Let’s start with what I see as the single best argument against nationalisation. The vast majority of economists get very worried when public ownership of banks is brought up because, as Frank Barry discussed yesterday, nationalised banks are particularly likely to be subject to abuse by politicians and their crony capitalist mates.
I was somewhat heartened by the overall tone of Peter Bacon’s comments about NAMA on Morning Ireland yesterday. He talked pretty tough about the need for NAMA to pay market prices for loans and correctly argued that indexes for property prices showed that one could put market valuations on these assets that would involve steep write-downs.
That said, I’m still not encouraged to think the plan will work out well for the taxpayer. Bacon himself won’t set the valuations for the loan portfolios—I’m guessing this will be done by a major accountancy firm. And I am concerned the accountants hired will value the portfolio according to conservative rules so that currently impaired loans are written down but all other property loans are valued at book value.
For me, however, what was more interesting than the tough talk on valuations was Bacon’s detailed explanation of why he did not favour nationalisation (starts at about 6.50 in). I think it is important that a full debate is had about nationalisation. To help with this, I’m going to write a few separate posts over the next few days to discuss the arguments made by Bacon and some others and to put forward a defence of nationalisation. Doing these as separate posts will facilitate interaction with our readers on specific issues and I’d be happy to take suggestions on which issues to discuss.
And before any our more excitable commenters start getting too worked up, I would like to emphasise from the outset that I view myself as politically moderate: A brief perusal of my research scribblings will uncover lots of boring arcane technicalities and no track record of radical left wingery. So, it is only with reluctance that I am advising this approach.
Without further ado, the first nationalisation post is just above this one.
Today’s Irish Times contains a head-to-head set of articles from me and Scott Rankin of Davy’s about the NAMA plan.
As is often the case, the articles are accompanied by a weirdly misleading headline—“Will NAMA aid the ailing banks?”. I am listed in the “No” column because I don’t like the NAMA plan. But my problem with this plan is not that it won’t “aid” the ailing banks.
The problem with the banks is under-capitalisation. Of course, any plan that injects enough money can solve this problem by re-capitalising the banks. The relevant question is how is this done and at what cost to the taxpayer—my concern is that this plan may “aid” bank shareholders considerably at the expense of taxpayers. More generally, I hope the Irish financial media will move on from their focus on “Will the plan work?” to examine the question of how it operates.
Scott Rankin’s final sentence is worth a short comment. He writes:
One important point to understand is that if nationalisation is not an option, then the liability to the State from these assets does not necessarily diminish if a bigger haircut is agreed on transfer, that is, if it’s 35 per cent rather than 15 per cent. If Nama achieves a bigger haircut on day one (and hence saving for the taxpayer) this probably means more government capital required to recapitalise the banks.
This argument makes it sounds like the “haircut” (the discount over book value at which the state purchases the bad loans) simply doesn’t matter. One way or another, we need to provide the funds to re-capitalise the banks. But look carefully, folks, is it really the case that the composition of these funds doesn’t matter?
The bad loans will end up returning some concrete amount of money to the state and this amount will be completely independent of the haircut we apply now. The state gains nothing from reducing the haircut by a euro. But it loses a euro of equity capital investment.
And contrary to Scott’s argument, this equity investment is not a “liability” for the state: It is an asset and can be cashed in for a return at a later date. In calculating the long-run cost of this program for the taxpayer, the size of the haircut matters greatly.
Karl Whelan’s case for nationalisation is very powerful but we shouldn’t lose sight of the dangers that were traditionally uppermost in our minds. (This does NOT equate to support for the Bacon plan). Even commercial banks are subject to strong political pressures. Remember the write-offs of Haughey’s personal debts, and even of some of Garret’s? (Though the similarity ends there, as the Moriarty Tribunal found. While Haughey’s assets remained intact, FitzGerald’s write-off occurred only after his assets had been exhausted). It would be much more difficult for a nationalised bank to resist political pressures (or do we really believe that “crony capitalism” will end with the current crisis?). Quite apart from the other problems with the post-dated levy idea, as identified both by Karl and the FT, it is easy to imagine that it would be applied only very leniently, if at all, for political and pressure-group reasons; the same dangers that arise in the case of nationalisation. Sweden seems to have a different political culture. And would a nationalised banking system be able to resist demands that there be no foreclosures on defaulting mortgage holders? I doubt it. What would that do to Karl’s figures? These problematic governance issues need to be carefully considered.
Is it just me or is there something deeply odd about the way the media report things like yesterday’s NAMA report from Peter Bacon? We are told that “the report by economic consultant Peter Bacon says the new agency has potential to bring a better economic solution to the banking crisis.” Well, he would, wouldn’t he? Why not report this as “Economist Peter Bacon, who drafted the proposals for a state asset management agency, released a summary of the report that he prepared for the government.” Too boring, I guess, but why mislead the public by presenting an assessment of the plan by the person who wrote the plan as being, somehow, objective?