April 18, 2011
Driving up the east coast on a beautiful sunny day, looking out, you can almost see Wales. I wondered was the weather so beautiful on this day in 1169,whenthe first Normans set sail from Wales to invade Ireland.
Did they get a fair wind, a bright sunshine for the short hop over to Wexford bearing their secret weapon, which was to subdue Ireland so quickly?
The five-foot longbow – Strongbow’s longbow – was the world’s most formidable weapon in the 12th century when they arrived here, and it put the fear of God into the Danish towns of Wexford, Waterford and Dublin.
A few years later, happily ensconced in Dublin in 1182,using a longbow of yew, one of these archers shot an arrow straight through a four-inch oak slab, proving to the Irish that no armour could withstand the longbow.
The Norman kings urged the adoption of this lethal weapon to terrify the Irish. They made longbow shooting competitions mandatory every Sunday and on public holidays.
This became the chief sporting event in Norman Ireland. Much of the marksman’s success lay in the use of a good bowstring. Archers typically had a favourite, and the Anglo Normans called this the fyrst-streng. This expression for the finest bowstrings soon became synonymous with the top contestants and emerged into the English language as the expression ‘‘first string’’ and ‘‘second string’’.
There is a distinct second-string feel about the position of Ireland in Europe these days. We are not playing at the highest level; we are condemned to be second best. But it’s not all that bad, as playing as a second-string outfit gives us the chance to improve. After all, the only way for the second string is more or less up, once you hit the bottom. But hitting the bottom is exactly what we are not allowed do at the moment. Without this sense of being at the bottom, no new capital will flow in.
The thing about recessions is that they all end. There never has been one that doesn’t. Life goes on and, interestingly, those things we thought so important during the crisis are quickly forgotten about.
In the second-string team, you can Allow assets to fall dramatically in value. If we forget about property, there are a number of reasons to believe that the process of recovery will begin soon. It will be slow and it will be faltering, but capitalism normally rights itself if it is allowed to run its course.
Companies that are put into liquidation will tend to find buyers for their assets and, in the same way as the boom involved a huge transfer of wealth from the buyers to the sellers because the assets were overvalued, the opposite will prevail now.
In this crisis, there is a massive transfer of wealth from sellers to buyers because the assets are terribly undervalued.
But why are they undervalued? Is it because of the fall in demand?
Although at first blush this seems to be the case, the real reason the value of assets will fall dramatically is because of lack of money. If no one can get their hands on money, the assets will fall and that fall will undershoot ‘‘fair value’’ substantially. In the same way, when there was loads of money about, assets overshot their ‘‘fair value’’ price dramatically.
Believe it or not, there is some evidence that assets are beginning to change hands at huge discounts. Look at the distressed property auction at the Shelbourne last week, where 80 of the 82 properties were sold.
There is evidence elsewhere too . Speaking to a liquidator friend of mine last week, I was told that serious negotiations are going on now, but people have to realise that we are seriously second-string and the price of everything has to fall. In businesses where the only problem is rent and where the landlords are forced to realise this, there are deals to be done.
Going concerns that can renegotiate their rents have a chance of survival.
We all know that there are thousands of businesses in Ireland that could survive if rents fell to a level where the business could make money.
But landlords are still in denial. They still think they are in the first string, but they are not.
The problem for society is that most of the state’s efforts since the property market crashed have been designed to ease the burden for landowners or those with property interests. Obviously the biggest property vested interests in the country are the banks.
At the top of the boom, over 80 per cent of all lending by Irish banks was property-related. So the banks’ ‘‘assets’’ are essentially land.
The more you prop up the banks, either with cash injections or with scams like Nama, the higher you keep the price of property artificially.
This artificially high price means that the real value is blurred. If a business has to pay a huge rent, it can’t extract the value in its other assets – its capital, its people or its ideas.
Therefore businesses are being put into liquidation, not because they can’t trade, but because they can’t trade in 2011 shackled with 2008 rents.
What will happen if the landlords are not confronted is that these businesses will be liquidated and their other assets will be vaporised.
Assets will be flogged cheaply in fire-sales and there will be a destruction of value throughout the country.
This will enrich buyers enormously as they pick up real (non-property) assets for a fraction of their real fair value. These players will be financed from abroad because the Irish banks are simply safety deposit boxes for the IMF.
They will take in our tax money and keep it there on deposit to meet the IMF’s stringent capital requirements.
Therefore, no matter how much the money supply is expanded, it won’t translate into credit. So the credit will have to come from elsewhere – or maybe even from a new bank or two, which no doubt will emerge in the next year or so.
The thing about being a second-string outfit is that our asset prices have to fall. If they do, we will recover. There is no doubt about that. But if we continue to prop up the interests of property, we will surely sink further.
We need to abandon policies that prevent private capital from being enticed here. One of these policies is the use of the courts by landlords to crush business people by anchoring them to rents that no one can afford. These business people will just go bust and there will be no businesses to sell, which means new capital will stay away.
Once new capital comes in at the level of individual businesses, the weapon of official credit constraints becomes as irrelevant as a hulking zombie bank.
The way to move from second string to first string is to make changes to the position of landlords.
Rents need to fall dramatically. That will allow capital to do its thing.
Even the Normans -who became prodigious exporters of agriculture, using our rivers as trading routes and our ports in the south east as trading hubs with France and England – understood that business can thrive. But it has to be given the right conditions.