March 26, 2008

Bank shares collapse is a blessing in disguise

Posted in Banks · 29 comments ·

This week, as financial markets recover their balance somewhat, millions of investors are trying to make sense of the past few weeks. Why did bank shares collapse so much? Can any rebound be sustained and what might be around the next corner?

Before we try to answer these questions, it is important to appreciate that we are probably not out of the woods yet. The volatility in markets implies that one piece of bad news can send shares tumbling. On the other hand, a ray of hope is seized upon as a sign that good times are ahead.

Traders are caught in the constant crossfire, reeling from fear to elation. If we block our ears to this din, it is not hard to see that we are now in a new phase and this might last much longer than many expect.

This phase could be described as the great unwinding. All over the world, leveraged bets that were placed in the past five or six years are being unwound and credit is getting not only tighter but in many cases has disappeared altogether.

Many people have been terrified by the suddenness and the magnitude of the downturn and are seeking a plausible explanation of the crisis that doesn’t involve things we’ve never heard of like CDOs, ABSs, monoline insurers and structured products.

One interesting way of looking at the behaviour of financial markets is through the medium of geology. The Earth’s rigid outer shell, the lithosphere, is broken up into an extraordinary mosaic of oceanic and continental plates.

The financial equivalents of the geological mosaics are the many markets which reflect global economic trends such as the stock markets, the commodity markets, housing markets and foreign exchange markets.

In geology, just underneath the lithosphere, there is another layer — a more fluid, plasticky surface, called the asthenosphere. This is the uppermost layer of the Earth’s boiling core, which bubbles away below. Trends in financial markets and global economics, such as bank lending, house prices and immigration, can be compared to this pressure bubbling away under the surface.

Ultimately, when the pressure in the bowels of the Earth gets too intense, the core bubbles and occasionally, where the lithosphere is thin or cracked, it explodes into violent volcanoes. In financial markets, these violent volcanoes can be seen in banking crises, house price booms and busts, large falls in exchange rates and gyrating stock prices.

Normal day-to-day market fluctuations are like the daily grinding of the Earth’s continental plates. So for example, along the 1,200km San Andreas Fault, the Pacific Plate has been grinding horizontally past the North American Plate for 10 million years at an average rate of about 5cm per year (about the same speed as your fingernails grow).

There are about 10 other main fault lines across the globe, so earthquakes both on land and under the sea are relatively easy to locate, but predicting precisely when they will happen is almost impossible.

The crucial thing is that although we can assess the pressure points, we don’t know for sure exactly when and with what intensity the financial markets will erupt.

In times like this, we are living on a financial San Andreas Fault and everyone is worried that the next tremor will be “the big one”.

This is why, despite the Fed’s extraordinary action last week, things remain uncertain. Every rally is followed by a trough and the financial markets lack direction.

Once we accept this, we can begin to try to answer some fundamental questions. Given the centrality of our banking system to our economy, have our banks been permanently weakened by the past few weeks’ convulsions?

Optimists, citing yesterday’s rally, are claiming that there is a great buying opportunity out there and that Irish banks will recover strongly, touching and surpassing the previous heights.

This view is hard to substantiate because the Irish banks are not really banks per se but, for the purpose of this discussion, they are simply large leveraged bets on the inflated property market.

Last September, I was criticised for describing in ‘The Generation Game’ certain Irish banks as nothing but “leveraged hedge funds, betting on property”.

I stick to this contention and believe that the Irish property market — far from being close to the bottom — has never looked weaker.

The reason for this outlook is simple. As the banks pull up the credit drawbridge to try to (a) convince shareholders that they are being prudent, (b) repair their balance sheets, they begin to see that lending to a falling property market is the quickest way of losing money.

House prices in Ireland will continue to fall this year and next and possibly longer. Remember, banks are not heroes.

They are not in the business of bargain hunting. They don’t sniff around the bottom of a market, hoping to catch a turning point. They are now in the preservation, rather than expansion mode.

The negative impact on the housing market of this credit contraction would be bad enough, but it is made worse by the fact that there are so many unsold houses in Ireland. This enormous oversupply of property will take years to unwind.

However, this is good long-term news for all of us. Ireland needs to wean itself off the housing obsession.

Unfortunately for us, the credit crisis hasn’t so much served to wean us off as suddenly rip the teat away, leaving the soft, pampered, milk-fed economy in shock. This shock will be difficult to take in the short-term but will only strengthen us medium-term.

In the past few years, the housing lobby has hijacked the debate in Ireland, forcing people to think that the economy and the housing market were one and the same thing. They are not.

For the rest of the economy to recover, the over-bearing presence of the housing market has to recede.

This will liberate capital for more productive investments. In a world of trade, no country ever got rich through speculation on a fixed asset like land.

I know it doesn’t seem like that now, but the collapse in Irish bank shares — in some cases by as much as 70pc in a year — is a blessing in disguise.

  1. George

    David, as an talented economist you should know that countris like Ireland have absolutely no chance of being a strong economy. The only reason Irland became what it is, is the fact the EU is able to create false economies. False booms.
    There is a reason why Ireland was always poor… simply because of its location, weather, and poor in minerals…the only advantage is the English language…
    every economist and businessman on earth knows this…look at Dubai where the pool water has to be cooled down because it gets too warm to swim in…the sand became gold with oil money…but Ireland has no oil…all naturaly healthy grown economies reflect in the infrastructure of that country…after 15 years of fake boom, it still takes an adventure to get from Galway to Dublin..not to mention the trains…
    the reality is there will not be any good times any more because there are no reasons for that, this is the very best that countries like Ireland can do…this has nothing to do with the Irish, English or Americans..this is simple law of economics…well there is an exception like Japan, but Ireland will never be Japan and even Japan learnt their lesson in the eighties…
    I myself am trying to go to Australia now, and I read so are a lot of Irish people trying to do..but they all have a house to sell and I don’t…four years ago when I came here I was told that I was stupid not to build a house (which I could have done as I am an Architect)…back then I did research on how the Irish economy came to be so “powerful”…where other countries stupied not to follow the Irish pattern…
    the truth is Celtic Tiger was not real…it was like this tiger I got to pet in a zoo in Thailand. He was sleeping so peacefuly on the grass and the man sitting next to the tiger says..go on you can pet him, he won’t do you any harm… You can never do that with a tiger in the jungle, he will kill you befor you even think of peting him…
    guess what,the tigers in that zoo were druged so that tourist could enjoy an animal which was never created to be peted by humans……………………………….

  2. shtove

    Irish banks can run to the ECB – hedge funds can’t, unless Ben Bernanke’s new concept of central banking gains ground. There were “high fives” in the credit industry after his Bear Stearns operation and the extension of the discount window – was it Omaha Beach, or more of the same old Dunkirk?

    The collapse in Irish bank shares is a blessing. No disguise to it – just a plain, simple blessing.

  3. John Q. Public

    Don’t feel too sorry for the banks as their share prices fall. They will be the real winners over the next 25 years or so. Imagine the profit on each house they make over that period due to the interest they charge.
    A lot of people actually feel secure knowing that their house has increased in value by say 20% and this is a false feeling of wealth gain. We have to cop on because even if the average mortgage holder could sell, he has to pay capital gains tax (after a certain period) then there is stamp duty on the next shoebox he buys so what does it matter? The truth is a house is not an investment- you lose on the deal(unless you are an investor, bought yonks ago or something like that) and the banks win bigtime.

  4. DubinSF

    George you are on to something but you are mistaken to say that the Celtic tiger is not real. You see the Celtic Tiger is actually an Irish Fairy, and like all Fairys they only exist for those who believe. These days the little Irish Celtic Tiger fairy is very unhappy and in fact the last time I saw her she kept wincing with little pains. When I asked what was the matter she said that when ever a little boy or girl or anyone else stops believing in her, it sends a little pain through her heart. It is up to us, the Guardians of the Celtic Tiger Fairy to make sure that people still believe, since if too many people stop believing in her at once, the cumulative pain could do her in altogether. In that case the Guardians of the Celtic Tiger Fairy would also be out of a job. In fact we would be away with the Fairies.

  5. TheVoiceOfReason

    I think you’re both away with the fairies. George, your view of natural resources is stuck in the 19th century. How come Singapore and Hong Kong are succesful economies? Smart governments running their countries like a business can make the difference. Take a look at Tanzania, a country with virtually every natural resource known to man, yet a basket case economy.

  6. VincentH

    While the banks play all sides of the street and use methods which can only be described as twinky to prop the share price, it was always a matter of time before a reckoning. Transactions between branches of the same bank are counted as bottom line and then reported to head office by both, where head office then trade on both reports. One ball, becomes two. While all banks know this happens, and that specie transfer is no longer done with horse and carriage. When a question like we now have occurs it is no wonder that they get a little leery of each other.
    Or the inter-bank bounce and many other little methods which harp to a time before fiber-optic light speed trades.

  7. AndrewGMooney

    Geology as analogy:

    When a volcano erupts under the sea, it can send a devastating tsunami which wreaks untold and unexpected destruction…….

    Does a rising tide [of debt] lift all boats? Or does it smash them to smithereens when it finally reaches landfall?

    What happens when the 3 month liquidity life-line from The Fed times out? Who’ll repurchase the worthless debt then? The taxpayer presumably. Having foisted ‘credit welfare’ onto sub-prime, American Capital will have to be bailed out again so another bubble can be inflated. Or maybe this is ‘the big one’?

    Very interesting analysis of Australia for any Irish/Brit thinking there’s an ‘escape route’!

    ‘Economics’ is a fascinating topic to study. The more you delve: the less sense it makes. I think I’ll return to quantum physics or something less bizarre.

  8. George

    VoiceOfReason, I agree with you about smart governments which obviously is not the case here in Ireland…but while you mentioned Singapore and Hong Kong you again forgot the strategic location of those countries as I mentioned before…….what is causing the boom in west of Australia?? their natural resources…
    if Irish government didn’t tell fairitails to their people then the irish would have planty of money to invest in real business and not in rubish built houses for a 40 years morgage…they wouldn’t have to drive their landrover on third world roads..bring their kids to school containers…share a room with 6 others in the hospital…spend 1hour in traffic to get from one village to the next although they are within 10km distance ….and I could see this country doing well for another 15 years, if things went smooth like in Singapore…and you know what makes me sad, is the fact that although the collapse has started, nobody has the courage to tell the truth (although David has being doing it for years and nobody listened to him). I say it again:
    Ireland is the man falling from the 50th storey of a building, and people at the bottom where wandering why he is not screaming…you know why??…he is thinking: I have at least 30 storeys more to fall….well have a nice fall then

  9. Ed

    David, It’s amazing that a large number of people are still hoping beyond hope that there will be a resurgence in the property market and that the party will continue ad infinitum. The party is well and truly over, but the contamination from the casino economy will take some time to cleanse from peoples minds.
    The next big one is just around the corner and so why bother with real enterprise when so and so made more from the sale of his house than he ever made from a lifetime of work. It’s going to be difficult to come down from that high. Even the government with their deferred pay rise were riding the imaginary tiger, and have all the appearance of now wanting to jump ship – the real world is just too difficult. It’ll probably take a generation to wash the contamination out of the system, but by then we could be on the floor. I wouldn’t hold out much hope for rescue from our young graduates, as they are experts at selling themselves, but short on application – we’ve well and truly bought in to an illusionary world.

  10. My Lost Generation

    Everyone knows the Irish economy has mostly been relying on the profits made by the property market. Other healthy profit makers in Ireland besides property developers, contractors, builders and so on … are publicans! Give the Irish people some houses to buy and some booze to drink! The current economic situation in Ireland resembles the start of a long hangover where people, sedated by alcohol, are wondering what is going on. 15 years of partying with no planning for the future. What a mess! Regarding the housing situation, my partner and I have been looking for a house to buy since August. We followed the prices of houses and realised that from one month to the next we were able to afford better places for the same money… until you just stop for a second and wonder how low is this going to get? We went to a lecture given by Fred Harisson in Trinity College. If people have never heard of him they definitely should check him out, he elaborated his theory of a boombust in Ireland on the price of Land; how Ireland actually got rich by speculating on Land (and EU money) and ‘laissez-faire’ from Irish politicians. It is all fake, it is a fake Tiger that generated fake prices and a false sense of security. Anyway, getting to my housing story, prices are going down, 100 percent mortgages are not available anymore. Many first time buyers cannot afford to gather between 20 and 40 thousands for a deposit so guess what? they rent! As a result rent is going up however this is the last trick, the last unfair bonanza that property owners or silly investors (who believe the Irish boom what going to last for 30 years!) will be able to profit on. We are reaching the end my only friend. If you are in your late twenties and bought in the past 6 years and can sell, sell! and get the hell out of here before it gets worse. Go to countries on the continent (France, Germany…) where governments take their people seriously; their health, their money, their well-being, their future. I’d say you have a year and a half from now to learn the language… Good luck.

  11. paddy cullen

    Once a month, the Permanent TSB/ ESRI publishes its House Price Index report. In my opinion it is highly likely that the average person is not going to have an idea of how the price of his house is performing against the indices that are available. At the early stages of a decline, investors/home-owners will probably assume this decline does not effect there particular home, and will in all likely hood probably pay little if any attention. As prices fall, the many who had intended to sell investment properties may be forced to withdraw from the market, preferring to rent them out in anticipation of a more buoyant market later. On the back of this decision by the seller a more competitive market for rented accommodation will then appear as a result of the increase in supply. This will exert downward pressure on an already faltering residential market. As the market for rented accommodation increases, there will be more competition and downward pressures on rents. This will mean that the gap between the interest on a mortgage and the rent from the property will widen. It will become far cheaper to rent property than to rent it out. This will further depress the values of residential property, adding to the self-feeding downward spiral in prices.

    As residential property continues its long slide, there will be many minor ripples; prices will certainly not fall in a straight line until we approach the end of the property crash. After a speculative bubble bursts, there are many upward moves that may trap the unwary. Initially people will see declining property values as a fleeting opportunity to buy at a slightly lower price. Estate agents will seize on this opportunity, selling the “get in now, last chance” concept i.e. get in now before the property prices start soaring again. Hope springs eternal at the early stages of a falling market, and each minor flip-up is considered to promise a reversal and the next massive rise. Each dip in property prices will be classified as a “healthy breathing spell” by most. Each rise will be hailed as the beginning of the next boom. Because of the enormous participation in the house-buying boom over the last two decades, thousands of Irish will be affected as they gradually become aware that property prices have been steadily falling. Eventually, I believe that many will begin to think that house prices may not start rising again for quite some time. Many will begin to doubt that property prices will “always go up” and will become deeply concerned. Lending institutions will then in turn place restrictions on lending. House builders may try to hold on to their stocks of unsold houses, but most will probably be forced to sell the properties at distressed prices to meet overdue construction loans. With professional property speculators adding to the supply of houses and lending institutions restricting demand, the fall in prices will increase with severity. This trend in my opinion my not be easily reversed. Minor recoveries will become brief and gains will be more modest. The declines will be sharper and longer. The sense of urgency to buy a home that exists to some extent at the moment among the youth of Ireland will I expect also virtually vanish from the residential property market. As the falls in prices become more pronounced, other necessities of life may take priority to owning a home. Rented accommodation may become more plentiful because of what might be happening in the buying market. Investors in property will have no choice to rent out their properties, since buyers may be less interested in buying given the current climate in the market. There will be a steady increase in the supply of houses, but sales will become scarce. Losses on property will be making the headlines and building and construction companies may stop trading. As we enter a stage of increased uncertainty within the Irish property market, we may also be confronted with the forced sale of houses. House buying has been the main player in the bubble of our recent prosperity, what happens when that buying stops?

  12. Ed

    It’s amazing that a large number of people are still hoping beyond hope that there will be a resurgence in the property market and that the party will continue ad infinitum. The party is well and truly over, but the contamination from the casino economy will take some time to cleanse from peoples minds.
    The next big one is just around the corner and so why bother with real enterprise when so and so made more from the sale of his house than he ever made from a lifetime of work. It’s going to be difficult to come down from that high. Even the government with their deferred pay rise were riding the imaginary tiger, and have all the appearance of now wanting to jump ship – the real world is just too difficult. It’ll probably take a generation to wash the contamination out of the system, but by then we could be on the floor. I wouldn’t hold out much hope for rescue from our young graduates, as they are experts at selling themselves, but short on application – we’ve well and truly bought in to an illusionary world.

  13. coldblow

    Someone here mentioned the other day that someone had mentioned Will Hutton. That was me, twice, and now it’s three as I finally finished his book (The World We’re In) last night. I wouldn’t like to spoil the ending for anyone but it’s pretty much what we are facing right now. But we all knew that anyway didn’t we, despite what they told us (present company excepted). Very persuasive, although I admit I’m easily persuaded.

    Now, where were we? Ah yes, the banks and the financial system. These are merely a utility and should accordingly be subject to proper regulation and if this strangles “creativity” and “innovation” then all the better for the rest of us, surely. Economics is tricky enough without their added mystifications. Our political and our commentariat/academic ruling classes have failed us here but not only in Ireland. Remember that word. Utility — like the Waterworks in Monopoly.

    By the way, it was reported on Channel 4 News yesterday that according to Sarkozy France had much to learn from Britain business-wise. Did I hear that right? I hope it was some Gallic sarcasm which got lost in translation. As for speaker at the Cahirciveen Easter Sunday parade I heard him loud and clear but I ask myself, how can he be so sure about what we were like 11,000 years ago? Although that does rather put matters into perspective.

    What we have had in recent decades (this is Hutton talking) is a brutsh “free-market” ideology based on turning a quick buck and with little time for the social dimension (you and me in other words). The received wisdom, or the bits we could actually understand, has turned out to be largely bullshit. Unfortunately in opposition to this we have equally two-dimensional anti-capitalist not-in-my-name posturing.

    I really sympathize with Lost Generation above. It has been an ugly exhibition of greed.

    While I’m still under Hutton’s enlightened, but muscular- in-a-liberal-kind-of-way, influence (he must surely be from Hampstead or Holland Park) I wish, chastened, to retract my unworthy suggestions of a couple of weeks ago that we should play the cute hoor and take on the Europeans at their own game (ie hidden protection of strategic industries). No European nation can go it alone (in the face of predatory markets) and so we need to agree on a set of sensible common values and ideals and to build the economics from there, honestly and openly (I think that’s just about vague enough). We need to aim at a rational system which serves the people rather than the present winner-takes-all super-casino. The US can jump on board whenever it returns to its senses. And the likes of China, some day,when it finally accepts democracy.

    But his benign influence might already be waning. Mention of Hampstead reminds me of two fellow students gushing over the Guardian’s Posy Simmonds comic strip, about how “true to my life” it was. From that moment on I knew there truly exists a gulf… In short, Ireland should be willing to play her part here, but not be too naive about it – and to remember her 11,000 year old history.

  14. aidan

    “There is a reason why Ireland was always poor… simply because of its location, weather, and poor in minerals…the only advantage is the English language…
    every economist and businessman on earth knows this”

    an excellent article david, i have to strongly disagree with george’s article above, many rich countries around the world have alot less natural resources than ireland, holland, britain,germany, in fact most of europe, ireland per capita is actually fairly rich in natural resources, water, agricricultural land, huge coastline and territorial waters, zimbabwe is rich in natural resources yet is now one of the poorest countries in the world, the most important factor in economic success is good government and management of all the resources at a country’s disposal not just natural, australia maybe booming now because of the commodities boom but what happens when they have mined all these non renewable resources, it now has a huge water problem which is being masked by the commodities boom, with farmers abandoning farms because unable to grow anything, this is one area where ireland has a huge advantage over australia, also you mention irelands isolation as a factor in our poverty, surely australias isolation is much more significant than irelands,

  15. Observer

    A reccession is needed to keep our heads on our shoulders, sadly this is a wake up call that should have put us down to earth years ago, instead of now when our own greed became more inflated.

    We just have to get back to normal and learn this lesson by being more responsible, people had been living lives they had no hope of sustaining.

    It’ll take time but we’ll be OK, this isn’t the famine and we made it out of that.

  16. Malcolm McClure

    I like geological analogies, but the shake-up of irish banks is just on the scale of that earthquake in England last month, compared with the San Francisco scale quake that is coming.
    Data on the five-fold growth of derivatives to $516 trillion in five years comes from the most recent survey by the Bank of International Settlements, the world’s clearinghouse for central banks in Basel, Switzerland.
    U.S. annual gross domestic product is about $15 trillion
    U.S. money supply is also about $15 trillion
    Current proposed U.S. federal budget is $3 trillion
    U.S. government’s maximum legal debt is $9 trillion
    U.S. mutual fund companies manage about $12 trillion
    World’s GDPs for all nations is approximately $50 trillion
    Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
    Total value of the WORLD”S real estate is estimated at about $75 trillion
    Total value of world’s stock and bond markets is more than $100 trillion
    BIS valuation of world’s derivatives back in 2002 was about $100 trillion
    BIS 2007 valuation of the world’s derivatives is now a whopping $516 trillion
    Deflating that balloon will be like the Chixulub meteorite impact, causing the extinction of the dinosaur banking system we all work 50% of our time to support. As an example of their disregard for basic economic ideas like the parity of reward with success, Barclays Bank Bob Diamond, head of investment banking, received pay and shares worth over 21 million pounds ($42 million) last year. Mr Diamond led Barclays’ attempt to buy Dutch bank ABN AMRO but was beaten to the prize by a consortium led by rival Royal Bank of Scotland.
    There’s something rotten in the state of banking. If they display a basic contempt for integrity they deserve everything that is coming to them.

  17. ‘Bank shares collapse is a blessing in disguise’, I hope so, as I just want to buy a a 3 bed house in south Dublin city, for under €300,000. I think it is only time and patience and I can achieve my goal. The past 12 years have been mad, that is €300,000 for a house should be the normal amount. Our kids won’t be able to afford a house if the prices don’t correct them selves, so if not now, in the future prices will fall as we have a market economy.

  18. barry

    As usual, a good analysis, but I wonder why you didn’t mention the new element, that the banks now know that almost anything they do is covered by a bail-out. In a ‘normal’ market economy mistakes of the magnitude of those made by banks in the last few years would led to their demise. In fact only one, Bear Sterns, has gone, in one sense, but in fact has been rescued by being bought out with a Fed guarantee.
    As a result I think that banks will continue to act irresponsibly with impunity.

    Bye, Barry

  19. Garry

    +1 barry, but the only thing that can stop this from happening is the threat of jail for directors/CEO’s

    Fair play to the US, Conrad Black and that Enron guy are behind bars…., I hope that bankers concern for their personal liberty will moderate their actions. …. Full steam ahead here though, we’d probably organise a tribunal and pay their costs!!

  20. Rob

    Not sure I entirely agree with the commentator about the lack of natural resources. I visited that cliffs of moher recently and the scenery along with the new centre were fantastic. I have always thought that with our lack of oil, minerals etc we should carefully develop our tourist resources.

    The house boom had to end, it was becoming a giant parasite sucking the life out of everything else. Ten years from now will be an interesting time to judge the developers, banks and their political servants who aided their grubby work. Yeats ‘Fumblers in a greasy till’ is looking very apt and contemporaneous.

  21. Ed

    Natural resources are not that important in the present age, ingenuity and application are far more valuable, as Japan proved a few decades ago. It’s a sham, however, that they fell for the property illusion – the Achilles heel of success – after such a spectacular rise. I was always fascinated by the way they expanded their economy using technology to enable grandparents of rice farmers to work at home. They developed miniature robots for operation in homes for the production small electronic assemblies for the consumer market. Millions of these assembles were required each year by the big companies and it was a win win solution for the country. Two thirds of Japan is mountainous and two thirds of the remaining one third. is reserved for agriculture, so the population has to live on one ninth of the country’s total area. They’re paranoid about having a secure supply of food , hence the restrictions on land usage. Having the Farmer’s grandparents supervising these robots added to the national output and also took pressure of the government when it came to subsidising rice production. Notice, hidden farmer subsidises there were linked to productivity , whereas here, they were in the form of non productive site/land sales for housing – totally different approach. How we use resources is far more important than having them in abundance.

  22. John Q. Public

    Ed, your last sentence is almost a text-book definition of economics, why doesen’t somebody tell the government! Don’t forget one of our factors of production ‘labour’ has been detrimental in this equation. Multiple pay rises, union troubles and strikes leading to even more pay rises has pushed up inflation and house prices. Labour IS the demand so with their increased purchasing power they went on a binge for years, the banks took full advantage of it and the rest as they say is history-oops and the present of course, and maybe a miserable future for some!

  23. Brian

    Whilst the short term for Irish property does not look good as per discussions above, has anybody thought of the effects that global warming is meant to have on humanity? With a scarcity of basic human requirements of food and water, countries geographically positioned like Ireland in 20 years from now will apparently be more desireable places to live from a primative survival perspective.In the long term our houses should be filled with an increased demand. Who fills them is another debate!

  24. bryan

    “Don’t forget one of our factors of production ‘labour’ has been detrimental in this equation. Multiple pay rises, union troubles and strikes leading to even more pay rises has pushed up inflation and house prices. ”

    That may have been true in the non-traded sector but for non-unionised workers in the private sector the competition with immigration, and outsourcing has not increased their wages commensurately with house prices. Far from it.
    Inflation in Ireland is not wage driven.
    House prices were driven by the herd mentality, and the cheaper credit available, albeit over 40 years. ( And Strikes?)

    In any case the point of any successful econmic system is to make people in the (broad) middle richer – thats the PAYE sector. The early part of the Tiger boom did that, the latter part made the property owners richer – without any entrepreneurial effort on their part.

  25. My Lost Generation

    Due to over inflated prices on property market created by pure speculation, no one can argue, and a low tax regime on multinational enterprises establishing themselves in Ireland, we eventually reached a stage where all salaries and cost of living are higher than european average, inflation. We are out of sync. Shares are going down, good. Price of property are going down, good. What is next? Easy. Salaries, not good. Either because it will not be possible for companies (providing they stay in Ireland…) to sustain the higher than average Irish salaries, (necessary if you want to survive in a very costly Ireland, or you escape as some immigrants have started doing…not good…) or because the Government will eventually need to put higher taxes on salaries, because guess what; you cannot have everything; the nice public health service financed by low taxation, the nice infrastructure again financed by low taxation… a bit of EU money…mmm I wonder if they will give us a bit more so we can carry on screwing up the rest of the European countries with unfair competition. Something got to give. And with the decadent government that contols that country you can see how they will come to the rescue in times of troubles… Scary!
    {I went to the march against the privatisation of hospitals. Don’t get sick if you are poor but then again only rich people never get sick. As a french stand up comedian used to say ‘you’re better off when you’re healthy and wealthy than sick and poor’}
    In a nutshell, the quicker we realise that we need a serious cut down on absolutely everything to bring us back in tune with the rest of Europe, the easier it will be to cope with the economic crisis that we are now facing. Irish people need to leave behind these 10 years of dellusion and grow up. In clear we need to CUT OUR LOSSES, if not the reality check will resemble on of these bad Ryanair landings on a 800 yards runway.
    Once again, good luck.

  26. Totally agree with your article David. A little bit (or a lot of pain, depending on how gullible one was) will hone character and make us great again. Its a necessary evil after a binge.
    George, how can you believe that Ireland lacks in natural mineral resources (it doesn’t, please do your homework more carefully) and how can you state that Ireland has no oil (and gas) resources? It does; and in fact sizeable ones at that. Some further research on the Irish chronology of licencing, finds and current exploration rights of multinationals might correct your opinion George as to which country, Ireland or Australia per square mile, may indeed have the most mineral wealth and natural resources. And point well made by another poster, water and its consequences for farm productivity, will see Irish agriculture producing more wealth again. If guided and supported correctly by the State. Lets produce more crops, less animal husbandry. Better use of land.

  27. John Q. Public

    If loan sharks don’t get paid back, they beat you up. If banks don’t get paid back, they take your house away from you. I would rather be beaten up than made homeless. What’s my point? Well, I always thought that mortgage lending in Ireland should be better regulated as US officials have proposed:

  28. Jonathan

    Hmmm, my house or my knee caps………tough question. In any case John Q. is on the ball here with regard to regulation.
    First off there is the question of whether the housing market should be regulated since unlike many other commodities there is no alternative (i.e. if the price of pasta rockets you can switch to spuds,…., not so with housing). Surely the boom bust cycle is not a good thing and the people who got in late, often the more productive members of society, are shafted.
    A second and more general question is should private debt be regulated better. I’ve made this point before but I’ll make it again. Banks should not be allowed to have enough rope to hang themselves and create these massive bubbles. It’s in everybody’s interest if they are regulated somehow. This in particularly the case in Ireland where monetary policy is out of our control and interest rate cannot be increased to kerb inflation. In order to prevent a bubble when interest rates are low and growth high, increasingly stringent conditions should be placed on borrowing. It is logical that as the economy grows so does the amount of money at peoples disposal. Rather than have debt become easier to get it should become harder, (i.e. the size of the deposit on the mortgage should grow since you should have more cash in your pocket and the ability to repay should be calculated against a realistic interest rate). Decoupling of collateral on loans used to buy the same asset class should also occur (i.e. if I buy a house in a buoyant market and sometime later have 100k in assets due to asset inflation the bank should not assume that I have the equivalent of 100k cash when looking for a loan to buy another house). I believe that these two measures can be effectively used to keep the dept/asset bubble under control in the absence on monetary policy.

    John Q. Public said,

    on March 31st, 2008 at 8:23 pm

    If loan sharks don’t get paid back, they beat you up. If banks don’t get paid back, they take your house away from you. I would rather be beaten up than made homeless. What’s my point? Well, I always thought that mortgage lending in Ireland should be better regulated as US officials have proposed:

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