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LQD: Irish Government to fall over Nama?

by Frank Schnittger Wed Sep 2nd, 2009 at 07:11:33 PM EST

Latest opinion poll shows FF support at record low of 17% - The Irish Times - Wed, Sep 02, 2009

Support for Fianna Fáil has slipped to another record low, according to the latest Irish Times/TNS mrbi poll published tomorrow.

The poll also shows that satisfaction with the Government is running at just 11 per cent with 85 per cent of voters expressing dissatisfaction with its performance.

Taoiseach Brian Cowen’s satisfaction rating has dropped to just 15 per cent with 77 per cent saying they are dissatisfied with the way he is doing his job.

When people were asked who they would vote for if there was a general election tomorrow, the adjusted figures for party support, compared with the last Irish Times poll in June were: Fianna Fáil, 17 per cent (down 3 points); Fine Gael, 34 per cent (down 2 points); Labour, 24 per cent (up 1 point); Sinn Féin, 10 per cent (up 2 points); Green Party, 3 per cent (no change); and Independents/others, 12 per cent (up 2 points).

To put this in context, Fianna Fail typically gets 40%+ in general elections and needs to get c. 47% to get an overall majority in Ireland's proportional representation system (which generally slightly favours larger parties). It is currently dependent on the Greens and a few independent and former FF backbenchers to stay in power

To make matters worse, the Irish government is facing a triple whammy of the second Lisbon referendum on October 2nd., an increasingly contentious Dail vote over Nama shortly thereafter, and a well nigh politically impossible vote on a new budget in December.

The Lisbon referendum will probably be passed, though not without considerable expenditure of remaining political capital and much popular resentment at having to vote on the same Treaty twice.

The Budget is due to implement many of the recommendations of the McCarthy report, which (at Government request) identified swingeing savings of €5 Billion across many essential public services in an attempt to reduce the Government borrowing requirement to c. 10% of GDP this year and next.

However it is the proposed passage of the Nama legislation just after the Lisbon vote which is causing most public angst.  Opposition is widening and hardening in both the political and economic establishments.

The latest economist to put his hat in the ring is the colourful and outspoken Sean Barrett who can not be accused of any socialist tendencies...

Nama will distort market and is economic nonsense - The Irish Times - Wed, Sep 02, 2009

OPINION: Nama is a macroeconomic three-card trick to refinance incompetent bankers and reflate a property bubble without addressing reform in the property market, banks, or bank regulation

THE GOVERNMENT faces serious credibility problems in securing public support for its bad bank, the National Asset Management Agency.

Up and down the country there are scores of empty housing estates. Public opinion is convinced that the purpose of Nama is to bail out the builders of these largely useless estates and the bankers who financed them, and that the bailout will take place at the expense of taxpayers.

Builders, bankers and the senior public servants who failed to regulate these sectors are perceived to be getting off scot-free from the crisis they caused. The Nama houses, as they are called in their localities, must be sold openly now at market prices. Anything else will be seen as builders and bankers gaining at the taxpayers' expense.

The interface between politicians and the construction industry in Ireland has frequently disgraced both parties. The economic record of the sector has been regularly published by the Economist magazine and shows Ireland to have by far the worst house price performance in the OECD countries.

On April 5th last year the Economist asked: "Where are house prices most overvalued?" The answer was Ireland. Almost a third of house price increases between 1997 and 2007 could not be justified by economic fundamentals. The Irish house price rise of 251 per cent between 1997 and 2007 was double the US national index and was notably uncompetitive compared to Germany, Japan, Italy, France, Denmark, Australia, Canada and Sweden, and even with other house bubble countries such as the UK and Spain.

Housing accounted for 12.7 per cent of GDP in 2006, about twice the typical share in other advanced economies.

The performance of the construction sector in providing public infrastructure was also a disaster. The cost overrun on the national primary roads budget was €10.8 billion on an initial estimate of €5.6 billion. The Dublin Port Tunnel cost escalated from €220 million in 2000, to €580 million in 2002 and €792 million in 2006. The M50 widening increased from €190 million to €562 million, the Youghal bypass from €10.7 million to €43.5 million and Luas from €290 million to €750 million.

It has, therefore, been obvious for quite some time that the construction sector was on a bubble path, and was seriously damaging national competitiveness by the prices it charged to house buyers and for public infrastructure. The sector was confident that it could rely on subservient politicians for dig-outs. Builders also knew that the bankers who funded their bubble lacked the qualities required to call in their loans.

I fully support Colm McCarthy's call for an inquiry into what was going on in Irish banking in recent years. For over 200 years, Irish banks guarded our savings, transferred our payments and invested prudently as did their Canadian counterparts who are still solvent today.

What does the Government propose to do to protect the simple banking service sought by 99 per cent of Irish people from the casino conduct of Irish bankers which caused this crisis? Were the seeds of this banking crisis sown when we last engaged in bank rescue two decades ago?


He goes on:

Nama will distort market and is economic nonsense - The Irish Times - Wed, Sep 02, 2009

It will be so easy. Nama pays off the builders at a bit less than bubble prices, builders pay off the unreformed banks and banks will immediately begin investing in productive economic activities and will never be codded by builders again, really. Nama is a macroeconomic three-card trick to refinance incompetent Irish bankers and reflate a property bubble without addressing reform in the property market, banks or bank regulation. It has dire microeconomic consequences for these sectors and adverse consequences for the rest of the economy.

Market efficiency outside the three sectors being rescued depends on people working hard, investing wisely and being efficient. This efficiency is ensured by ease of entry to, and exit from, the market. Rescuing failed businesses results in the so-called moral hazard problem in economics. By removing the penalties for failure, the incentives for hard work and wise investment are also removed.

The immediate result of market exit by bankrupt builders and bankers would be a fall in property prices. This will reduce the cost base of the Irish economy. Ireland would gain in competitiveness by having lower property costs. A target in our economic recovery should be to reduce the ratio of house prices to average earnings. The prospect of Nama is preventing prices from falling now and delaying Ireland's economic recovery.

The prices of houses and other property will not be allowed to fall to the full market extent under Nama. The assets will be transferred to Nama at their imputed long-term economic value. This will be in excess of current market prices.

The market price of any item is determined by supply and demand. That is why, happily, we do not have a Nama for horses, aircraft and millions of other goods and services. The market for empty Irish houses, shops, hotels and the bizarrely titled "development land" is similarly determined by competition between those who believe that the items have, and will continue to have, a high value and those who don't share that opinion.

The Nama concept that taxpayers should pay above market prices for the assets of bankrupt builders and bankers because they have a higher long-term economic value is an economic nonsense. The prices in the market already incorporate these long-term considerations. Since these considerations are already incorporated in the market price there is no economic case for further intervention by Nama to pay any higher price.

It is silly for the proponents of Nama to maintain that paying above market prices for impaired assets is not a subsidy to bankers and builders. The banks themselves, with the exception of ACCBank, have spent a lot of time and money at the High Court and Supreme Court to buy time so that they may benefit from Nama.

The proposition that Nama should pay more for impaired assets because it alone is aware of their long-term economic value is at best a gamble with public money founded on a belief that Nama knows something that no one else in the market knows about these items.

This way of doing business has been agreed, we are told with some pride, by the IMF, the ECB and the EU Commission. This might be as simple as international bureaucrats rescuing national bureaucrats from a hole of their own making. We also need to know whose version of this crisis was communicated to the international bureaucracies.

The proponents of Nama describe the sale at market prices of impaired assets as a fire sale. The description is, of course, wrong. A fire sale involves assets harmed by the fire and the damage is incorporated in the price. The sale of empty houses, shops, hotels and land bought at inflated prices arises from the economic incompetence of the builders and bankers concerned and not because of any fire damage.

Sales transfer assets from the present incompetent owners to new owners. If these owners are also incompetent the assets will be sold on again at lower prices. The sooner we do this the quicker will Ireland's economic recovery begin.

Ireland needs to lose its property bubble fixation. We need lower property prices across the board for houses, shops, hotels, factories and land for decades to come to restore and retain our competitiveness.

We need a banking system based on the traditional Irish model still observed in Canada. We must separate this from the casino model and must remove layers of bank management as their penalty for destroying as much as 98 per cent of the value of their companies. We need building societies that lend to their members and not to developers.

We need competence in financial regulation across the Central Bank, Financial Regulator and Department of Finance, with massive management changes in all three bodies. We must solve the present crisis in the three sectors that caused it, bad builders, bad bankers and bad regulators.

We do not need Nama.

What is most striking here is that Sean Barrett has no time for socialist tampering with markets.  He is basing his critique on pretty mainstream neo-liberal economics laced with a criticism of regulators for failing to regulate banks and to prevent property bubbles emerging.  There is no sympathy for the political, financial, and industry elites whatsoever.

The proposed solution - to let market forces run their course - may well seem simplistic to many, but is surely preferable to allowing the political elites legislate in favour of financial elites and against the public interest.

Putting €90 Billion  - 60% of Irish GDP - at risk to bail out failed bankers, financiers and developers doesn't even make sense in a neo-liberal world which has no difficulty with the €5 Billion in cutbacks in essential public services  which Sean Barrett appears to approve.

With both the right and the left lining up against its Nama proposals, the Government is in serious trouble.

The key public issue here seems to me to be how to retain or recreate a functioning banking system for personal and business banking whilst allowing bankrupt banks to go bankrupt - and thus wiping out their shareholders/bondholders.  The Irish taxpayer does not owe failed bankers/investors a duty to make good their losses, but s/he does require an ongoing functioning banking system and means of raising debt finance to fund the national debt.

Guaranteeing depositors is perhaps understandable to enable ongoing banking activities to continue.  Guaranteeing bondholders hard to justify seeing their returns reflected the risks inherent in the investment.  But why on earth guarantee shareholders of businesses gone bust?  Even shareholders/investors don't expect that - and can't believe their good fortune and finding a Government which seeks to appease them at all costs...

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Sep 3rd, 2009 at 05:56:07 AM EST
Lenihan cracking under pressure of Nama - FG - The Irish Times - Fri, Sep 04, 2009

Fine Gael today claimed the Government was starting to crack under pressure on the issue of creating the National Assets Management Agency (Nama).

Party deputy leader Richard Bruton said an "uncertain" Minister for Finance Brian Lenihan was seeing his plan crumbling after he showed some signs of "finally accepting one of Fine Gael's primary criticisms of Nama, namely the unfair burden of risk being shouldered by the taxpayer".

"The Government is beginning to crack on Nama. By conceding to the idea of explicit risk-sharing between bank investors and taxpayers in the Nama legislation, I hope Minister Lenihan is finally yielding to pressure from Fine Gael, independent economic commentators and the ECB to ditch the crazy idea of deliberately over-paying banks up-front for their developer loans, which flies totally in the face of risk sharing," the Fine Gael finance spokesman said in a statement.

Mr Bruton said the best available solution to the banking crisis was setting up a "credible mechanism" to get credit flowing immediately to business. "The new Central Bank Governor, Professor Patrick Honohan, and Colm McCarthy have both expressed scepticism that Nama will achieve this".

He said there was a need to abandon the "discredited concept" of long term economic value, and to protect the public purse by ensuring private investors take the "lion's share" of the risk and responsibility for working out the toxic assets.

"A growing chorus of mainstream experts now support Fine Gael's longstanding contention that certain classes of bond investors (owners of subordinated bonds) should be exposed to toxic loan losses before the taxpayer," Mr Bruton said.

He said although there would be no painless solution to the economic crisis, Fine Gael's model for a "good bank" could save the public from billions in losses compared with the Nama proposal.

"The Irish Government now needs to take courage and ditch the Nama approach. It must stand up for the Irish people, and drop this bogus notion that imposing pain on bank investors risks a flight of capital. The opposite is the case. Nobody wants to invest in a country whose Government so clearly fails to defend the national interest," Mr Bruton said.

Mr Lenihan yesterday indicated an element of "risk sharing" between the banks and the taxpayer will be introduced to the scheme for the proposed Nama.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Sep 4th, 2009 at 11:27:29 AM EST
Just 26% of voters show support for setting up Nama - The Irish Times - Sat, Sep 05, 2009

THE PUBLIC has divided views about the National Asset Management Agency (Nama) plan, with more people against the project than for it, although a substantial number of voters have no opinion, according to the latest Irish Times /TNS mrbi poll.

Asked if they supported the Government's Nama proposal as a way of removing bad loans from the banking system, 26 per cent of voters said they were for it, 40 per cent were against and 34 per cent had no opinion. When asked if they favoured nationalising the banks, 36 per cent said they were for, 38 per cent were against and 25 per cent had no opinion.

The latest poll was taken on Monday and Tuesday of this week among a representative sample of 1,000 voters in face-to-face interviews at 100 sampling points in all 43 constituencies. The margin of error is plus or minus 3 per cent.

A striking feature of the poll is that while Fianna Fáil supporters are the most strongly supportive of Nama, Green Party, supporters are the most strongly against.

Among Fianna Fáil voters, 46 per cent favour Nama, while 26 per cent are against. Among the Greens, 50 per cent are against the plan while only 21 per cent are for it.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Sep 5th, 2009 at 05:33:11 AM EST
Ka-boom!  I wish more socialists spoke like Barrett, instead of twisting and backing up over and over.  Of course, it's not that simple and there are other public consequences, but overall, demanding responsibilities at the source, would do us all a world of social good.

Our knowledge has surpassed our wisdom. -Charu Saxena.
by metavision on Mon Sep 7th, 2009 at 01:15:27 PM EST
Absolutely.  Even the nationalisation proposals involve socialising private losses.  His argument - that market forces should be allowed takes their course - at least avoids that.  The issue then becomes how can we rescue a functioning banking system from the ruins of bankrupt banks - something the Examinership process is supposed to be all about.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 7th, 2009 at 01:21:50 PM EST
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