November 23, 2008

Time to face up to reality

Posted in Banks · 146 comments ·

As the banks move to sort out their bad debts, it’s imperative that the state also tries to alleviate negative equity problem facing young workers.

Just in time, the cavalry have arrived. On Friday, it emerged that some US-based private equity funds are interested in buying some of our banking assets. Bank of Ireland issued a statement suggesting that it had been approached and the state breathed a sigh of relief.

The first part of Brian Lenihan’s plan seemed to be beginning to work. The Minister for Finance gambled that if he waited long enough, some buyer would emerge because bank share prices would fall to such a low level.

Realising that he would have to write a cheque at some stage, Lenihan, by playing awaiting game, could at least avoid making the same mistake as Gordon Brown, who obviously bought stakes in the British banks too early and has lost a fortune of taxpayers’ money as a result.

Lenihan wanted to ensure Irish bank shareholders – not the Irish state – were exposed to the dramatic falls in share prices of the past few weeks. His judgment here was spot on.

Now that share prices are in cent – or as close to it as makes no difference – the state can begin to move, knowing that the downside is minimal. In fact, it might be well advised to wait a little longer before committing cash, because the banks might get even cheaper.

If you want to understand why banks might get even cheaper, look at the accompanying chart. This tells the story of the US banking system in the past year. It shows that banks are invariably always wrong when it comes to bad loans, because they underestimate the difficulties in their loan books. As you can see, the difference between the banks’ forecasts and reality was enormous.

When the banks realised that something was wrong, they went out and raised equity to cover the losses. To see the disparity between hope and reality, take the example of 2007.

In the second quarter of 2007, US banks realised that there was a bad debt problem of $5 billion. So, in the third quarter, they went out and raised $11 billion to cover these losses, believing that by raising $11 billion they would more than cover themselves for even a doubling of the bad debts from second to third quarter. But bad debts not only doubled, they increased by a factor of ten to $48 billion. In the fourth quarter, bad debts increased again to a whopping $184billion.

This chart is telling you that, whatever the banks are saying now, you can be sure that the problem will be much, much worse. Whatever the PricewaterhouseCoopers report is saying, a prudent investor can be safe to assume that the bad debts in Ireland over the course of the recession will be much worse.

Therefore, there is a huge risk in putting money in now because we have no idea what the true picture will be in a year. If you doubt this, just look at what happened to one of the savviest investors in the world, David Bonderman, the chairman of Ryanair. Bonderman put $7 billion into Washington Mutual last March, because he thought that the bank’s share price had fallen too far and it must be a bargain. By September, Washington Mutual was bankrupt and Bonderman lost all of his $7 billion.

Let this be a cautionary lesson to people who are committing money today – the minister included. The state will have to put money into this recapitalisation to match the private cash.

However, the question remains: what are we buying? For example, if the bad debts are admitted now by the banks to be €7 billion, recent history suggests they are likely to be three times that at least, meaning that the bailout will have to have a warchest of over €20 billion to succeed.

To raise that type of money, Lenihan will need to return to the idea of ‘war bonds’ where he opens up the recapitalisation to the Irish people, so that we can all participate in the upside as the economy recovers. But the recovery won’t come on its own. While numbers like €20 billion are extraordinary, we are living in extraordinary times, which call for extraordinary measures.

One extraordinary measure that has to be considered by the minister as part of any restructuring of the banking system has to be some alleviation of the negative equity problem faced by hundreds of thousands of young people.

Many people would see such an initiative as heresy, as it rewards the bad behaviour of those silly enough to scramble into a housing loan when prices were at their most ludicrous. A large part of me agrees with this, but for future social cohesion we cannot tolerate thousands of young people (in many cases, young families) defaulting on their mortgages and being kicked out of their houses. Neither can we entertain the prospects of those people languishing in negative equity for a decade.

Make no mistake about it: Ireland is likely to see massive mortgage defaults in the years ahead. The reason is simple: unemployment is rising rapidly and will be in double-digit figures by the end of 2009 or early 2010. Many people who lose their jobs will not be able to pay and the banks face a choice, either take the houses back or renegotiate the mortgage.

Instead of waiting for that in an ad hoc way, why not now, as part of the restructuring of the banking system, reset the principal of these mortgages down to, let’s say 50 per cent, of their peak value? The banks’ shareholders would take on the lion’s share of this pain, with the state taking a proportion.

But such debt forgiveness doesn’t mean the lender is off the hook. They pay later. As people move houses over their lifetimes and tend to trade up, the capital gain when the mortgage holder sells on the starter home to the next generation goes to the state.

Therefore, the state is protected, the system is preserved, the banks take the hit and the mortgage holder keeps his house today at the price of significantly lower capital gain tomorrow. It is a bitter pill for the banks to swallow, but so be it. Better to have someone paying some interest on a smaller amount of principal than paying nothing on a big loan.

The other main reason negative equity has to be addressed is that people with negative equity will not spend no matter how well the banks are capitalised. Without spending, the recession gets worse, unemployment rises further, tax revenues fall further and the negative cycle perpetuates itself.

Equally, what reason is there to stay in Ireland if you lose your job and your home? This is a possible future for an entire generation. The property boom enriched the middle-aged and indebted the young in a ‘generational scam’, which is now becoming increasingly evident. Without some really imaginative thinking from our politicians, this generation will move away from Ireland and mass emigration and social unrest is a likely prospect.

Therefore, a move to alleviate negative equity for our young workers is not only advisable, it is imperative. The banking crisis and its subsequent restructuring, gives us the opportunity to sort this out. No matter who eventually owns the banks, this is going to be a cost. This idea might not be for the financial purists, but it is for the social realists, and facing up to reality is what recessions are all about.

[23/11/2008, 11:40am]: chart added

  1. Ger


    I hear what you are saying about the negative equity reduction scheme. Your heart is in the right place. I agree with you on many levels. However, this will turn into a free for all. Just look at Washington now with the bailouts. Dutch companies are buying US Banks to get in on the bailout bonanza. Detroit is trying to get in on the act. (GMAC is now a bank it seems!)

    If they do something like this it will need to be very carefully designed, crafted and audited by very honest non political brokers. This is a very scarce comodity in Ireland. Otherwize it will turn into the great negative equity bonanza and every specuvestor and developer with 20 unsold houses will find some legal loophole to get in on the act.

    You are right tho. Something needs to be done fro the poor sods who got conned by the cabal into buying into this mad pyramid scheme.



    Yes indeed it’s time to pay the piper with whatever you can.

    Let the home owner negotiate an interim differential rent until the borrower can bail himself out of renting what he owns.
    It will be a more punitive measure for the buyer, and it would pump real money into the system.
    It’s not easy to forget what you are owed, but if you have someone giving you disposable cash every week you could at least generate a cautious (if there is any such thing, ha) business into a big business in these bad but also opportune times; create a bit of a flow.

    Just an idea from an ordinary Joe.
    I’m sure there are lots of good ideas, and I imagine what makes them a non tarter is that people want an instant restart of “the big cash flow” again.
    Whatever! People have to realize, the big cash flow days are over. The ranks of the “middle class” will diminish greatly along with the big wage earner rapidly and continually well into the future.

  3. Alternatively David, in many cases people could trade down to decrease their liabilities and start afresh. This is a viable option for very many people, except those in the lowest rung of housing, who bought at the peak of the boom. But of course people don’t want to cut their cloth to fit, and apologists like yourself are pandering to them. Your assertion that people with families will be ‘kicked out of their houses’ is sensationalist ; despite the ridiculous over-pricing of the recent boom, there is a large variety of housing categories available to trade up and down to.

    The stampede to qualify for your golden parachute would be a sight to behold.

    David McWilliams. Mr Moral Hazard.

    • Ruairi

      paddy – I am totally at a loss as to understand how any trading up or down can occur in a frozen market. It seems like a nice idea, but for me, it’s rather woolly. Nobody is buying! Everyone is selling, in the sense that they have stuff for sale, that is.

      If you could elaborate on this though, I’d appreciate it. I don’t see how it works.

      • PaddyThePig

        Hi Ruairi,

        I think the market is not as frozen as you say. There is still activity if you price to sell. People with properties for sale can sell in the morning, if they price their property to sell. The reason there is inertia is that many sellers are in denial, and do not want to accept a lower price. Basically, they don’t want to take a hit, and are living in hope that things will rebound. This inertia can only last as long as those sellers income can continue cover ownership costs, and as long as their financial masters can afford to play the waiting game with them. Buyers are waiting in the long grass, but they will pounce when the price is right.

        It’s all about price.

        I do accept though that transaction cost are a disincentive to a fully functioning market. But that’s an argument for another day.

        Le meas,

  4. Leo

    Where is the chart?

  5. diarmuid

    i can’t believe David you are still pushing this notion that the poor first time buyers should be bailed out. Did you ignore all the comments made by your readers last week? The idea that hard working taxpayers funds will be used to bail out the most reckless, foolhardy eejits ever born in this country at a time of health, infrastructure & education cuts is incredulous.

    At most, if anything is to be done, there could be a roll-up of interest for people who lose their jobs (similiar to what is proposed in the US), but the debt would have to be repaid in full when they return to work after the crisis passes.

  6. John

    Ireland 2030.

    “Daddy, I’m not sure if I can afford that 10x salary multiple for a shoebox in Tyrrelstown.”

    “Now Johnny, let me tell you a story from when I was young.
    I couldn’t pay my mortgage, but the government just wrote it off for me. They said it was a one-off but that’s just them talking.
    If the shoebox goes up in value you get a huge profit, if it drops in value just get the government to write off your mortgage. You’ll be fine.”

    David – GIVE ME A BREAK

  7. Banking buy outs or recapitalization or whatever phraseology one uses are inevitable. My concerns are about the WHO and the nuts and bolts of these deals. Regulation is one of the most important factors to prevent the Poker playing mentality getting a free fall foot in the door. Brown may have gambled too early but he was coming at least from the right place in my view. The Irish Privatisation agenda has screwed up big time. Government needs to be extremely careful in how they do business on behalf of us the taxpayers. Nationalising banks in part needs to happen but taxpayers need a voice (control) in how that happens and Government has a huge responsibility to ensure that controls are in place. This is not the time for banks to play full house when that cupboard is bare. Get real…. The outcomes may not be controllable but the methods of how we proceed need measured controls. Free reign still for the banks should simply not be an option here. Voting rights and more regulation for and by government need to be part of any deal on behalf of taxpayers.

  8. Furrylugs

    Whether or not all or any of the propositions in the article are palatable or not, at least it’s strategic thinking. I fully agree that we can’t allow another “brain drain” which has already started. The people who were duped this time should be shown some degree of mercy by those who were duped the last time. You cannot put an old head on young shoulders.
    Since money has lost all sense of proportion and reality insofar as we’re now talking in Trillions (what comes after a trillion?) and the banking fraternity were the custodians of that reality, we should lose the current banks. Let the market decide their fate.

    How does one set up a national state bank owned by the people for the people? How would that entity be funded?
    I revert to the comments I made previously about the credit unions. People trust them. They didn’t lose the plot (hopefully) and with a tweak or two would fulfil the simple banking role most people need. As an interim measure they could be capitalised to fill the breach while the market disembowels whats left of our private sector banking shambles.

    The general populace would carry on about their business while the “experts” sort out the trillions.
    And the vast majority of people could largely ignore the depressive gloom to get on with their lives.

    Or yet again, is that way too simple?

    • “The people who were duped this time should be shown some degree of mercy by those who were duped the last time. You cannot put an old head on young shoulders.
      Since money has lost all sense of proportion and reality insofar as we’re now talking in Trillions (what comes after a trillion?) and the banking fraternity were the custodians of that reality, we should lose the current banks. Let the market decide their fate.”

      Furrylugs – I fully agree with your sentiments. Its easy for all of us at the bottom of the financial lending pyramid to start infighting and bitching; as is easily becoming apparent in the day-to-day politics of prime-time America and Ireland. But just as we (usually, though there are some heartless types in every societal discussion) would not accuse an abused child of being to blame for their predicament, nor one of the Garda’s much-publicised victims, we should not lay the blame concretely at the feet of the victim, rather the aggressor who clearly knew the big picture and was EXPECTED to guard and protect those in their care.

      1. the state had a duty of care towards its taxpayers that should have been exercised with a long-term view, but wasn’t. The Financial regulator stress-tested down the line (you and me) but not up the line! How strange! How strange that if it wasn’t part of the regulator’s brief, that common sense dictates it should have been.
      2. the lenders had a duty of care to advise with regards to wealth protection and increase. This was not done. Due to the nature of agency conflicts in companies, they looked after shareholders (or did they?, It seems they didn’t even get that right over a 10 year period). No, the duty of care that should be implicit in professional conduct by advisors is blatantly absent.

      The idea of the war bond is something I tried to articulate back in mi-summer when I suggested (rather hamfistedly I admit, as I may have used the Sweepstakes as a construct!!) that something should be constructed around Cowen’s recognition of the power of the Irish diaspora and that it could be a sort of a bond for investing in real wealth, real projects for sustainability (dirty word among businessmen and fun-word among politicians, but put it before most nouns like building, loans and other such important aspects of our nomenclature, and its quite a reasonable foundation for making real wealth.

      Brian Lenihan, read the 33 strategies of War, or Think and grow Rich, or any book of such like that will awaken you ?sleeping giants? (I hope). The guarantee was an excellent move, but you need to move again. In a massive way. Very shortly. You gave the developers their party (they extracted hundreds of millions, latecomers will take a beating) but now you must give to the Irish people. See the opportunity in the crisis. Show leadership now. Do your shopping across the border, I’ll even drive you, but do your core job right Minister. ‘TAKE’ THE BANKS (the way they took the Irish punter by empowering them through tantalising minority property ownership schemes and work them on behalf of us to within an inch of their lives! But keep them alive! Yes, pensionholders are invested in banks but the market’s already told them what’s what. you can protect the other aspects of their wallet by this warbond / stealth hostile takeover. Do this and you save Fianna Fail, don’t do it and you’ll be remembered as the party that got infected by the little-deceased Party Disease.

  9. [...] the Irish gov bail out first time buyers? David McWilliams appears to be advocating it in his article today. I have to say that, even though I am one of those [...]

  10. Mugsy

    Like some of the other comments, especially ‘Paddy the Pig’, I think this article’s proposal is ridiculous. Do we reimburse people who make unwise investments in the stock market too? I wouldn’t mind having all of my investments turn to green again please. No, unfortunately I’ve had to suck it up and play the waiting game. Instead of re-valuation of mortgages, why not come up with a smarter solution which would be involve letting them walk away from their mortgages easier? This could work a number of ways, either a one-off amnesty for people to simply turn in their keys and return the property to the bank, or an easing of the foreclosure process so that people’s credit ratings and ability to purchase a more sensibly priced property is not crippled for years to come. I think this would be just as effective as rewriting mortgages and would also include the necessary lesson for people who bought beyond their means. It would also hopefully bring back some sensibility to the house prices.

    David, you ask why people will stay with no home and no job. You are assuming in that question that a home means a mortgaged property instead of a rented property. In other countries, particularly Germany & France, long tenancies are the norm, and tenants enjoy many more freedoms to make the property their own. Perhaps we should strengthen tenant rights in Ireland so people can feel more at home in a rented property and live the way they want. A home doesn’t have to mean the stress of a mortgage and the other ills owning a house brings.

    One final point semi-related to your articles of late. Why is it that the boards of the Irish banks are not removing their inept management teams? The relationship between management and its board (who are supposed to first and foremost address shareholders concerns) is usually that managers have free reign to build up their layer of managerial fat and autonomy to a point, but only when they are building the business and maintaining profit levels. When this ceases to happen, the boards job is to kick out management and replace it with a more capable team. The management teams of all of the Irish banks should have been replaced by now. What does it tell us that they haven’t? Either the managers are too powerful or the boards are too weak. Both are bad scenarios. The fact that they are defending their terrain with such gusto tells me that the managers are way too powerful. This has got to change.

    • Furrylugs

      “Why is it that the boards of the Irish banks are not removing their inept management teams?”

      As my wife just commented, the mafia are only trotting after them.

  11. There is a serious possibility that the youngest and brightest people in the country will not be sticking around and Ireland will be seeing an exodus of potential. One of the reasons for this is that the majority of smart people who came from university over the past 5 or 6 years, people with the ability to innovate, didn’t buy into the housing bubble knowing full well that the prices were in outer space. Now they find themselves in a country with little opportunity in front of them and nothing to keep them here.

    • Ger

      spot on! I am one of those people – in a lower-middle income level, permanent and pensionable position but certainly considering my future and my children’s – this country has been mismanaged by amateurs who have ham-strung the nation, we have basically sacrificed everything for a few greedy developers, bankers and other money men – Ireland is going to be broke for a very long time and i’m not sure i want to stick around for the ‘restructuring’ or ‘to do my patriotic duty’.

      I refused to I knew we were going through an absured economic cycle inflated all the more by a small group of people who all knew one another and stood to make enormous gains but instead of being summoned to court they get a bailout. I think this will rank as one of the greatest financial frauds ever perpetrated against a nation.

      The politicans and others didn’t give a dam about me with their inflated economy, talk of Celtic Tiger (BS) and ego’s since 1994.

      Even when they were being confronted with the unpalatable truth as Michael Martin was in UCC by a social worker who painted a very different picture to the one he (Martin) would have us believe his response was ‘frankly i don’t buy that’. A vacuous stock phrase, which he is ‘good’ at – in truth, well he can afford not to ‘buy it’ with his 250k annual salary but is this democracy? Is this leadership? Is this is a future Taoiseach? Give me a break!

      If I thought genuine change would occur I might stay but to be honest distant shores and an American girlfriend seem more appealing than the malarkey that goes on here.

  12. Lorcan

    David. You’re pretty determined with this one!

    You are putting forward two arguments in favour of the FTB bail-out. Firstly, you say ” people with negative equity will not spend no matter how well the banks are capitalised. Without spending, the recession gets worse, unemployment rises further, tax revenues fall further and the negative cycle perpetuates itself.”

    This seems by itself to be a good argument. But. You suggest that the bail-out be funded by ‘War-Bonds’ paid for the Irish people. So the demand increase provided by the relief given to FTBs will be matched by a demand reduction from the rest of the economy. If I’m buying bonds, I won’t be buying consumer goods or I might put off building that extension. It becomes a zero-sum game.

    Your second point, that “This idea might not be for the financial purists, but it is for the social realists, and facing up to reality is what recessions are all about.” is certainly emotive, but I think you might be over egging the cake a little.

    The largest spender in the Irish economy is the government (38% of GDP according to the OECD economic outlook). Bailing out the FTBs will not have a big effect on the economy, so how will it effect the ‘social cohesion’ of the country? The worry is that we will return to the emigration of the 70s and 80s, stripping Ireland of it’s 20-40 year olds. But this crisis is not like the 1980s. Where will they emigrate to? Remember, this is a global crisis. We might be going down the pan, but we’re watching the rest of the world going down with us (with the possible exception of Canada).

    So we may find ourselves in a position where we have a lot of disaffected AB1s ‘stuck’ here. Tying them into their current houses won’t help matters much.

    I think rather than giving people money to pay their bills, the government should be giving people jobs, and thereby the means to control their own destinies. Government as the ‘employer of last resort’ is not a new idea, it worked well for the Nazis in the 1930s, and could work again here.

    There is no avoiding the social consequences of a recession. They can only be alleviated through government action. Large scale unemplyment is more dangerous for society than low scale bankruptcy.

    • Furrylugs

      At the risk of sounding facetious, we could be heading for a 21st century Congested Districts Board down my way with the amount of people already out of work.

      • Lorcan

        Facetious? Never. See you in the workhouse!

        • Furrylugs

          Amoto quaeramus seria ludo, Salus populi suprema lex as I think DMcW is saying.
          I didn’t invent that quote. I did what Minister Linehan does and robbed it from another source.

        • Lorcan

          Yes, but what’s good for the people often isn’t good for the individual.

        • Furrylugs

          Normally yes but since the vast bulk of our individuals are going to take a pasting in one shape or form some start with collective help has to be a good thing. At least some sense of unity will give hope.

          Interesting question doing the rounds this morning. How are the governments going to exit their bank involvement down the line? Or do we think that far ahead?
          Could be another mess in the making.

          Is there any thought gone into defunct pension funds and the future demand from those who saved for the rainy day. Big resentment bubbling there too.

          We seem to be led by people capable of dealing with one issue at a time and then poorly at that.

          Could we link the reduced mortgage debt proposed by DMcW to an increase in contributions for a pension. Could existing mortgages be converted into pension investment vehicles?

          Just chucking ideas about, wish I was an economist but I’m glad to see David isn’t afraid to cause debate.

          Must have the roast while I still have the oven.

          Slan go foill.

  13. diarmuid

    Which would do more to prevent a brain drain – lowering taxes for start-up business, providing R&D grants, giving export assistance, lowering income taxes OR giving taxpayers money to the few who borrowed recklessly? I don’t know how you think the banks have the billions to spare for this, or that their shareholders would suffer it.

    Can you please refrain from calling it a whole generation of people in negative equity. I am a member of that generation and will happily continue renting for the next 2/3 years, as will plenty of others that I know. Many of those who bought in the last few years were financially illiterate estate agents, construction workers, bank clerks & services workers whose jobs are gone for good. They will not be the people capable of lifting us out of the recession. Do you think they would have been prepared to fund a dig-out for people struggling to buy a first home if prices had continued to rise?

    What you are proposing is essentially a social welfare cheque of €100,000 / €200,000 for the select few who borrowed us into our problems while others pick up the tab …..and you worry about social unrest?

  14. Mugsy

    Furrylugs – quadrillion comes after a trillion I believe. I’m sure it won’t be long before debt in the States reaches quadrillions.

  15. b

    I think that this debate is at least five if not ten years too late. We are tilting at windmills here and we are only looking at the consequences and not the causes of the current difficult situation.

    We had and still have a housing mania that was fuelled by government bodging and a credit market that had the safety catch off. I worry when the bank wants to give me money not when they don’t.

    It still amazes me that we have the same thicks that overheated the housing market still in charge and the banks and developers still calling the shots.

    It further amazes me that we let Bertie negotiate with the banks when it is clear that he was the key architect of our downfall. The fundamentals are sound my hole!

    This is going to be unbelievably rough and affect the country in a profound way. Our leaders should be done for treason.

  16. hillside chieftan

    I’ve enjoyed reading David’s articles and the comments here now for a while,this is the first time I’ve felt the need to comment myself though.
    This idea of debt forgiveness is nonsense in my opinion,you make your bed and ly in it.Every chancer in the country would be looking to get in on it,depending on who you know and what strings could be pulled.If people were stupid enough to sign up to mortgages they couldn’t afford then they have to live with the consequences of their own actions,I couldn’t see the prople of Ireland standing for any such sheme.I certainly wouldn’t.

    • blueangel

      There is the principle of caveat emptor involved – yes it would be galling to compromise on this by forgiving the debt of the greedy and/or the foolish.
      But there may be/should be other principles also involved too, depending on whether like Margaret Thatcher you think “there is no such thing as society” or not.

      When families lose their homes marriages break down, children’s schooling is interrupted, large costs arise and there is much distraction from the business of making a living. None of this is good for society, unless like thatcher you believe such discussion is sterile.

      Looking at other principles which may arise – neighbourliness, decency, mercy etc may be relevant to some. Consideration of increases in policing, health and dole costs for tax payers in the event of mass repossessions may also be relevant.

      It seems to me that we will all pay in the end for the ignorance and immorality of a goverment who deceived ‘society’, and for the unprincipled way that our civil service allowed itself to be bullied into implementing growth policies based on bullshit. For anyone who doubts this – the lack of a sustainable basis for wealth generation after 20 years of FDI is the proof. My starting assumption is that Ireland’s entire government, political opposition, and civil service shares guilt by association and has no objective credibility.

      My concern is – in a society where the public sector cannot be trusted to place the good of society above its own interests – where can principled and knowledgeable leadership be found, capable of threading its way unscathed through the minefield of the Irish democratic electoral process after the present government falls next year? In the vacuum of failure which we can expect to see unfold in the next few years here, as the irrelevance or inefficiency of state economic policy comes unders scrutiny (SFI, EI, FAS, policing, health provision, transport and utility networks etc) there is the risk of further social breakdown, growing civil disobedience and return of a black economy.

      So do we find a way to keep our sillier neighbours in their homes in return for pocketing any equity growth that arises in coming years? Good question. All I know is that the implications of the question go way beyond the principle of moral hazard.

      • Colin



        Allow me play my violin for you!

        You say
        “When families lose their homes marriages break down” – there’s been plenty of marriage breakdown going on before the credit crunch – where parents have gone separate ways in different houses (another contributing factor to the bubble). Such unhappy families should sell their house now to the highest bidder – share the proceeds and go their seperate ways if they can’t rent together. Its not my fault if the children don’t have parents who can’t last the pace. didn’t they take vows anyway – for better and for worse?

        “children’s schooling is interrupted, large costs arise and there is much distraction from the business of making a living.” – are you trying to blackmail people who chose not to buy? i grew up in the 80s when times were tough, we didn’t have fizzy drinks, sweets, trips to cinema etc…. very regularly. today’s kids wouldn’t know tough times if it hit them in the face!

        “None of this is good for society, unless like thatcher you believe such discussion is sterile.” Neither was buying overpriced housing, employing polish cleaners cos the wife doesn’t like housework, using the car to go everywhere, keeping up with the joneses, living beyond your means and being brash about it.

  17. Robin

    Before the bubble burst , the prevailing mentality was one of “Me first, I’m alright Jack”. I see no indication that that mentality has changed now, Debt forgiveness in reality would amount to people taking advantage of the situation to improve their own lot at the expense of others.

    Indeed, it is strange that David is championing this course of action, since this is the very essense of “privatising profits and socialising losses” which he warned should not be tolerated only weeks ago.

    For the long-time financial and moral health of the country, it is important that difficult and painful lessons in financial responsibility are well and truly learnt at this point.

  18. John ALLEN

    David assumes the Government will be in a position to decide the best sociable solution to our national problem…..I have my doubts …..if they ever will be able … experience with high class financiers is that they seek their full pound of flesh after paying their dig out commision to a derailed politician and ‘ secure it ‘ with cheap money from a dubious source conditional that the financiers make a profit before they actually pay anything and the loss of face value is left ( which will be far less than the profit made by the financiers ) to be paid for by the tax payers ….thus the profits made by the financiers is greater than the loss made by the taxpayers …….nevertheless that loss is Significant … why cannot the mandarins alone organise the Profits ….and Stop informing their cohorts how to fleece the nation…….it is the mandarins and bankers that are up for treason…….the dogs know that

  19. Malcolm McClure

    David headlines: “Its time to face up to reality” Okay, much of the discussion so far seems a bit panic-stricken, so perhaps a few facts will draw it back to equilibrium:
    The average house price, new and second-hand, in Ireland in September 2008 was about €270,000. According to the 2006 census there were about 1,500,000 houses in the entire country. So the total value of housing in the state is about €400 billions. Less than €50 billions of this is mortgaged (somebody out there might have a better total). So even if 10% of mortgages default the total exposure is only about €5 billion. So it is unlikely that we need a war-chest of €20 billion to succeed. That would imply that bad debts other than mortgages are enormous but the taxpayer shouldn’t be expected to carry that can.
    I earlier suggested that the government agree with the banks that mortgage-holders who lose their jobs be allowed a repayment moratorium until they start earning again. That still seems the cheapest solution to the immediate problem. My other suggestion was to loss-proof bank share purchases by Irish tax-payers.
    This would allow a once-off loss-on-sale recovery from future tax payments with appropriate safeguards against fraud. This would help push the price of bank shares upwards to a more comfortable level.

  20. Fergal

    I made comments on this last week too. Almost everyone here agrees that baling out the FTB is a bad idea. Elements of moral hazard, effectively punishing those who were too smart to buy into the hype or too poor to able to reach the bottom rung of the ladder as well as the very questionable rate of return for society on an investment in the reckless and stupid all add up to solid reasons not to bale them out.

    The argument that these people will contribute to the economy is weak. If they emigrate, well, they weren’t the most financially astute. They invested in an asset that was clear to me since 2002 (when I chose not buy – and ultimately emigrated in 2004) was massively overvalued. These people let their hearts, or their greed rule their heads. If they stay, they’ll need to work to pay the bills. If they lose their jobs, they may lose their houses – tragedy for them and their families, but possibly opportunity for NBMs (Non Bubble Makers) to get their foot on the ladder. A tragedy for one may be opportunity for another. Harsh, but so is the financial crisis to which the FTBs contributed in a way that the NBMs did not.

    For those who argue that FTBs had no choice – Enough! You always have a choice. If you want to get married, if you want to have children, these ARE choices. If you choose to buy rather than rent, this IS a choice. If you were ‘hoodwinked’ into buying, then you made a choice. Many people did NOT buy. They made a choice. This choice was tough, they were looked down on, some wanted to marry but recognised that they couldn’t afford it in the insanity of the last few years. This was a tough choice. These NBMs will effectively be punished for being wise, for being prudent, for not buying into the hype. FTBs, you sow what you reap. NBMs, the time may be coming when housing is actually undervalued and you can harvest the fruits of your wisdom and patience. (If you can keep your job, which if you lose, will be partly due to those FTBs who overstretched themselves).

    If FTBs were to be rewarded for their poor financial prowess, how would it be policed? Should NBMs buy now? After all, then they’d be FTBs, buying into a falling market with only upside risk! It is a bad idea, David is presenting it with good intentions (I think).

    For the good of society, the resources of the nation should be steered towards job creation / maintenance, infrastructure – rail, broadband, R&D support. Steering the state’s resources towards the very people who have already proved that they cannot manage their own personal economies prudently is simple folly. FTBs will be supported by successful job maintenance and creation. State funds can be better used than they are – are we still paying for storage of voting machines that will never be used? Infrastructure contracts such as the Port Tunnel and Luas could have been agreed with far more benefit to the state. Projects running 100% over budget and delivered late and below specification is NOT value for money. The state has pissed away plenty of our money, Planning Tribunals with end, Blood Transfusion tribunals the list goes on. Supporting FTBs would be more money flushed down the toilet.

    The pace of emigration of immigrants will escalate, the oversupply of housing will become clearer, credit will continue to become tighter and the emotional factor of fear will drive house values down, possibly even below their true value (average house = 3.5 – 4 times average salary).

    NBMs, bide your time. You never know, some economist might support a grant to buy your own place – thereby supporting FTBs and getting you on the ladder! (What tosh – grants and supports for no-one, let the market bring house prices where it will, that 3 bed 750K house in Ranelagh is really worth something in the region of 250K – 300K.)

  21. Ger

    I am wondering if this plan is already in place. Maybe this is part of Cowen’s great plan to get the economy going as described in the irish media the past week.

    David successfully “predicted” the bank guarantee. Maybe this is a “prediction” too? Am I too cynical?


    • John J

      Would adding billions to the national debt really “get the economy going?” That debt has to be serviced, you know.
      Irish government debt already has the second highest spread in the eurozone, after Greece. We were once one of the lowest.
      If we launch hare-brained schemes like this, we’ll be up there with Russia and Hungary.

      If McW plants an idea like this in government heads, we should all remember who to blame for the chaos that follows.

    • Furrylugs

      As in get them all agitated, confused and seeking a popular solution? I’d say you’re not cynical. I’d say you’re on the money. DMcW isn’t part of it. He was one of those people who should have committed “Bertie Suicide” last Summer.
      He and Shane Ross and many other trained economists, particularly Prof Morgan Kelly, should have been given an audience back in 2004.
      Those 3 men had every chance to make absolute fortunes but they chose to advise caution and piss off the system.
      We really need to know our friends now.

  22. Geizer

    I am an IT graduate with in my mid 20′s working for a successful and innovative Irish owned R&D company. if I ever see such a scheme as David suggests implemented, I would pack my bags and head to OZ, or indeed any other country without such widespread social corruption.

    I wouldn’t be able to live with the resentment of the fact that hundreds of thousands of people older than me are rewarded for unwise investments.

    In the interests of fairness, the system should be allowed to equalise itself and the same set of rules should apply to everyone, because at the end of the day I will not pay taxes to help people stay in a bubble that I have been priced out of.

    The scheme is reminiscent of the driving licence amnesty of old, when we were left with a generation of incompetent drivers, but it is far more sickening. There’s no need to even consider the abuses such a scheme would be open to.

    • Geizer – I wouldn’t be able to live with the resentment of the fact that hundreds of thousands of people older than me are rewarded for unwise investments.

      Too late my friend. You’ve just seen 10 years of land and property owners being unduly rewarded for the true wealth producing value of underlying land. Ok the unwise investments were on the part of the buyers :-) At any rate, I believe we’ve been having a minor brain-drain for a few years now already. Anyone?

      • Colin

        i left 1 year ago and i’m a member of mensa.

        well, just kidding about the mensa bit. i’m a civil engineer and while in college we were told by our lecturers how lucky we were in that we may not need to emigrate like thousands of engineers have done before us due to all the infrastructure projects being planned .

        about half the class had to go abroad to find work

    • Geizer: That’s NOT what’s being proposed here. David never suggested a carte blanche write-down of all house related investments. I didn’t buy a house because I felt the prices were too high. I was damn lucky in that I found myself without a wife or a family to pressure me into setting up home. A very natural impulse if you think about it and not something that really needs to be punished.

      That’s the reality of a lot of these FTB’s you’re criticising so harsly that you’d rather leave the country because of your potential resentment. They weren’t engaged in wild investment. They were buying a house to live in that almost everybody in society told them was a sound investment for the future. You need to distinguish owner-occupiers from speculative buy-to-let investors. I agree that some of these were sharks.

      Personally, I’d feel little resentment if debts of these FTB’s are partially written off as they were shamelessly exploited by builders and mortgage lenders for years. Equally, the knock on economic effect of their labouring for many years to come under negative equity is severe. It will affect everybody living in this Ireland. It’ll also effect Australia as more and more Irish TRY to find work there.

  23. David Mc Williams

    Evening all, David here.

    I’m listening to your responses and it seems that almost unanimously any idea that alleviates the pain of our FTB generation is regarded as extremely silly. This is the position I have always advocated, and have taken a bit of flak by being unforgiving in applying economics, not politics to the analysis. But I’m beginning to change my mind.

    Up until very recently, I regarded any slump in prices as a cleansing of bad behaviour, leaving us better off on the far side. Now I am starting to think that as we are not in a recession, but something that may look like a deep, deep depression, the political upshot of the depression is social and political chaos. Being a natural evolutionary rather than revolutionary, this prospect scares me.

    As a result, I am prepared to entertain new ideas. In the 1970s inflation wiped out the debts of Ireland’s mortgages FTBers. As long as we are in EMU, this won’t happen. In contrast, we are now facing deflation and this means the incidence of debt is even higher. In fact it was the likelihood of a great deflation that prompted me to take such a hard-line stance of the property and banking madness since the start of the century.

    As you can see, I’m grappling with the new reality as it changes by the day. As Lenin once said, you get decades that pass and nothing happens and then you get weeks when things happen that change decades (or something like that!).

    All I can say is that events are moving so quickly, my mind is changing accordingly. All the best David

    • John

      Yes, we’re in uncharted waters here. We’re also at a crossroads.

      Are we continuing with capitalism? If we are, then we must accept its fundamental tenet: an individual has the freedom to take financial risk, and the responsibility to accept the profit or loss that result from taking that risk.

      I have spent the last few years working and saving money.
      I haven’t remortgaged my house so I can buy a flash car and have three foreign holidays each year.
      I haven’t maxed out my credit card to pay for designer labels, drunken nights out and posh restaurants.
      A lot of the people you suggest “helping” have just those things. Should their handout be reduced? Have you a calculation? I want numbers and formulas here please.

      Throwing out silly ideas is not just irresponsible. It’s dangerous.
      If anything like this ever comes to pass – if the prudent and responsible are ordered to bailout the reckless and foolish – I will be left with only two decisions.
      Emigrate, or remain in the country and take up arms.

    • Malcolm McClure

      David, in the above response you are finally getting close to the heart of the onion. I was thinking a couple of months ago that hyper inflation was the train headlight at the end of the tunnel. I was mistaken. As you say, it is deflation.”we are now facing deflation and this means the incidence of debt is even higher. In fact it was the likelihood of a great deflation that prompted me to take such a hard-line stance of the property and banking madness since the start of the century.”

      In the FT Economists Forum the other day
      Brendan Brown argued “The case for negative interest rates now”.
      It took a while to get my head round this concept but it deserves consideration. Maybe a bout of severe deflation for two or three years is a good thing as it will restore people’s faith in economic prudence.
      To paraphrase Brendan B : Central banks aim for 12% deflation in 3 years. Thus all bank deposits lose 4% value per year.To prevent people holding assets in cash, every €10 note would require a 40 cent stamp to be attached each year to remain legal tender.
      Because it is risk that expands the economy, this process would propel an avalanche of cash into shares and quickly generate the next boom with long-term benefits for everyone.
      Brendan B is an economist with Mitsubishi bank so he knows about Japan’s 10 year recession experience.
      You deonstrate your wisdom by being open to new ideas in these unprecedented circmstances. Keep up the good work.

      • Furrylugs

        Typically prudent and wise comment Malcolm.

      • Fergal

        Interesting idea, but it would need global co-operation, with every government agreeing to it simultaneously.

        Otherwise, I’d convert my EUR to USD, YEN, Rimimbi or whatever, wait a year and convert back. Or buy gold. Yes, there’s a currency risk, but a 12% depreciation guaranteed would guarantee that EUR liquidity would freeze solid…. At least that’s how I see it.

  24. Furrylugs

    To my mind it’s natural to vent ones feelings against the perceived perpetrators of this mess. This is a systemic global failure which our myopic, greedy bankers got sucked into. Similarly shareholders who demanded more and more profit. Our rulers codded themselves that they were responsible for the “wealth” and have only now become aware, in horror, of the fundamentals of a bubble in economic terms.

    I can’t blame young FTB’s for wanting to own their own house and better themselves. They were actively encouraged to by society.Neither can I blame someone for wanting a second house for the same reason. They are genuinely distinct from professional property speculators with inside knowledge about, for example, where the Government was going to build the next railway line.

    Young people have to be encouraged to aspire otherwise they become as apathetic as us old guys.

    Day to day domestic economic decisions are supposed to be taken under the protective umbrella of the financial watchdogs, which, when the market is self regulating, means the mortgage sellers.

    What has been done is simply criminal and whilst I see the need to alleviate domestic hardship, those responsible should not profit again but be brought to book.

    • Furrylugs

      Another Lenin Quote….

      If the writer of these lines has succeeded in providing some material for clarifying these problems, he may regard his labours as not having been fruitless.

      Lenin, The Development of Capitalism in Russia, The “The Mission of Capitalism” (1899)

      In the absense of mature debate out in the wild, so to speak, I’d have to stand with DMcW for promoting open and frank dialogue. What follows the failure to talk now and agree strategy, no matter how unpalatable, is unthinkable. Retribution will follow in its own democratic time.
      Put simply, if Ian Paisley and Martin McGuinness can go Christmas shopping to New York , I can swallow a bitter pill or two to get us out of this mess. But woe betide those causal perpetrators once we’re back on our feet.
      Linehan got one thing right. It is a time for patriotism and unity but against him and his ilk.

      Then hopefully we can, to paraphrase John above, avoid the Boat or the Bullet.

  25. James

    ” almost unanimously any idea that alleviates the pain of our FTB generation is regarded as extremely silly”

    Who’s that banging on the door Dougal?

    It’s Moral Hazard Ted

    Ah shure tell him to come in and we’ll give him a nice cup of tea. Mrs Doyle !!

  26. David wrote:

    “However, the question remains: what are we buying? For example, if the bad debts are admitted now by the banks to be €7 billion, recent history suggests they are likely to be three times that at least, meaning that the bailout will have to have a war chest of over €20 billion to succeed.”
    Sounds right.
    If so, what benefit a few billion from both the government and the private capital vultures circling the wagons at present.?
    Only serious money wil begin to address this debacle.
    I- like thousands of others- lost a lot of money on irish bank shares, but I heard it mentioned on the radio this morning that institutions such as the Church Of Ireland lost 40 million.!!
    I would love to see a full list of all those who are victims of this governments “Property Speculators Charter” .
    There ought to be some kind of Nuremburg style, “Economic Crimes Tribunal “set up in Ireland and Mr Ahern; Mr Cowan; and the full Cabinet of Fianna Fail Party leaders – plus the bank directors ,should be indicted and jailed.
    What we really need is a revolution.!

  27. AndrewGMooney

    Ok, so you ‘ring-fence’ the original mortgage debt. But won’t that only bring more egregious issues to the surface? What about the car loans? The credit cards? The ‘home equity loan’ that was drawn down to pay the creche fees – “because in 3 years we’ll both be earning so much more and ready to trade up to a much better place“? The store cards which I never told you about? That building plot in Croatia?

    All of which are probably secured against the property.

    Even if there’s any way of tweaking the tax system to allow an ‘imputed’ rental / mortgage allowance for differing situations (singleton, family with kids, etc, divorcee empty nest syndome, etc) : Is it possible to protect the credulous and the naïve, whilst avoiding rewarding the feckless, reckless and plain silly who thought they could pay 7 x income mortgages. And what if this is a Tokyo Bay situation, 15 years of stagnation? Why should today’s teenagers be mortgaged for the nonsensical mess their parents have made of things?

    The reality facing many people is they will lose not just current jobs, but an income / career / life-style expectation which is extremely unlikely to reappear. Ever.
    The ‘financialisation’ of the USA, UK, Switzerland and Eire, not to mention Iceland, is a phantom of the past. We just haven’t seen it play out yet. Eire may escape because of The Euro. Or maybe not. Black swans en masse.

    In a week where the CEO’s of the Destitute Detroit Big 3 all had to take their own ‘personal jets’ to deliver their poverty pimp script to Congress: It’s hard not to see the comedic effect of bailing out aspirant yuppies in Dublin condos whilst claiming there’s no cash for Laois kiddies to have decent classrooms, or for their grandparents to have the odd hip replacement.

    The future wealth of any country comes from the next generation of it’s workforce. Sad though it may be on an individual/family basis, it’s surely best to let this terrible scenario play out and ensure that any available money is put into education, infrastructure and health: Areas which all citizens benefit from regardless of their ‘housing tenure’.

    Compassion where possible, yes, but we’ve all been partying like’s it’s still 1999. It’s surely somewhat obscene to ask the kids to clear up the mess after us. Whilst pretending we’re the ‘grown-ups’?

    If Ireland’s willing and able to raise the cash for both investing in it’s future wealth-generating capacity and in rescuing the ‘lost generation’ of it’s Casino Capitalism Housing Ponzi Scheme, then fine. But if it has to be a choice, it’s surely an easy one to make?


    If it’s been a smart move for Lenihan to refuse to recapitalise the banks till now, then it surely makes sense to allow a complete implosion of house prices so the properties can then be mopped up by the State as ‘buyer of last resort’ for cents? To be rented back to the destitute populace? Or is that maybe a bit…radical?

  28. Stephen Kenny

    There has go to be a better solution than this.
    There are two issues here:
    First of all we’ve got a great mass of people who’re going to be less use to the economy than they might, if this plan doesn’t go through. They’re going to be weighed down with debt, not spending, etc etc.
    Secondly, we have the law of unintended consequences. What will they be for bailing out those in negative equity (what about the STB’ers?). There will be unintended consequences. There most assuredly will. If ever there was a time when Mr LookBehindYou, with impressive lungs, was to be seen standing on a high tower, bellowing ”You bunch of freaking I*D*I*O*T*S”, then this is it.
    Why am I so sure? Because otherwise it looks likes one of those signs to be seen above grim, back street, doors “Free money and sex”, and I can tell you, well, not I, obviously, but I’ve heard people say, that it’s not, altogether, absolutely, true.

    OK, so what would I do if I was a FTB, in negative equity, and suddenly I was only paying half the mortgage payment I was last month?
    After I’d stopped laughing (about a week), I’d rent my house out, downsize to a cheaper rental property, and live very cheaply, courtesy of the state. Thankyou all so very much. (e.g. Original mortgage payment: 2000 with rental value 1500. New mortgage payment 1000 with rental value 1500 – you get the idea).

    OK, so much for the individual. How about the country as a whole, what would the effect be? OK, let’s think this through:
    Everyone has Adam Smith looking over their shoulder, giving of his wisdom, so everyone attempts this.
    Well, we’ve created, overnight, a weird, sort of hybrid, two-tier system, and the market would try and close the gap:
    Rents: Rental prices below the average would rise, rental prices above the average would fall.
    Property prices: Basically, they’d follow the rents. Lower end prices wouldn’t fall so much, and higher end prices would sort of ‘crash into’ the lower end prices, and not fall so much.
    Result: Well, what would you expect to happen if you just poured billions into the property market? It’d stop falling so fast.

    Again, if you think about it, a house with a 50% mortgage would, completely artificially, pull down the prices of all the similar properties on the street. The owner could afford to sell at a significantly lower price, than someone with a full mortgage.

    So, 2 unintended consequences:
    1. Lower end rental prices go up, damaging the position of the (unwanted, and uncared for) pre-FTBers.
    2. Property prices in strongly FTB areas fall artificailly far, pushing those people above the 50% bailout cut off point, into even greater negative equity.

    The only “answer” I can see is to let people go bankrupt, and give them a council house to rent – in those rather unattractive shoebox estates that have popped up like as series of nasty rashes, all over the place.

    I can’t see any other solutions, I actually feel horrible saying this. I feel like that nasty workhouse manager in Oliver Twist (Harry Secombe in the movie), or using the logic of Scrooge in a Christmas Carol.

    You know what my real solution to this is? I’ll tell you:
    1. A one off wealth tax of 100% for all value over XX million (fill in XX as you see fit). This would exclude primary residence, stock market investments, and government bonds.
    2. The above applies to all Irish Nationals domiciled abroad. If they refuse, strip them of their nationality, and put out a warrant for their arrest for tax evasion at all points of entry.
    3. This is a principles based law, so if, in the view of the tax people, you were using some cunning legal wheeze to get round it, they could over rule it.
    Precedent (Yes, there is one). FDRs 1933 law regarding savings.
    4. Unintended consequences? Don’t get me started.

  29. Stephen Kenny

    On second thoughts, the wealth tax wouldn’t exclude Stock Market Investments or Government Bpnds.

    This tax would be a replacement for David’s War Bonds. Very little real wealth has been created, it’s just been moved around, ending up in the laps of a few rich people. It’s time to think of the country as a whole, and rather than charge the little guy for this nonsense, we should just accept that it’s all been a frightful cock-up, and get those whose laps the money landed in, to pay for it.

  30. Matt

    I invested a large part of my life savings in Bank of Ireland shares and have watched the share price fall from €18 to €1.
    As a shareholder can I take a legal case against each individual of the board of management for negligence?

  31. Pat

    Rather than throw good money after bad would it not make more sense to set up fully state owned banks from scratch (like ICC and ACC) with a mandate to lend to FTB’s and businesses in a sensible way. This would open up the credit to these important sectors of the economy. The national pension reserve fund can be used to invest in this and would receive a rate of return.

    If the government does decide to invest/ recapitalise the banks they should insist that non performing loans are identified and acted upon quickly. The fact that interest roll up’s are still probably appearing as income on the bank’s financial statements is compounding the future problem. If developers are made to reduce their prices to breakeven level the stock of houses/ apts will begin to shift and an increase in the number of transactions will get things moving again.

    The budget deficit needs to be urgently addressed and a cut in public sector pay is vital. The unions need to realise that they need to take the rough with the smooth and a 10% pay reduction across the sector for all staff on salaries over the average industrial wages should be implemented. The new pay deal should be frozen.

    The government should also remove the PRSI ceiling to reduce the deficit further.

    All green taxes such as the ridiculous parking fee (probably marginal revenue when you weigh up against the cost to adminsitrate) should be removed.

  32. Johnny Dunne

    David, agree it’s “time to face up to reality”. The problem is I don’t think our political leaders understand the reality , therefore they are signing us all up to trouble in the future with a weakended position of control over the sector.

    I think you may be giving Minister Lenihan too much credit for his judgement on waiting for a buyer to emerge if the price was low enough. The reality is as soon as the guarantee was announced there have been financial ‘sharks’ in Dublin city working on a plan to attract private equity investment to buy out an Irish banks or what looks like know a ‘gilt edged’ (government backed) buyout of more than one bank. Take the proposed merger of BOI and IL&P — what a deal — ‘sale of the century’ for ‘any’ private equity house to get a large slice of the equity for very little risk.

    The government are guaranteeing all the liabilities and now seem determined by ‘deal making’ up in Farmleigh to push through the sale of as much equity as possible to US investors — “Thanks you Mr Chris Flowers so much for investing in us”. This is not the IDA selling FDI and thanking them for the jobs, it’s giving away all the upside while retaining all the downside. Based on your chart, it’s obvious there will be more write-downs – €10 billion, €20 billion maybe €50 billion in Ireland. The government guarantee all the deposits and wholesale money lent to the banks.

    Putting it in perspective, there was no international property developers in Ireland over the past few years doing deals. Now the ‘market value’ has fallen out of the Irish banking system, stock market and confidence in the economy. International private equity houses — all the brand names — are queuing up to get a slice of the action. What do they know, we don’t ? They have probably never been offered ‘large chunks’ of equity in undervalued businesses with NO liability to the debt raised to fund the deal. The government are guaranteeing all the liabilities of the banks including subordinate loans which support bank capital and fund buyout deals traditionally.

    Minister Lenihan today sounded like he thinks the private equity investors would be doing us all a favour – “Banks need to convince private investors to invest in Ireland.” The 6 banks are now worth less than € 5 billion according to stock market valuations, in ‘X’ (say between 4 and 9) years assuming we still have a population of 4 million and a workforce of around 2 million there will be a very ‘valuable’ banking sector in Ireland. Assuming these banks (or merged equivalent) have Assets of €500 billion (as they are supposed to now) say earning a 1% margin would be profits of €5 billion, based on historic banking valuations of 12x earnings that would give a value of circa €60 billion to this banking / financial services sector.

    1st year business student’s are told not to match long term assets with short term liabilities, that’s exactly what the Irish banking sector had been doing until the government guaranteed the liabilities. Therefore made them long term and the ‘banks’ are worth a lot more with the blanket guarantee which is unprecendented for a reason! Governments are supposed to be ‘long term’ policy makers — they are about to ‘invite’ with open arms international private investors with local advisers (a long list of them are in Sunday’s papers) to ‘buy’ into equity of a group of 6 banks worth €5 billion now which will be worth 10+ times this in a relatively short period of time when the economy stabilises.

    Assume BOI over the coming days/weeks announce they are receiving ‘private equity’ investment to boost their capital base and fund the merger with say IL&P. Bother are valued at €1.5 billion together on the Irish stock market today. They could return at some time in the future to combined profits of say €2 billion (they would have to with a book of business with nearly every citizen in Ireland — reported 60% of the life assurance market and 50% of the mortgage market). This combined entity could be worth well over €20 million in the not to distant future. Again the only risk to the private equity house which could own say 40% of the equity for less than €1 billion.

    Here is a scenario – all the banks are recapitalised by ‘private equity’, then someone tells the Government they still have a problem (“what’s that Ted”) the ‘new owners ’ of the banks have decided not to lend to ‘risky’ Irish SME’s, residential mortgage holders but if the government want to they will have to take on ‘securitise’ all these loans into a separate entity, which they have already guaranteed the matching deposits / wholesale loans.

    Within 2 years, assets/loans could be written off, lending will be restricted to the ‘real economy’ (eg BOI have 70% residential and commercial loans), assets will be sold and ultimately the banks loans may have to be repaid ‘anyway’ by the Government. These guys are ‘masters’ at managing financial institutions balance sheets – JC Flowers, KKR, Blackstone, Carlyle etc. see a fantastic opportunity to pick up equity so cheap with such a willing ‘partner’ — a government running scared wanting to offload all the equity, power and control in the short term to sound like they are doing the right thing by the ‘electorate’ – not investing less than 1 years borrowings on current expenditure to ‘own’ the banking sector which could be sold on when the values rebound. Instead sell out at the bottom !

    This will be a ‘litmus test’ to see if we are being ‘done’ and the ‘wool’ is being pulled of Brian’s eyes by the ‘sharks’….

    If any of the 6 guaranteed banks get an offer of ‘equity investment’ from a private equity house therefore diluting current shareholders further who do not exercise their rights to re-invest. ALL Irish taxpayers must be offered the EXACT same deal from an equivalent ‘equity’ point of view. I’m not talking about the further subordinate debt which will be needed to fund the banks, this is guaranteed anyway by the government / tax payer / population.

    I for one would invest all I could if given the opportunity to participate in this no risk deal (again – because the taxpayer is underwriting all the bank’s liabilities during the period of change). Any other takers ?

    Here is the problem — where are the ‘top notch financial advisers’ in Dublin with experience of working on these deals. They are either working for one of the banks or engaged by private equity investors.

    Your suggestion about “war bonds” is along similar lines and should be done. Like the government announced it’s own sub prime business why not have a website to register interest in investing in Irish banks at ‘knockdown prices’ ?

    • Furrylugs

      Surely to God Johnny, Linehan isn’t doing a “Corrib Gas” with our banks. If he is, then we are truly corrupt. That would beggar belief. All on here comment as though we are a democracy where reason prevails. If I’m reading your comment right, we stand close to the ultimate sell out.

      Kieran Fitzgerald said in 1982, “Where’s your f**king pride”? Where are we going here?

    • Micheal

      “Here is a scenario – all the banks are recapitalised by ‘private equity’, then someone tells the Government they still have a problem (“what’s that Ted”) the ‘new owners ’ of the banks have decided not to lend to ‘risky’ Irish SME’s, residential mortgage holders but if the government want to they will have to take on ‘securitise’ all these loans into a separate entity, which they have already guaranteed the matching deposits / wholesale loans.”

      that’s it in a nutshell. And That’s What Will Happen (if PE companies, the most rapacious of all investor vehicles are let in the door). Specially with the gormless “negotiators” in current power. No doubt the Greens will extract an assurance that bicycles have to be made available to bank directors or whatever their contribution to government is these days.

      Lenihan and Co being masters of funneling money, not creating value, are simply waiting for themselves to be bailed out. I can see it now, the envelope being passed, and “Thanks, big fella” muttered. Photo opportunity, grinning handshakes, and all is forgiven, Brian(s).

      Anyway, don’t want to make a political rant of this, point is PE jocks don’t get rich by writing a whole lotta cheques. Remember the VHI versus private health insurance? VHI was saddled with all the clients BUPA & co deemed too risky (i.e. actually in need of medical care). Seems like if you want to carpetbag your way into Ireland all you need is to tell the Gov that they are being modern and pro-business. Make ‘em feel like they’re as good as the sharks themselves.

      Four words, Brian(s) : Barbarians At The Gate.

      PE companies do one thing and one thing only : they cream off ANYTHING of value, and don’t waste time innovating on the loss makers. They just trash them. They buy the debts thus lowering the outlay, then destroy everything associated with the debt, usually getting the debts partially forgiven, almost immediately realising a profit.

      Finally re: bailing out the negative equity people to avoid “massive social unrest”, I’m sorry David, but tough love is still love. Your solution is a slap to the face of people who work hard and did not buy a house purely to speculate. Future young people are not interested in going to hell for the sins of others.

      On rewarding people for poor speculation : OTC trading ruins people daily worldwide, CFDs etc, it’s basically legalised gambling. the housing market in Ireland devolved into an OTC market in real estate where unsophisticated “investors” were given free rein to ruin themselves. And the Gov, as the appointed experts in civil management, saw it and let it happen. Naysayers were told… well we know what they were told, and it was shameful beyond belief. Imagine, knowing that people who know NOTHING about investment are being allowed to purchase unsaleable items for vast sums of money purely for speculative reasons. and standing idly by.

      BTW my parents called me and asked if they should buy BoI now it’s “rock bottom”, I agree with everything David said in his analysis, as it reflects perfectly the financial statements of BoI and others. There’s plenty more to fall yet. But I can’t stomach people being bailed out.

      Has it occurred to anyone that maybe Ireland is better off without BoI? Start a national savings scheme, and back THAT by the Gov. people will have the right to transparently move their savings from BoI and others to this entity. Ring fence personal savings and company cash. Some companies will have their overdrafts maintained based on due diligence and meeting a set of basic sustainability criteria, some will be left to the wolves (i.e. BoI and KKR). a few eggs broken, but hey. National Scheme has a loans facility for SMEs; MNCs and large cap can finance themselves as they are big enough to take care of themselves. Then tell KKR that they can take over the radioactive mortgages without the benefit of a gov backing or sticky personal savings to lever off. and if they don’t want to do that, then they can go fry (which they will). Real estate market implodes (as there are already hundreds of thousands of empty houses in the country anyway). banks disappear and mortgages are repaid cents on the euro. Hardworking young FTBers pick up bargain houses. Gov introduces cap on mortgages to 5 times annual earnings after tax, the system is handheld for another 5 years. Minister for environment places cap on new houses that can be built in the country anyway, and all have to agree to strict environmental standards with components made in Ireland. after one year of tough love the ECB agrees to print more cash now that we’ve shown we’re really sorry after all.

      Do Something that implies fresh thinking and cleaning up the mess. None of this is rocket science, and overcooking the damn thing will only make it worse.

  33. Furrylugs

    At the risk of incurring the wrath of the webmaster, I publish here Article 45 of our Constitution. it’s supposed to be the means by which we control, for the common good, the society we live in.

    Article 45

    1. The State shall strive to promote the welfare of the whole people by securing and protecting as effectively as it may a social order in which justice and charity shall inform all the institutions of the national life.
    2. The State shall, in particular, direct its policy towards securing:
    i. That the citizens (all of whom, men and women equally, have the right to an adequate means of livelihood) may through their occupations find the means of making reasonable provision for their domestic needs.
    ii. That the ownership and control of the material resources of the community may be so distributed amongst private individuals and the various classes as best to subserve the common good.
    iii. That, especially, the operation of free competition shall not be allowed so to develop as to result in the concentration of the ownership or control of essential commodities in a few individuals to the common detriment.
    iv. That in what pertains to the control of credit the constant and predominant aim shall be the welfare of the people as a whole.
    v. That there may be established on the land in economic security as many families as in the circumstances shall be practicable.
    3. 1° The State shall favour and, where necessary, supplement private initiative in industry and commerce.
    2° The State shall endeavour to secure that private enterprise shall be so conducted as to ensure reasonable efficiency in the production and distribution of goods and as to protect the public against unjust exploitation.

    I hold that the present Government are , through their actions or inactions, in breach of the Constitutional rights bestowed on the people of Ireland.

  34. Furrylugs

    Oh yes, as regards penalising our OAPs and Kids………….

    4. 1° The State pledges itself to safeguard with especial care the economic interests of the weaker sections of the community, and, where necessary, to contribute to the support of the infirm, the widow, the orphan, and the aged.
    2° The State shall endeavour to ensure that the strength and health of workers, men and women, and the tender age of children shall not be abused and that citizens shall not be forced by economic necessity to enter avocations unsuited to their sex, age or strength.

  35. sue

    What really needs to happen and as quickly as possible is a “floor” to be found we have entered the negative spiral which is a self fulfilling loop. I commend the brits for trying the VAT stimulus measure slashing it to 15% when we increase ours to 21.5% This is a brave step and just shows how government can take action. What big steps can we take to show we are willing to tackle the problem ?

    AS the property market has completely stalled and this caused the bulk of our current problems. What steps can be taken to remedy this. WE need to create a permanent floor to bring confidence back to the economy. How to establish this floor is through the tax system , the revenue from house sales is virtually non existent, so how about for 2009 declaring a stamp duty rate of 1% for all houses under 250k. This will bring activity back to the market and cause property prices to drop to a more realistic level (especially if a developer wants to sell it )

    Next step encourage small business’s to grow and employ people . Offer the dole payment for say six months to take on unemployed staff. This affords an opportunity to tackle the problem now and allow for reskilling people who are simply stagnating at the moment.

    And finally restructure the public sector to provide value for money …10 % pay decrease effective December 1st and earned back only through productivity.

    Where did all the money go ????

    Did it just disappear into a hole in the ground ?

  36. Robin

    I daresay a VAT rate decrease is of little interest to somebody with no job and a 450k mortgage.

    If you want Joe Soap to spend then work at helping businesses to keep Joe in employment.

  37. Paddy the Pig here.
    Thanks Mugsy
    Thanks Ruairi

    Author: Mugsy
    “”"”Like some of the other comments, especially ‘Paddy the Pig’, I think this article’s proposal is ridiculous.”"”"

    Author: Ruairi
    paddy – “”"”I am totally at a loss to understand how any trading up or down can occur in a frozen market. …………If you could elaborate on this though, I’d appreciate it. I don’t see how it works.”"”"”

    Ah if only I had a mathematical brain like Einstein.

    Turfing people out (whoever “those people” happen to be) means more debt; banks with empty property that could – and will I think hit rock bottom – for god knows how long. OK maybe in five six years, but that’s infinity in the financial world.
    Lowering mortgage repayments means banks lose with more debt; also another infinity and loopholes of future wage agreements keeping repayments the same (sure the kids can eventually pay it off) What can you do when things are frozen, get whatever heat you can to survive.
    Property is basically useless (with some exception) if you can’t shift it in a certain time, so why not rent to the owner – and get what you can – who will have more respect for the up-keep of the property that he will be buying (and hopes to sell one day to move on) back again as soon as he can. He‘s not stupid enough to want to pay rent on what he already owns on paper. (or is he?)

    And as I said the rent money is for the bank to do with what it will. The banks have to turn a blind eye to the debt they’re in as they are doing anyway, and be glad for the rent until in the long run things pick up.
    I know it is not a brilliant financial solution, but can you do when you need cash to go to the supermarket; bitch about the money you’re owed, or just take the few bob you can get from your man, and hope he gets a job soon. And don’t for gods sake break his legs or arm; if he gets a job he’ll need them.

  38. Some people are impossible to please. I think it’s your choice of the phrase “war bonds”. If you’re talked about a “democratic recapitalisation” then we’d be all for it!
    Seriously though, I think this is a cracking idea if a little rough around the edges. A dual pronged approach with cash from the NPRF and some from “democratic recapitalisation bonds” could be the best approach. It’ll be a sop to the public sector bashing and if ever there was a rainy day for spending some of the NPRF money this is it.

    Your basic suggestion of passing the write-downs onto consumers, who are after all paying for their own deposit guarantee and footing the bill for provisions for the interbank loan guarantee, is admirable. Not really sure why there’s such a negative reaction. Would we prefer the banks to trigger write-downs on their own assets and avail of recapitalisation at the expense of the tax-paye, ryet have a generation punished for buying property at the wrong time. This punishment would reduce spending, cause other businesses to fail and reduce entrepreneurship as personal negative equity makes financing businesses nigh on impossible. Perhaps under the barrage of economic bad news we’ve talked ourselves into a depression.

    I’ve a few problems with your comparison with the US market though. They have chapter 11 bankruptcy whereas we don’t. The effect of this on speeding up write-downs or write offs shouldn’t be underestimated and accelerates capitalisation problems in the US. My understanding is that the Irish homeowner is statistically much less likely to default. They try their damnedest to repay whatever mortgage they’re shackled to. Chapter 11 is undoubtedly beneficial for the consumer but does introduce a moral hazard. Strangely, it doesn’t seem to encourage US banks to lend more responsibly. Perhaps the scheme you propose requires very tight legislation on deciding who qualifies or, if it’s everybody, then it should be a “one time only” reprieve. Perhaps Irish banks would be more cautious than their US counterparts if faces with a statutory provision for mortgage writedown? The property bubble suggest otherwise. Lots of questions here that really require further research & study. I believe a precedent on this was already set earlier this year in a repossession case before an Irish court. The bank lent almost 10 times salary and was deemed reckless. They were ordered to agree a new complete or partial repayment schedule rather than repossess. The last thing we want is banks repossessing from the same tax-payers who are underwriting their “bail out”.

  39. Garry

    exactly Johnny… even better why not take the money allocated to the subprime business and invest it in the banks when they are desperate for cash and at terms where we can get a return. Whether someone owns or rents is not as important as whether they are are warm and dry or cold and hungry. The houses are already built, they will rent at their market rate.

    “time to face reality” The reality is there isn’t enough money to solve this problem for everyone…. we may have enough money to avoid bankrupt the country if we pay our cards right and the international situation works in our favour. It is that serious.

    Either the banks are fucked and we should be putting as much daylight between them and the taxpayer as possible or they can be nursed back to health in which case this is a once in a lifetime opportunity as terms can be dictated to them. Since the time of the moneylenders in the temple, banks have been making money, so its pretty safe to assume some banks will make money in Ireland over the next 5 to 10 years.

    We seem to be picking the worst of both worlds guaranteeing them and giving private equity firms control of the ship and keeping no upside for ourselves…
    Now in a well managed country there may be some sense, private owners may extract more value by firing half the workforce of a combined entity, something the government couldn’t do. But given the squandering of the boom here, and the failure of the regulator or central bank governor, we aren’t well managed. and also given that we have spent 1 billion on legal fees investigating corrupt politicians, its only natural for people to suspect corruption.

    We also seem to be picking the worst of both worlds on house prices… In a country that’s seems hell bent on borrowing itself into bankruptcy to pay for current spending it makes no sense to borrow to put a false floor on house prices which is what the governments sub prime scheme is doing. All they are doing is ensuring social welfare rent payments to banks and landlords remain high. The houses are built, that money has been spent, they will sell or rent for what they are really worth.

  40. so if the older generations have been enriched, let them be the ones to bail out the FTBs, indeed, perhaps by a selfless gesture leading to inheritance spending boom. Drink the Kool Aid old people. Drink it!

  41. MK1

    Hi David,

    > US banks realised that there was a bad debt problem of $5 billion. So, in the third quarter, they went out and raised $11 billion to cover these losses, believing that by raising $11 billion they would more than cover themselves for even a doubling of the bad debts from second to third quarter. But bad debts not only doubled, they increased by a factor of ten to $48 billion. In the fourth quarter, bad debts increased again to a whopping $184billion.

    Banks raising money has nothing to do with their predictability accuracy of bad debts. Bad debt provisioning is a ‘black art’ rather than a scientific/financial skill and can only be accurate IF one knows the future accurately. Hence Banks cant, I cant, you cant. It is an estimation, and banks have historically ALWAYS used models that err conservatively. Bad debt estimating over the next 12 to 24 months is like tying to predict where hurricane No.10 will make US landfall in Oct 2010. We know there will be bad debts, yes, but how much, we dont know. The devil is in the detail.

    Banks cant operate efficiently by keeping a war chest of funds to cover the ‘doomsday’ scenario where all debts go bad. Because to do so, such banks would be kept behind in the market place and would not flourish. Overall, there has been too much debt, too much credit. The global system has the attributes of being capable of it failing completely. That is why there is government panic and stimuli being thrown at ‘it’ left, right and centre.

    > war bonds

    Just like someone bought Barings Bank for 1 usd, we could buy some of “our” (note the quotes) banks for a similar amount. I will donate the 1 euro in this case if the government cant find one! But its the risks of losses/bad debts, etc, which we would be getting onto our taxpayers books. The government should tread very very carefully, and only get the banks when they are rock bottom prices and there is a known financial return likely, not an unknown. ie: wait.

    > FTB reprieve

    No need to ‘jump up and down’ on David as he is restating his solution to his SB Post audience after airing it with the Irish Independent audience on Wed. The arguments for and against are the same as then though. I too, like many no doubt, dont like seeing anyone get into difficulty, but that is the nature of a semi-regulated capitalist system. By rights, those that made a mint form the property bubble should be ‘made’ to refund these FTB’s and others with negative equity (Negative Equity Property Owners – NEPO’s).

    But we dont have that system. The value of property, like shares, may rise as well as fall. Thats the system, thats the rules. We all know the rules. People may forget the rules at times, perhaps even a whole ‘generation’, or large swathes of it. But tough, that’s life. I dont like to live in a planet where people are dying from starvation. But I have to live with that guilt of human society, which is not humane society, every day. A lot needs to be fixed, both in the globe and more locally here at home. Giving NEPO’s a free fix needs to get in the queue of needs and it is well down that list. So no, something that shouldn’t be done.

    By the way, its lashing out there today …..


  42. Paul

    “There is a serious possibility that the youngest and brightest people in the country will not be sticking around and Ireland will be seeing an exodus of potential.”

    My friends left for Australia earlier in the year, they are now back in Ireland, as they could not find work.

  43. stevied

    As ever, the talent will emigrate and the shit will stay behind.

  44. Paul

    Both my friends who travelled to OZ are professionals, the doors are closing for everyone, and it has only started, wait until 2009 then the fun will really begin.

    As for bailing out people in negative equity, they will turn around and stick two fingers up at the rest of us, while having a good laugh, that is a guarantee, because there is one thing the Irish are good at, and that is looking down on each other, and acting smug.

  45. John ALLEN

    Lenin would have been a capitalist had he had a second life and who knows he may be reincarnated somewhere in Dublin.
    Leninhan….made his recent successful decision not that he was wise or that he had foresight ….he did so because he had the advantage of hindsight from mistakes made by gordon brown…so it was common knowledge …..we must not pour garlands on the incumbent minister …he has yet to show what he maybe capable of ….and my doubts are becomming greater as each day passes ….i do not expect the two b’s that are two lawyers talking convincing economics that will bring success……i would much prefer to listen to the two puppeteers for the taoiseach and minister to show face so we can understand what they are made of
    Icelandic people protested over the week end against Haarde and Odd and they have balls…..even if it is rheindeers ones …our two b’s are just two soft eggs

  46. Garry

    Just commenting on Davids followup
    “Now I am starting to think that as we are not in a recession, but something that may look like a deep, deep depression, the political upshot of the depression is social and political chaos. Being a natural evolutionary rather than revolutionary, this prospect scares me.
    As a result, I am prepared to entertain new ideas. In the 1970s inflation wiped out the debts of Ireland’s mortgages FTBers. As long as we are in EMU, this won’t happen. In contrast, we are now facing deflation and this means the incidence of debt is even higher. In fact it was the likelihood of a great deflation that prompted me to take such a hard-line stance of the property and banking madness since the start of the century.”

    and on the comments re Iceland

    There is a very very interesting article or even a phd in comparing the different economic holes that Iceland and Ireland have dug for themselves and how/why either managed to drag themselves out of it. Granted, the definitive version will need to wait for years but there are a number of areas that would be enlightening if analyzed even now…

    The speed of the deterioration in both countries. Here I suspect those taken aback by things here would do well to look at Iceland
    The priorities and assumptions driving initial attempts to confront the problem.
    What if any levers each have to extricate themselves. a country with its own currency that it can control but is not credible internationally vs a country with a credible currency outside its direct control.
    How bad can it get. Right now, it looks like Iceland will have it much worse than us, they are worried about food rather than fairness or bailing out people but its early days yet for both of us.
    What if anything can be learned from this.

    Its ironic, we seem to be arguing about Lisbon and Iceland are begging to join the euro. Is it a case of far away hills being greener or is one option better than the other.

    • Malcolm McClure

      Garry said: “There is a very very interesting article or even a phd in comparing the different economic holes that Iceland and Ireland have dug for themselves and how/why either managed to drag themselves out of it. Granted, the definitive version will need to wait for years but there are a number of areas that would be enlightening if analyzed even now…”
      In 20 years time I can foresee troops of earnest American academics mining this series of DMcW blogs, trying to fathom the range of national sentiment expressed here. And discussing in their theses possible reasons why we were unable to change the course of Irish history that ultimately led to to the horrendous *******************************
      (Use your imagination to fill in the blanks.)

      • Furrylugs

        ………………led to to the horrendous queues of ordinary Irish people waiting for free soup at the border being beaten back by Irish soldiers whilst British troops looked on helpless to prevent the brutality??

        Stranger things have happened.

        • Garry

          Fair play lads…. I think Malcolm has it right in the comment about being “unable to change … that led to” … I hope the leadership will have been dealt with before it every comes to your scenario furrylugs.

          I get the sense that were at a key moment in our history; by making the right choices, pulling together, and a bit of luck, we’ll be all right. We haven’t grasped the extent of the downside if we screw up, which i think is part of the problem, it’ll be interesting to see if were going to stay in denial, give up, get angry or give it a lash.

          Of course we could be completely wrong on here, 2009 could be a recovery year.

  47. b

    We have no food or fuel security. If it kicks off in the UK or in mainland Europe we will be sitting here in the dark with feck all to eat.

    Its that serious.

  48. John ALLEN

    b – thats the most rediculous contribution i have read to date…..our nation is endowed with all the riches of the land, sea and air ….unlike most of europe….our problem is that as a nation we suspiciously are more interested in philosophy than getting things done simply…this is our Atlantean thought process we aquired from our forebears …Phoenicians ……we need to reason more …and ……….NOW

    • b

      We gave the sea to Spain to join the EEC. The farmers are only interested in handouts from the EU and if you try to give an Irish person fish or vegetables they turn their ignorant noses up at it.

      The fuel thats used to light your crack den is imported on a thing called a ship along with most of the fancy organic biscuits you eat.

      i work in the shipping and transport industries. The industry that bizzarely Fianna Fail has been trying to shut down.

      What do you think is in all those boxes? Illegal immigrants and drugs? Your Pollyanna doesn’t exist.

      If you are going to deride my comments learn how to spell. We cannot eat heritage and we certainly cannot use your astrology as economic policy.

      Put down the crack pipe and snap out of it. We are in serious shit and you ain’t helping!

  49. Stephen Kenny

    There are two problems with the negative equity (FTB) bailout problem.
    1. The moral hazard is certainly a big problem as it’ll result in FTBers making money at the expense of the tax payer. It’s also just plain unfair, unless the FTBers have to pay it back (over time).
    More importantly:
    2. It just won’t work. It will not have the desired effect.
    We are acting as if we’re in a normal sort of ‘over-heating economy’ recession: Companies invest too much in people and productive capacity, produce to much. In this situation, you increase interest rates, and cause a recession as the ecnomy cools down.
    We’re not in this sort of situation at all. We’re in a structural debt driven consumption recession. The problem is that the economy is organised around a level of increasing debt & expenditure that is, by definition, unsustainable: Expenditure can only increase by increasing debt, and debt cannot increase for ever.

    The solution being executed all round the world is to enable more debt. In the short term, of course, it will work, because all we’re doing is extending the 2006-style economy. It’s just ‘more of the same’. When the cash infusion runs out, we’ll be back to exactly where we are now, but with a substantially larger outstanding debt.
    We’ve used this solution to every economic problem in the last 10 years: More debt.

    This solution is an answer to the wrong question. The solution to the problem of FTB’ers should be part of the solution to the economy as a whole.

    If an FTB’er needs help, then they have to do something as pay back. The Soutnik-era USA launched a massive technology education/training campaign, so let’s do something similar. Our smart people shouldn’t be doctors, lawyers, and bankers, they should be scientists, engineers, designers, and technicians. So, use the money to push them in that direction. Entice, encourage, and push.
    I’ve probably said this before, but link up with high-tech industrial conglomerates abroad (Germany, France, etc).

    What we’re proposing, and doing, now, just delays the day of reckoning. Again.

  50. [...] It worked well for the Nazis in the 1930s, and could work again here.” (Lorcon, commenting on David McWilliams’ site, 23 Nov. [...]

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