November 11, 2009
Sometimes we can be an extremely vindictive society. In times of trouble, there’s often a dreadful clamour for vengeance. As a general rule, it seems sensible to avoid those who seek recrimination and punishment for those who made mistakes; although righteous indignation may satisfy a visceral yearning, vengeance and outrage don’t move things on one bit.
Nowhere is this more relevant than in economics and finance, particularly now, when we are in dire straits. One of the biggest questions facing our country is how are we going to deal with the simple mistake made by hundreds of thousands who bought property at the top of the boom. Many of these people — ourselves, our brothers, sisters or children — were cynically manipulated by “vested interests” and find themselves in the situation where they can’t repay the loans they have taken out.
So what are we to do? Back in February, this column argued for a debt moratorium for people who simply can’t pay. Interestingly, it seems that our mortgage lenders are coming around to this position. There are many imaginative ways of giving people a break. We need to give ordinary people a chance. Ireland must give people hope, because hope is what will prevent us from sinking and without hope and a belief in the future, we will get nowhere.
The idea of debt deferral means the banks would write off say 50pc of the principal and in return get to own half the house so that in 15 years’ time, when all this is a bad memory, the bank gets half the upside when the house is sold. This is not as radical as it sounds and in the US such proposals have been around for a few months.
This is what corporations do when they are in trouble. In corporate finance it is called a debt/equity swap. For example, this was the route that Independent News and Media took with its debt-holders recently. The deal was that the debt-holders (the bankers in this case) would take shares in the company instead of forcing the company to pay all its debts now. Over the next few years, if things turn out better, the shares will rise and the company, the creditors and the shareholders will survive. It’s not perfect, but nothing anyone does from here is going to be perfect. Crucially, though, it gives everyone hope again.
If we look at the hundreds of thousands now in negative equity, the main argument against deferring debts, which can’t be paid anyway, is that if we defer debts now, people will just do it again the next time the economy recovers.
In economics, the idea is that if you let people away with their mistakes they will never learn. This way of looking at such a dilemma is to say, “hard luck, you made an error and you should pay”. This view contends that this is the way life works — “you win some, you lose some” and when you win (as people who sold land in the boom did) you win big. In contrast, when you lose (as hundreds of thousands who bought in the boom did) you lose everything. This works fine in a pure world where everyone takes a hit and moves on. But in a world where the banks are being bailed out, thousands of people struggling with debt can rightly ask, what about me?
Quite apart from the obvious disparity between the treatment of the big bankrupt banks and the small person in negative equity, there is another huge issue, which is lost in today’s deliberation about where we go next. Let’s try to look at the dreadful debt trap we are in from the national perspective because all these thousands of decisions add up to one collective dilemma.
When you think about it, when the banks lend you a mortgage, they are betting on you. They are betting on your “long-term economic value” — that is, your ability to pay over the next few decades. They are taking a view on your career and your financial prospects. The house is just the security, but the income is you and your abilities.
Now with unemployment up sharply, wages falling and the next move in interest rates likely to be upward, the prospects of the average person have taken a huge hit. But if the banks move against the person now, they cut off any hope of redemption. The unemployed person caught in the trap has a choice: emigrate or stay on the dole. Those who have jobs will save more because they are worried about the future. This is what we are faced with. So we need to change things and give people hope.
Think about emigration: once a person leaves this country, they are gone and they contribute nothing to the place. Most often, emigrants are young people in whom the country has invested hugely in terms of education so to get nothing back is quite a waste. Likewise, if that person goes on the dole, the State pays their income so the situation for the country is actually worse. And if the person stays here in a job — just clinging on — but saves everything he or she earns, then the place grinds to a halt with people too scared to spend. Prices then fall and fall further. This cycle has to be broken quickly.
LP Hartley said: “The past is a foreign country: they do things differently there.” This is where we have to start now. What is done is done. It is time for solutions, not recrimination. Sometimes ideas which might sound radical are the only alternative. Debt deferral, while not perfect, is an obvious place to start, and since we are giving the banks so much money, there should be some conditions placed on the banks for our benefit.
We have a generation — in the prime of their lives — who are stuck, dragged down by mistakes made in the wild hysteria of the past five or so years. That place was “a foreign country”. It is now time to reinvent ourselves as a better country, one that learns from the past but is not hostage to it.