September 6, 2009
At the height of the boom, I got used to being accused of ‘‘talking down the economy’’. In fact, this was almost a weekly occurrence as the old vested interests tried desperately to squeeze their last greasy fiver out of the population. Back then, questioning the credit binge was dismissed as ‘‘unpatriotic’’.
Interestingly, it was not just the vested interests who bayed like sheep, but also the mainstream economics profession, the vast majority of whom said absolutely nothing about the likelihood of a crash in the property markets and the probable insolvency of our banks. Maybe they were infatuated by the intellectual game called ‘efficient markets hypothesis’. Whatever their excuse now, it is a pretty unflattering episode for the profession and clearly undermines the credibility of many who are now suggesting policy changes. Outside the economics profession and the banking industry, there was a way of dealing with dissenters; it was based on painting us as incendiary, volatile and in some way beyond the pale.
Exactly this weekend last year, I remember being on a Saturday View panel with Brian Lenihan and Richard Bruton. When I suggested that we’d have a bank crisis by Christmas, the minister slapped down such a suggestion with the retort that even suggesting such a thing was dangerous talk. Bruton agreed with the minister on that occasion, and even he reiterated that the banks were sound. In subsequent public discussions with members of the political establishment, ‘‘loose talk’’ replaced ‘‘dangerous talk’’.
All the while, the editorial line was the same. There is a pattern in the establishment’s approach to contrary ideas. It depends on the put-down rather than on persuasive analysis. Anyone who deviates from the party line is ‘‘dangerous’’ and by extension is endangering the interest of the average citizen with their questioning and their scepticism. We are seeing a similar approach with Nama.The minister is suggesting that any alternative to Nama is ‘‘dangerous’’. So we are back to the position whereby the people who got us into this mess and described those who warned of impending catastrophe as being dangerous are again, despite their own lamentable record, dismissing critics of the Nama adventure as treacherous.
As for Nama, I understand and have sympathy for what the minister is trying to do. He is trying to keep the banks afloat because he believes that they are essential and that nationalising them would be a bad thing to do. He also believes that a bank failure would be tantamount to a sovereign default because the guarantee is in place. Additionally, someone has persuaded him that the global bond trading community would never touch Ireland again if one of our banks failed. So he has concluded that it’s best for all of us to buy land that we don’t want via new government debt that will be honoured only by the European Central Bank. This doesn’t mean it’s not debt – it just means that the only institution willing to take a risk on the ‘hope value’ that Irish property prices will rise again is the politically-driven ECB.
By replacing the bad debts of the banks with the good money of the average citizen, he saves the banks with our cash in the short term.
In the medium term, he believes that the price of property will rebound in Ireland. This might minimise the taxpayers’ exposure to something the taxpayers didn’t want in the first place. If it doesn’t, he will slip the shortfall on to the now growing national debt, and no one will be any the wiser because events will have overtaken Nama, and the National Treasury Management Agency (NTMA) – the institution which will really gain from this – will issue more bonds in your name to be paid for by your children, from its now bigger empire down on Grand Canal Street.
We will then have an average European government debt to GDP ratio, but without all the roads, railways and schools. Instead ,we will have fields in Mullingar. That’s a great deal, isn’t it? But from an optics basis, the minister might ask, what’s the problem? The crisis is over, the banks have been saved and the country doesn’t have the shame of a bank default on its hands. But we don’t have much else.
This is the plan. The only flaw in it is that it doesn’t address the big question, in fact the only question, which is whether Nama will accelerate a national recovery. With high and persistent levels of unemployment, and high and persistent levels of taxation needed to pay for Nama, can the country thrive?
It will only thrive if investors decide that it is a good place to put their money. Investors are not vengeful individuals who want to make countries pay for their mistakes. That is not how traders operate. The trader wants an ‘event’ to clear the air, so that he can invest again. Financial markets have short memories.
The entire story of banking crises around the globe is that the objective is to minimise the cost of the banking collapse. If the cost is too high, then let the banks go as the Swedes did. Once a deal is done with creditors, off we go again. That’s how the market works.
The last thing the trader wants is a country wracked by political instability, where taxes are rising and growth is falling. The trade has no interest in a country that is suffering unnecessarily to keep banks afloat. Why do you think we are paying a huge premium over Germany for our borrowing? It is because investors need protection because they don’t believe in Nama.
They have taken the view that no democratic government can lumber the people with taxes to pay for the sins of a few. That’s not how the world works. So they are looking at the pressure cooker, waiting for it to blow. Once it blows, the pressure eases and we are back to business. Remember: the world is full of money.
The German, Chinese, Gulf States and Japanese current-account surpluses have to be spent somewhere. But to get this cash, we have to offer an attractive option, a new option that sends a signal that everything has changed. Nama merely tells the world that the ‘lads’ are still in charge and nothing has changed. There is a better option than Nama, which will impress international bond investors much more. This is what rational businessmen would do. We’d tell the creditors of the bank that we don’t want to extend the guarantee. It will lapse, as was envisaged, on October 1, 2010.
At the moment, with the guarantee in place, the creditors know that they will get 100 per cent of their money back. On October 1, 2010, they know that they will get close to zero because the banks they took a punt on are bust. So the clock is ticking, what do they want to do? Where do they want to deal? At what price are they prepared to trade? Is it 30 cent in the euro? 50 cent?
This will focus their minds because, at the moment, it’s a one-way bet, with you and me acting as underwriters. This approach allows us, the Irish people, to get out of the way and let the creditors deal with the banks, with the government acting as broker rather than principal.
So we do a deal with the creditors and maybe give them equity in a new Irish bank in a debt-equity swap, which we will help set up. The state issues a deposit guarantee, paid for with a guarantee insurance product. We then have an orderly examinership of the bank, selling – let’s say – the branch network of AIB or other assets to the new bank, and off we go.
Problem solved. No need for Nama, and land prices stay low, allowing us to ‘lock in’ the fantastic competitive opportunity that a fall in land prices gives us. Then a New Ireland would truly be open for real business again and we could begin to talk up the economy with confidence.