and this is huge. Certainly, the economy appears to be still contracting, if not at quite the shocking pace of late last year and early this year. In the seventeen months since December 2007, the unemployment rate has increased by 7.2 percentage points or four-tenths per month.  Today’s release is exactly in line with that pace of increase.

On a more mundane note, expect to hear plenty over the next few days about how we have “400,000 unemployed” (the total listed on the Live Register).  This is despite page one of the release stating:

The Live Register is not designed to measure unemployment. It includes part-time workers (those who work up to three days a week), seasonal and casual workers entitled to Jobseekers Benefit or Allowance.

Infiniti Finance Conference at TCD

TCD are hosting the Infiniti Conference on International Finance on June 8-9. Full details and booking forms are here. More information below the fold.

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Deadweight Loss and “Job Creation” Plans

There is a widespread consensus among opposition politicians, unions and business lobby groups such as ISME that the government needs to launch a “jobs plan” to reduce unemployment.  One such proposal is Fine Gael’s plan to give those firms hiring unemployed workers either a €6000 subsidy over two years or a waiver on employer PRSI. (Labour have a more restrictive version which only applies to recruiting people unemployed more than six months.) Another proposal is ISME’s call for “an employment subvention fund to protect existing jobs.”

At a time of rapidly rising unemployment, I’m sure these seem like tremendous proposals to the public and the government is being widely criticised for its failure to adopt “innovative” proposals like these. To my mind, however, it would be a mistake to adopt proposals of this type.  Let me explain why.

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Why is Anglo So Costly for the Taxpayer?

From today’s Sunday Times:

Brian Lenihan, the finance minister, said last week that the plight of Anglo Irish Bank was a reminder that nationalisation carried a heavy price for taxpayers.

Lenihan held up Anglo as a warning to academic economists who support the nationalisation of Ireland’s big two banks, Bank of Ireland and Allied Irish Banks.

A direct quote along these lines is reported in Saturday’s Irish Times. The Minister is quoted as saying that

Anglo’s need for capital “illustrates the point that, when nationalising a bank, there is an issue for the taxpayer”.

Ok then, perhaps I shouldn’t bother taking the bait at this point, but let’s think about this for a second.

Suppose Anglo had remained in private hands after last Autumn, perhaps with new management after Seanie and co were cleaned out.  Now they report losses that wipe out their capital base.

What would the government do at this point? No private investor would be willing to recapitalise Anglo. The government could decide to let Anglo be liquidated. However, the September 30 guarantee would then put the government on the hook for paying back Anglo’s liabilities and a disorderly asset firesale would probably only make things worse.  (Which is the government’s argument for not winding up Anglo right now.)

So, because of the September 30 guarantee, the government would be forced to re-capitalise Anglo now, whether the bank had previously been nationalised or not.  To blame the cost of re-capitalising Anglo on the decision to nationalise is putting the cart before the horse. The principle argument in favour of nationalising Anglo was that the government had guaranteed its liabilities and could not afford to keep a discredited management in place gambling with taxpayers money.

I would summarise the moral of the story here somewhat differently: When issuing blanket guarantees to troubled banks, there is an issue for the taxpayer.