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"We need a revolution"

by Frank Schnittger Mon Oct 12th, 2009 at 06:22:53 AM EST

originally posted 12 September, 2009

Courtesy of Chris Cook, I attended a conference on Nama - the proposed National Asset Management Agency, or bad bank, organised by FEASTA (Foundation for the Economics of Sustainability) and the Environmental Pillar of the Irish social Partnership framework.  It was addressed by a number of prominent economists who explained their concerns about the current Government Nama proposals.  Not to put too fine a point on it, the general conclusion - reached by a roomful of mostly middle aged people - is that we need an almost immediate revolution in Ireland if disaster is to be averted.

The star of the show was Professor Brian Lucey of Trinity College Dublin, the author of the OP Ed piece signed by 46 economists which drew a virulent response from Government adviser Alan Ahearne.

His central thesis was that by overpaying for toxic assets, the Government was engaging in an enormous transfer of wealth from taxpayers to shareholders and bondholders of the banks.  Far better to pay the market rate for those assets (which might yet, indeed, have much further to fall), allow the banks to fail/default over a week-end, and then re-constitute and recapitalise the banks as ongoing businesses the following Monday. Investors should bear the consequences of the risks they have taken, that is capitalism in its essence.  Turning a private default into a public national default is the very worst thing we could do.

Diary Rescue by Migeru


Ireland, he argued, is about to be hit by a second wave of even more severe recession - as more people lose their jobs, default on their mortgages, are pursued on their credit card debts, and the whole consumer economy grinds to a halt. We are entering into a long term economic cycle of economic decline which typically takes 15-20 years to resolve - peak to peak, or trough to trough as the case may be.  In this context, and given the enormous overhang of property on the market, property prices have lot more to fall before they stabilise, and it is sheer madness to pay way over current prices for bank loans which may take 20 years to recover.

The Government have invented a concept of "long term economic value" as a means of overpaying banks for their loan portfolios which is predicated on the notion that previous bubble prices were a norm soon to be recovered. In reality, it is little more than a fig leaf to cover the naked extortion of the taxpayer.

Compounding this madness is the government decision to borrow short to cover long term liabilities.  Nama bonds will be issued with but a 1-2 year lifespan, even though the liabilities they are designed to fund are unlikely to be realised only over a 10-20 year period.

In addition, the Banks will continue to "manage" the Nama loan portfolio alongside their own loan portfolios.  Are we seriously to believe that a Bank will put a Nama property on the market (thus depressing prices) before they dispose of their own?

Part of his argument was the classic economic "moral Hazard" argument, that if you protect investors from the consequences of their reckless actions, they have no incentive not to act recklessly again.  The seeds of the current crisis were sown in the previous Allied Irish Bank bail-out of the 1980's when the bank was threatened by a very ill-advised takeover of an insurance company.  And yet Government Advisor, Alan Ahearne, had the temerity to talk about the need for "Irish banks for an Irish economy".  That should go down really well with the ECB which is expected to stump up the cash to back the Nama bonds.

Brian Lucey went on to dismiss the bizarre arguments against nationalisation being offered by the Government:

  1. Nationalisation would make it impossible to get funding from international bond markets: Really?  Many countries (not private banks) e.g. Russia, Argentina, have defaulted on national debts, and yet have been able to access international bond markets almost immediately afterwards.  Often their problem has been the excess availability of debt funding.

  2. Nationalisation removes market oversight of the banks: Yes, that worked really well over the past few years didn't it?

  3. Nationalisation doesn't have an exit strategy: Anyone ever heard of privatisation?

Once again the Irish elite are engaging in the most banal nationalistic rationalisations for trying to keep in control of a situation they have manifestly mismanaged.   T.K. Whitaker, the Irish economist and senior civil servant who masterminded the Irish economic renaissance since the 1960's would be turning in his grave (except he is still apparently hale and hearty at 93!).

The reality is that the Irish banks have failed.  Irish taxpayers had no hand, act, or part in that failure.  The banks shareholders and bondholders have failed to exercise due diligence and oversight and now must take the consequences.  Nama should take on the toxic debt on behalf of the shareholders - not the taxpayers - and should realise what value it can over the next few years as any receiver or liquidator would.  Shareholders and subordinated bondholders should have to write down their investment as happens in any similar situation in the capitalist world.

The conference was followed by a meeting of members of the environmental pillar of the Irish social partnership framework which contained some Green Party activists concerned that the Green Party would be "bounced" into supporting the Government Nama proposals at their party conference this week-end. The short term-frame did not permit the formulation of an agreed considered response, although their was unanimous concern that the Government was initiating a major programme (Nama) without discharging its legal responsibility to conduct a Strategic Environmental Assessment first.

Many parts of rural Ireland are being re-christening "Namaland" because of the presence of "Ghost" housing estates built during the boom and for which there is never likely to be a viable market.

Display:
Thank you for the update.  All mention of the "Celtic Tiger" has dropped off the radar here in the US.  

Seems to me, and I'm no expert, the solutions to the situation in Ireland are the same as those needed in Iceland and Estonia ... and the US, for that matter:

1.  The stock and bondholders of these parasites need to suck it up and 'eat it.'  They are the ones who profited on the upside and need to bear the initial brunt of the downside.  

This would give time for ...

2.  The regulatory and other authorities need to get their heads out of their bums and start being creative.  Using the same-old/same-old band aids isn't going to get the job done, this time.  

Ireland, et.al., can follow the US down the WC - after Obama's speech last week I have no hope for the US - or they can institute economic and financial policies and regulations reflecting the Real World©.  


Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Sat Sep 12th, 2009 at 01:09:13 PM EST
to make news outside of Ireland only with respect to how it can bring down the euro (following your story) or the EU (with the referendum).

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Sep 13th, 2009 at 05:01:37 AM EST
and even worst case scenarios for Ireland will be relatively small beer in the context of the Eurozone as a whole.  A little weakness in Euro exchange rates isn't necessarily a bad thing in any case.  Nobody in Ireland is talking about leaving the Euro - despite the fact that a massive devaluation would be a short cut (short term) solution to some of our problems.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Sep 13th, 2009 at 02:21:25 PM EST
[ Parent ]
Interesting diary, Frank!

Where is the LTE?

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Sun Sep 13th, 2009 at 03:27:33 PM EST
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Sep 13th, 2009 at 03:52:42 PM EST
[ Parent ]
Nama Bill in its current form rejected by Green grassroots - The Irish Times - Mon, Sep 14, 2009

GOVERNMENT PLANS to establish the National Asset Management Agency (Nama) have suffered a significant setback with only 13 per cent of the attendance at a Green Party conference expressing support for the legislation in its current form.

The Nama Bill came in fourth out of six options placed before an all- day meeting of more than 140 Green activists from around the country held in Athlone, Co Westmeath.

The most popular choice at 23 per cent was for an agency which would pay only the current market rate for loans transferred to the banks.

In second place at 20-21 per cent was the so-called "Swedish solution", which would also mean paying only the market price for loans.

This will place further pressure on Minister for Finance Brian Lenihan, who is to announce the valuation he will place on bad loans in the Dáil on Wednesday.

Although Green Party activists voted by a large majority to withhold the results of Saturday's "preferendum" for the time being, The Irish Times understands the results were as follows:

1) Nama with strong Green Party policy conditions and only current market values being paid for transferred loans: 23 per cent;

2) The "Swedish solution" with each institution forced to write down its loan book to current market values and the possibility of separate asset management companies for individual banks: 20-21 per cent;

3) A free-market, laissez-faire approach, with banks left to fend for themselves: 14-15 per cent;

4) The Nama legislation in its present form: 13 per cent;

5) Partial nationalisation, with a "good bank" to assist small and medium enterprises: 12-13 per cent;

6) Full nationalisation: 12 per cent.

Green Party sources have cautioned strongly against premature interpretation of the vote as a signal that the party would walk out of the Government.

The attendance at the special policy-making convention on Nama and the renegotiated programme for government on October 10th would have an attendance three or four times greater than last Saturday's consultative session.

However, the vote is still likely to cause concern among the party's coalition partners.

Pressure will increase on the Green Party leadership to win further concessions and on Fianna Fáil to agree to them.

Green Party sources said there was "a very intense debate" about the valuation announcement to be made by Mr Lenihan.

The format of the special convention on October 10th, which will be crucial for the future of the Government, remains unclear and is likely to be strongly influenced by negotiations on the programme for government.



notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 14th, 2009 at 10:58:43 AM EST
Thanks Mig - for the rescue - I was just thinking I needed to do an update because the Greens approved Nama and a revised programme for Government over the week-end - a decision which surprised and saddened me, but then I can't complain because I have always avoided getting involved in party politics.

If a get a chance I will do a diary on the 40 page revised programme for government later today.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Oct 12th, 2009 at 06:35:47 AM EST
the bizarre arguments against nationalisation being offered by the Government:
  • Nationalisation would make it impossible to get funding from international bond markets
  • Nationalisation removes market oversight of the banks
  • Nationalisation doesn't have an exit strategy
Is that it?

What more evidence do people need that the government works for the bankers? Two helpings of market worship and one of USian talking point?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Mon Oct 12th, 2009 at 06:53:19 AM EST
I think the major ideological and emotional reason for these pathetic rationalisations is that the Government desperately doesn't want to get into the banking business because then they will be seen as being directly responsible for exorbitant bank charges, denying small businesses loans and foreclosing on people's homes.  

Given that they have been doing such a pathetic job of managing the public service I'm not too keen on publicans, farmers, teachers, and lawyers run international banking groups either - the level of managerial expertise and competence is just awful - although it could hardly be worse than what has gone before.

However there is a long tradition in Ireland of Semi-state commercial companies running electricity, gas, phone, fuel and banking businesses so I suspect it is also EU rules on competition as well as neo-liberal ideology which are inhibiting this option.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Oct 12th, 2009 at 08:46:52 AM EST
[ Parent ]
If EU rules on competition prevent banking regulators from doing their job then they must be changed. Only neo-liberal ideology prevents this.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Mon Oct 12th, 2009 at 02:29:51 PM EST
[ Parent ]
The apparent issue isn't about regulators doing their job, but about the state taking a direct role in managing "commercial" businesses.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Oct 12th, 2009 at 03:07:13 PM EST
[ Parent ]
That's a misdirection. See here for how it's done.

Oh, and as I have said before, essential infrastructure need not run for profit but for serviceability. If banks are not essential they can be allowed to go bankrupt. But since they are and they can't, if they are managed incompetently the managers need to be replaced.

We have had 2 years of governments protecting (in this order) management, shareholders and creditors. It has to stop.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Mon Oct 12th, 2009 at 03:24:50 PM EST
[ Parent ]
In the neo-liberal world, the job of regulators is to regulate the market with as light a touch as possible - i.e. do virtually nothing unless their is plainly fraudulent or insolvent trading.  It is not the job of regulators to actually run anything, much less to take it over, however temporarily. What you are talking about it SOCIALISM - the very antithesis of the free market - and the reason why regulators are kept as toothless as possible.  In Ireland the Central bank was, unitl very recently, a sinecure for retired senior civil servants.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Oct 12th, 2009 at 05:00:15 PM EST
[ Parent ]
Can you stop it with the ideological bullshit, please?

I know it's not your ideological bullshit, but that just makes it all the more annoying. I know what these bozos are thinking, and we know they're wrong on the merits.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Mon Oct 12th, 2009 at 05:18:13 PM EST
[ Parent ]
It is not the job of regulators to actually run anything, much less to take it over, however temporarily.

See the FDIC's Failed Bank List. Clicking on the name of each institution takes you to a press release where it is explained what the FDIC did to each failed bank.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Mon Oct 12th, 2009 at 05:22:56 PM EST
[ Parent ]
The whole point of what makes Nama such a debacle is that the Irish Government is acting in a manner which is not even explicable with reference to neo-liberal ideology. In the end it Nationalised Anglo Irish despite it being of virtually no systemic importance. Neo-liberal dogma or the FDIC would have let it go to the wall.

Now instead of nationalising or recapitalising AIB and B of I with share or loan capital it GIVING them 7 Billion of taxpayers money by overpaying for bank assets.

In other words the Govt. has moved from the neo-liberal position on regulators etc. I described above to something much worse - and now even the Greens have agreed.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Oct 12th, 2009 at 06:06:06 PM EST
[ Parent ]
Does it not just come to a few good mates making sure that their pals don't lose their arses - and fuck everyone else?

ie Crony capitalism to a cosmic degree, and second only to Iceland?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Oct 12th, 2009 at 06:36:28 PM EST
[ Parent ]
I don't know any green party activists who were at the meeting so I can't be sure about this.  There is no doubt that the Greens had a once in a lifetime shot at imposing their agenda on Fianna Fail as the latter were desperate to avoid an election.  In my view the Greens failed to get a good deal on even the non-Nama elements - but I plan to do a more detailed diary on this ASAP.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Oct 12th, 2009 at 07:29:14 PM EST
[ Parent ]
What about renaming Ireland "The Celtic (commercial) paper Tiger"?

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Mon Oct 12th, 2009 at 07:19:48 AM EST
I'll let a few people know you said that in preparation for your visit next month....

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Oct 12th, 2009 at 08:37:18 AM EST
[ Parent ]
Banks may buy back homes from struggling customers - National News, Frontpage - Independent.ie
BANKS and building societies may be forced to buy homes from people struggling to meet their mortgage payments and rent them back to them.

This is one of the options that will be considered as part of the new Programme for Government.

The Greens have secured agreement that this and other schemes will be looked at to rescue indebted homeowners.

Under the proposal, lenders would be forced to buy back a home from mortgage holders who find themselves in arrears over a number of months.

The bank or building society would be forced to write off a large chunk of the original mortgage.

The lender would then have to lease the home back to the resident at a much lower rate than the original mortgage repayments.

Even though the banks would be forced to write down some of the original mortgage, homeowners would still owe money to the lender.

But under the scheme, the new rental payments would come off what is still owed on the mortgage.



"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Tue Oct 13th, 2009 at 08:17:10 AM EST


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