Arguments Against Nationalisation, Part 3: Transparency

Peter Bacon outlined two other arguments against nationalisation in his Morning Ireland interview. The first related to the question of transparency:

You nationalise it and then you would still have to deal with it. You would be dealing with it behind closed doors. People have screamed “let’s have transparency with this”. The only place you will find transparency is if you do this in the open market.

Given the amount of public money at stake, I couldn’t agree more with Dr. Bacon that transparency is essential. However, I disagree with him regarding the levels of transparency that would prevail under nationalisation relative to his NAMA plan.

Scope of NAMA

Much has been written about the pricing of the NAMA loan purchases and the consequences for shareholders (including by myself in tomorrow’s Sunday Business Post), but less on the scale and scope of the proposed purchases.

The announced plan is that

“The eligible land and development loans of each bank involved will be transferred – that is the eligible loans secured on development land and property under development. In addition, the largest property-backed exposures of all the banks in the scheme will be transferred.”

Ignoring, for a moment the undefined word “eligible” — which allows an attractive degree of flexibility — what about the two other distinctive features of this proposed scope of purchase:

First, it is not limited to non-performing or impaired or problem loans. Second, it excludes a large swathe of property-related and other loans, including problem loans.

Inclusion of performing loans
I can see that it is an attractive simplification for NAMA’s management to sweep in all of a clearly-defined category of loans, not least because that way you are sure of covering even those loans that have not gone bad yet.

I am less impressed by the argument that including performing loans is good for the taxpayer because they will be serviced. The inclusion of performing loans increases the gross scale of the NAMA operation, and with it the size of the National Debt. It may also, I suppose, complicate the operation inasmuch as both the banks and their non-delinquent borrowers may be very unhappy to be separated.

Exclusion of non-development-property loans
If the goal is to end up with unquestionably clean bank portfolio, should one not also be considering inclusion of other non-performing loans, given the deterioration in the overall economic prospects?

At this stage, I am not sure what to conclude, except that the scope of the purchased assets is an important issue. Clearly, that word “eligible” could come in very handy as the scheme moves towards statutory definition.

Meanwhile, another question worth considering is whether NAMA needs to wait until it has identified all of the loans to be purchased. Here the answer seems clear: best to go ahead with an initial purchase of the most problematic loans as soon as the agency is up and running (assuming, of course, all of the pricing & financial restructuring,  governance and transparency issues also sorted).

Arguments Against Nationalisation, Part 2: Baconian Equivalence

Probably the most common argument I have heard from influential Irish commentators when they argue against nationalisation is to quickly dismiss it on the grounds that it simply does not help in “solving the problem” or reducing the cost of the banking crisis for the taxpayer.  Yesterday’s Irish Times article by Scott Rankin provides one example of this argument.  Let me provide three other examples.  Here are two examples from Prime Time on March 19.

Arguments Against Nationalisation, Part 1: Politicisation of the Banks

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.

Bacon on Pricing Assets and Nationalisation

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.