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There has been understandable focus on what NAMA will pay for distressed assets, and the risk of over-payment. This is the biggest component in considering the broader problem of re-constructing the banking system at minimum cost to the Exchequer, but it is not the only one.

Excess Exchequer cost could also be incurred if NAMA comes under pressure to dispose of assets on anything other than best commercial terms, and this pressure has already commenced. A ‘social dividend’ from NAMA has been suggested, notably by ICTU president Jack O’Connor. Mr. O’Connor called on RTE radio on Friday for the State’s newly-acquired property portfolio to be deployed in the provision of schools, sports facilities and health centres. There seems to be some support for this approach from Green Party spokespersons, and it is all too easy to see the notion growing legs.

Disposal of assets at less than best commercial value is a direct cost to the Exchequer, € for € as costly as excess payment for those assets on acquisition. There may well be a case for improved provision of schools, sports facilities, health centres, and indeed lots of other things, but it is an illusion to pretend that the State’s imminent acquisition of an enormous property portfolio at enormous cost somehow relaxes the overall Exchequer constraint.

NAMA will of course need to avoid over-payment. It will also need to avoid becoming an adjunct to the National Lottery Fund, dispensing property assets to worthy causes.

Karl Whelan also delivered a paper to the McGill summer school. I am not going to try to summarise the paper given that the author regularly posts here but I want to open a couple of aspects to discussion and I acknowledge that this may be selectively focusing on issues from a more general paper that contains some very strong insights.

In particular, I think Karl’s talk leaves wide open the extent of the problems that are emerging from credit decisions made by households and their lenders in the context of a much more open credit market during the last ten years. There seems to be some evidence for Ireland, as Karl notes, that older homeowners did not cash in their housing windfall and this, ex post, is a very lucky thing for them. However, as Karl partly acknowledges, the data currently simply does not exist for us to know the extent to which people have overstretched themselves and the potential second-round consequences this will have if a sizeable group of indebted consumers begin to default as their incomes and job prospects decline. The point made in Karl’s paper about the extent to which asset values of households also improved thus mitigating their indebtedness must be seen now in the light of drastic reductions in the value of housing and arguably many other types of household assets.

Again Karl’s paper does talk about potential problems that might arise: “So, the composition of recent changes in assets and debts likely differed substantially across demographic groups and it is the younger cohorts that are most likely to be in trouble now.” But I think we need to put something much more substantive on this statement. This is not a criticism of the paper as the data doesn’t exist so we cannot have expected Karl to incorporate non-existing information into his paper. Perhaps we can tell the story of the causes of the current decline without this information. But I can’t see how we can even begin to talk about its consequences without knowing the extent to which people have become overextended and the likely behavioural and psychological consequences of this.

Thanks to Patrick for posting the links. He mentioned George Lee’s talk, which I have just read.

I have blogged about Deputy Lee and I state again that I dont have any connections with him or his party. He is improving the quality of the political debate around economics in my view. Whether his position is correct can be left to the comments and hopefully the comments can stick to the economic merits of these suggestions rather than more personalised political arguments that are best debated on the many politics blogs in the Irish landscape.

The speech, unsurprisingly, is critical of government performance and policy. A summary of the substantive economics points is as follows:

– The size and swiftness of the current proposed fiscal adjustment is too large. The government should reconsider trying to get the budget deficit back to 3% by 2013. “What’s so sacred anyway about having a General Government Deficit of 3% of GDP by 2013, especially if achieving that target runs the risk of turning an economic recession into a depression?”

– The tax base was narrowed too much during the economic boom and should be broadened. “Taxes on the average worker were cut to the lowest combined rates in the developed world outside of Mexico and Korea. Despite the fact that global interest rates were historically low and that access to credit both at home and abroad had never been easier, massive tax breaks were given to property developers and investors. This was an irresponsible approach to the structure of the taxation system and of our economy that has now blown up in our faces.”

– Guaranteeing all bank debts is irresponsible. “There is no sane reason why Irish taxpayers should continue protecting investors who bought bonds issued by Irish banks….The protection given by the Guarantee to bond investors in Irish banks should be removed September next year when the first two-year term for that Guarantee is up. This shouldn’t preclude the Government from renewing the Guarantee for normal wholesale borrowing by Irish banks. It would, however, help send a message to the international financial markets that the Irish Government is reducing its debt exposure in a rational way and is not lumbering ordinary taxpayers with debts obligations they should have no liability for.”