March 2, 2015

Watching while the economy burned

Posted in Sunday Business Post · 97 comments ·
Share 

Could it happen again? This is the thought that went through my head, as I waited for the first question from the panel at the banking inquiry last Thursday morning. During the previous few weeks, I spent lots of late nights going through articles, books and documentary evidence written since 2000 on how an economic catastrophe builds. It’s funny how things seem so obvious in hindsight, but back then it was not clear to that many people.

In the inquiry, I likened the narrative of economic and financial meltdown in Ireland to a forest fire which starts with a few matches and ends with an inferno engulfing the entire economy. This fire, if it is allowed take hold, will destroy everything around it and therefore has to be put out with force, otherwise it will incinerate the entire economy.

This analogy came to me years ago, sitting in a Croatian café talking to a local fireman as he explained to me what can happen when a fire is allowed catch.

Every summer I visit a particularly parched region of Croatia called Dalmatia, which is subject to quite high and variable winds. All the young lads in the village belong to the most important local institution: the fire brigade. Every few years, vicious forest fires catch that kill tourists and locals. Usually they are started by tourists who are camping in the forests, unaware that they are barbecuing in a potential tinderbox.

Dotted around the higher points of the island are numerous look-out towers where the locals take turns doing eight-hour shifts on the look-out for smoke, day and night. If they see anything suspicious, they radio the base in the village and the trucks – manned by local firemen – head out.

Being a fireman is a rite of passage for these rural Dalmatians, so much so that my own son, who hangs around with the youngsters every summer, is down in the village ledger to be a fireman in 2018.

Now think about the banking/property/credit cycle in this context.

The pyromaniacs who start the fire are the bankers (and all others who cheer-led the credit splurge, you know who you are). Credit is the lighter fuel igniting the economic inferno. Human nature is the wind that whips up the flames because everything I do affects everything you do. You are forced onto the property ladder, not by yourself, but by me. When I buy, prices rise, this forces you to bring forward your house purchase because you don’t want to get left behind. So all our actions affect each other.

In the period 2000-2004 when this was building, the firemen who are supposed to spot trouble – the Irish central bank and regulators – are saying everything is grand.

Yes sure there’s some smoke and maybe a bit of fire, but it’ll be grand!

As they take no action, the fire engulfs the entire economy and culminates in a bank run, which is the financial equivalent of the entire island – forest and village – being incinerated.

At this very late stage – the very last resort – the state wakes up and has to put out the fire with whatever method it can deploy.

To argue about the method used to put out the bank run is like criticising the firemen for the type of water they use to put out a forest fire. It is a legitimate discussion and argument, but it misses the point that the entire episode was predictable and preventable. It needn’t have happened had the warnings been heeded.

There would have been no need for the troika had there not been a credit boom. There would have been no need for any guarantee had the banks been regulated, but once an economy gets into the disaster, the state can’t just say, “Let’s see what happens.”

It is like the Croatian fireman saying, “Let the fire burn itself out, sure you never know, the wind may change at the last minute just when your curtains are catching fire!”

Early warning is the key; prevention is always better than cure.

Now that we are armed with the experience of 2000-2008, could this possibly happen again?

My answer is unfortunately yes, unambiguously yes. The reason is that human nature is a funny old thing. We never learn. Never. Credit cycles are as old as the Bible. Read Leviticus and Deuteronomy and you’ll find the biblical equivalent of Anglo.

We always think this time it’s different; that’s just the way we are.

This consideration of the nature of humanity came to me when I was testifying at the banking inquiry. In the end, the question was whether it could happen again. It could because the way banks, credit and property work in Ireland is that banks will always want to lend, so prices will always have upward pressure and, as prices go up (as is happening now in Dublin) people will always look at the last rise in prices and think, they had better get in before they get left behind.

At the moment, the last monthly increase in house prices amplifies the amount of credit extended for lending next month. If the house price goes up, the banks will feel they can lend more because the house is the collateral and that collateral has gone up in value. Therefore, there is always inbuilt inflation in the system.

Imagine a mechanism where the latest increase in house prices doesn’t increase the amount of money that could be lend out but decreases the credit available. This could be self-regulating and would work as the watchman without having to depend on human frailty.

Think about this.

When a loan is granted, the nominal declared maximum LTV ratio (say 80 per cent) should be multiplied by the average house price index available for the previous 24 months and divided by the latest available price index.

This means that LTV ratios will keep coming down as long as prices go up, and thus the ability to flip over the property to the next guy will diminish.

The system will become self-regulated. The greater the increases in price last month, the less can be lent out next month and therefore increases in prices beget decreases in credit. This implies you don’t need to depend on humans, blighted by human nature, to make judgments, the system can do it itself.

This is a simple way of breaking the link between credit and prices and would go some significant way to reducing the tendency of houses prices to feed on themselves.

As I left the inquiry, I asked myself why hasn’t this type of innovation been introduced.

Could it possibly be because the same vested interests that cheer-led and caused the last boom are still in more or less in power and the system hasn’t really changed?

Surely not – it couldn’t be.

Could it?

 


    • pearar400

      Ouch!

      Banking inquiry

      Tue, Mar 3, 2015, 01:07

      Sir, – The economist David McWilliams’s appearance at the banking inquiry on February 26th was very important (“Crisis was ‘absolutely preventable’, says McWilliams”, February 27th) as the then government’s decision to adopt a bank guarantee on September 29th, 2008, appeared to follow closely the option he had forcefully advocated in a Sunday Business Post article of September 21st, 2008, “State must act as a safeguard”.
      As we know, he was consulted informally around that time by the minister for finance Brian Lenihan, and spoke on one occasion with the leader of the Greens and minister for the environment John Gormley, but I do not wish to suggest that his was the only advice taken into consideration.
      In the McWilliams article, the argument for the blanket guarantee was that “the Irish government would be using its well-earned reputation as a sovereign entity, not its hard-earned cash, to solve this crisis”.
      He did indeed also argue in that article that “the government could do this for a limited period – let’s say two years”.
      However, he overstated his case at the inquiry, when he denied that he got anything wrong in relation to the bubble and the crash.
      The entire recommendation in his September 21st, 2008, article, like the guarantee itself, was based on the premise that insolvency was unlikely and that the banks were facing a liquidity crisis.
      His Sunday Business Post article concluded with the statement: “If we act now, quickly and with confidence, a potential insolvency won’t escalate beyond a temporary problem of illiquidity and will be sorted without panic or long-term consequences”.
      Mr McWilliams has been arguing since that the decision would have been the right one for the government to take, despite the misdiagnosis, if only it had been time-limited.
      But if the problem was solvency, not just liquidity, how could the then government have withdrawn from it, even if it had been made conditional from the start, without the danger of a collapse of confidence and of the entire Irish banking system?
      As we know, the mere statement of intent by German chancellor Angela Merkel and French president Nicolas Sarkozy at their Deauville summit in October 2010 that from 2013 creditors should be bailed in accelerated the loss of market confidence that led to the bailout and the advent of the troika the following month.
      Could one respectfully suggest that expert witnesses would serve the public and the inquiry well, if, following the admirable example of John FitzGerald of the ESRI (“FitzGerald admits ESRI ‘totally wrong’ on banking collapse”, February 11th), they could explain not just the many occasions where they were right and farseeing but also where they went wrong?
      – Yours, etc,
      MARTIN MANSERGH,
      Tipperary,
      Co Tipperary.

      • michaelcoughlan

        I hope Martin you are reading this response and that you have the courage to come on here.

        When McWilliams was saying that the whole episode was preventable he meant that if the Government hadn’t pursued the policies it did and had done its job to ensure the regulator was doing his there would have been no need for a guarantee in the first instance.

        As for:

        “But if the problem was solvency, not just liquidity, how could the then government have withdrawn from it, even if it had been made conditional from the start, without the danger of a collapse of confidence and of the entire Irish banking system?”

        Guess what Martin?

        THE WHOLE BANKING SYSTEM HAS COLLAPSED! JUST LIKE EVERY WHERE ELSE! OH AND GUESS WHAT ELSE? THE MONEY THEY ARE GETTING TO SUPPOSEDLY LEND TO THE ECONOMY IS BEING BROUGHT TO THE STOCK MARKET CASINO.

        Keep Writing Martin:

        The more you write the more you damage yourself.

        Michael Coughlan,
        Tipperary.

        • Can’t see why you are hard on the good Martin. I read quite a few good observations and reasoned opinions.
          How exactly did he or would he damage himself?
          He had the respect to identify himself rather than use a pseudonym.
          Why do you not give a reasoned explanation of where he went wrong?
          Perhaps you are acquainted both being from Tipperary?

          • michaelcoughlan

            Hi Tony,

            Just a bit of background to Mansergh. He is a studious intellectual type. He was the guy that the other politicians went to for analysis and insight when the good friday agreement was being negotiated.

            The article above I think is taken from a newspaper which means many more people would be reading it than this blog.

            The article calls into question the integrity of McWilliams by asking him to explain himself by saying:

            “the witnesses would serve the public and the inquiry well…………… they could explain not just the many occasions where they were right and farseeing but also where they went wrong?”

            and diverts the readers attention from the substantive issue which McWilliams had been articulating throughout the boom which was that the whole thing was a con job. It was an attempt to put McWilliams on trial and/or discredit him rather than the people responsible.

            If Mansergh had been sincere he would have congratulated McWilliams for the accuracy of his analysis an insight and then simply said that no one gets it right all the time.

            Where McWilliams erred was in two areas: One was when asked about getting things wrong the answer should have been of course I do. No one is right all the time. If the question came what do you do to get around this human condition? Ans. I do what Soros does. I am my own hardest critic looking for errors and flaws and ask trusted colleagues to find them as well. When found I am humble enough to change my mind.

            The other area he erred in was that because he still has a conscience he may well think his honesty may convince the people in the Parlement to do it right from now on. That was obvious from his testimony because it was delivered without pretence. It was others who mocked him simply saying that it was a “I told you so” performance.

            McWilliams is only pissing in the wind if he believes his two pence worth will change the mind of the administration because it won’t.

            Mansergh’s article was a very intelligent subtle and well written ploy to divert peoples attention from the substantive issues form a very skilled and capable politician. He damaged himself by demonstrating to the more clued in reader that he ignored what is important and tried to besmirch McWilliams.

            Finally Tony, he mentioned Tipperary to let the people know (who count in his eyes the people he hangs around with in the Dail) that the can be trusted to protect them in the face of such evidence that their policies were so destructive. I would say this is to convince them that he can be still be considered part of their inner circle because he lost his seat in the last election. With regard to the part about preventing the banking system from collapsing it did collapse. We now have zombie banks hoarding cash and lending is still going south.

            My head hurts now.

            Michael.

      • coldblow

        At the time of the bank guarantee (if memory serves) I don’t think it was clear that the big two (AIB and BOI) were insolvent as the Financial Regulator had surely cleared them and the banks themselves were reluctant to admit the full extent of the problem but drip fed the information over the following months and years.

        Also, I get the impression that solvency and insolvency in banking are to a great extent in the eye of the beholder. If you have a bank run then all the banks are insolvent overnight I expect, with a liquidity problem turning into insolvency.

        A bank run was about to begin, as I recall, with comments on Joe Duffy’s Liveline on the radio. Following a comment on this blog I decided to move my savings (22k I think – I can’t remember the name of the savings scheme where the Govt gave away money if you saved for a certain amount ot time) out of Irish Nationwide into the Post Office. As it happened it wouldn’t have saved me as they filled my form in wrong at the Post Office and I had to go back in to them a couple of weeks later to do it all over again.

      • woodsey

        @pearar400 – I think I’ve just read one of the nicest ways to tell someone to stop blowing their own squeaky little trumpet?! And, does an enquiry, seven years after the event have any relevance anyway?

  1. woodsey

    Absolute rubbish, David McWilliams! The crisis that occurred 7/8 years ago was not caused by lenders, developers or governments. It was caused directly by us. By our inherent greed, driven by our ignorance of the consequences. We didn’t have to borrow to buy things we couldn’t afford. And of course it will happen again. It’s happening now. Imagine, in a broke country that can’t afford health-care, people are still shelling

    • DJR

      Absolute rubbish, woodsey! Irish people in the 2000s didn’t suddenly become more greedy than the rest of the world, or than every other generation of Irish people.
      What we DID have in the 2000s were lenders, developers and governments who, driven by inherent greed and ignorance of the consequences, stoked a property bubble to enrich themselves and beggar the Irish people!

      • woodsey

        @DJR – Oh yes they did! And in spades to the extent that when things went wrong in the world of finance, they went VERY wrong in Greece, Ireland, Portugal, Spain and Italy. Poor countries, where the people demonstrated a very poor grasp of simple economics. Lenders, developers and governments cannot enrich themselves without a financially-compliant public!

        • DJR

          Do I have to point out that people need to live somewhere? What do you expect people to do if the elite conspire to drive up the price of property AND rents? Sleep on the streets in protest? Postpone having a family indefinitely?

          And why pick out the PIIGS as having a poor grasp of economics? Are you unfamiliar with the property bubbles in the US, UK, Sweden, Luxemburg etc?

          In case you are still confused about the cause of our crisis – it was globalised finance aided by a financially compliant government

          • woodsey

            @ DJR – They weren’t living somewhere, they thought they were investing in an ever-rising asset. There’s no such thing as the ‘elite’ & no-one ‘conspired’ to empty the pockets of the foolishly willing. They may sleep where they please and yes, if they had had the sense to postpone whatever it is they couldn’t afford, Ireland wouldn’t be saddled with this enormous debt. It wasn’t ‘globalised finance’ it was the tragic ignorance of the very greedy. They’re the GIPSI’s btw.

          • Colin

            DJR,

            Do I have to point out that people need to live somewhere?
            Renting and living somewhere are not mutually exclusive.

            What do you expect people to do if the elite conspire to drive up the price of property AND rents?
            People have various options. you can emigrate, build a good relationship with your landlord who would then be more unlikely to ramp up your rent, or you can move back in with mum and dad.

            Sleep on the streets in protest?
            No need to be a drama queen.

            Postpone having a family indefinitely?
            Yes, that would make sense, unless you wish to raise your kids in poverty and in a household full of stress about paying the next bill.

            And why pick out the PIIGS as having a poor grasp of economics?
            PIIGS have a lot in common at the moment.

            Are you unfamiliar with the property bubbles in the US, UK, Sweden, Luxemburg etc?
            We should bring in ‘jingle mail’ mortgages, like they have in the USA. London prices are crazy at the moment, and they went bust 20 years ago, and this will happen again soon.

            In case you are still confused about the cause of our crisis – it was globalised finance aided by a financially compliant government
            Ah comeoffitnow. John and Mary boasted about the size of the large mortgage they could obtain from their bank. They viewed this as a validation of their status in society, and duly went for that overprices house/apartment, and to hell with the consequences. people who didn’t buy were there to be sneered at as losers, remember?

    • Praetorian

      Multifactorial, never a single issue, however, I would suggest, the system that was put in place, with all it various aspects and supportive commentators (‘get on the ladder before it is too late’, ‘soft landing’, ‘fundamentals of the economy remain sound’), played a massive role, far more than Mary and John who sought a mortgage so they could have a roof over their heads. Surely some engaged in flipping and property speculation, but that was relatively small scale when put side by side with the goings on at Anglo Irish Bank.

      • woodsey

        @ Praetorian – Of course it played a massive role but, who was it playing to? Mary and John weren’t just putting a roof over their heads, they allowed themselves to become convinced that the achievement of that roof was a lottery win!

    • Deco

      {
      in a broke country that can’t afford health-care
      }

      People might be spending nothing on healthcare – but they are still spending a fortune on products that damage their health.

      Both legal and illegal.

      with the illegal stuff being in plentiful supply in the banks.

      • GF

        “Landlords are barely making enough to cover their mortgage repayments”.

        I keep hearing the above sentence being speckled about across hundreds of media outputs. Does this sentence incense anyone else or is it just me?

        It would be like a pub owner taking out a loan to add a kitchen and then charge €21.55 for a pint of Heineken. When asked why his price is so high he would respond he is barely able to repay his loans. That is not business, that is not how a good business is run? He would either go out of business or learn that in business when you are not making enough profit it is not the states fault, or the Central Banks fault, or whoever else you are trying to blame. It is just business. Customer spending habits cannot be guaranteed for your pleasure.

        But what it shows is just how much power vested interests have and what a HUGE influence on our media they have, without anyone questioning their dribble.

        In addition when the above sentence is mentioned it is with an air of disbelief and astonishment that such a scenario could even be considered civilised, let alone actually happen. You hear individual landlords state with shock that the rent they receive “barely covers the mortgage”. I keep expecting the next sentence to be “do you know who I am, I’m kind of a big deal”.

        They (the landlords) borrowed someone else’s money (the banks, or in Ireland the Tax Payers), and are having someone else pay back that money plus the interest (the tenant), and will own an asset at the end of the process, yet still seem to think something is wrong and the government et al should be doing more to help these poor people.

        Something is very wrong, when they can mention that sentence over and over and over again and not one media pundit puts a hand up and asks “do you understand simple business models”.

        Just this morning on Newstalk Ivan Yates was interviewing some dude wanting minimum wage to be raised by €1 which has nothing to do with landlords. But he also, for counter balance, had a woman on from the Small Firms Association who managed somehow to mention the above sentence in the conversation without challenge. This is only an example from today, and not a criticism of Newstalk or Mr Yates, just the most recent random occurrence of this sentence being used that I can think of.

        She also managed to state within one minute that increasing the minimum wage would result in loss of jobs because employers would have to let people go, and then that people on benefits will not come back to full time-work because the state is giving them the extra amount, which is leading to employers not having enough staff? Sorry I am digressing but just a bit shocked how all these vested interest groups seem to be the only people speaking within our media (Mr McWilliams excluded along with a handful of others).

        Maybe I am the only one disgusted when I hear the sentence? It makes me feel that property owners (landlords) in this island somehow feel entitled, and that feeling of entitlement is real and deserved, because they are treated better than the rest? They actually believe the FF hype?

        • Robert Mc Call

          For sure you’re not alone GF. Now i’m standing here,reading your post on my tablet and that sense of entitlement you speak of, runs deep in the psyche on this little island-with it’s gladiator culture.A population (People,rather) of vice seekers devoid of any real sense of identity and unsurprisingly awash with narcissistic tendencies,and lots of other very degenerative,ugly qualities which again unsurprisingly, have an ever subtracting effect on society – the opposite direction of where we need ‘to be’ ! The Future !

          On another tab i’m watching a documentary all about cannabis research and featuring Prof David Nutt on Channel4 – all about cannabis research.As a lay person, it appears to me that their ‘experiments’ are woefully inadequate in establishing anything worthwhile.And unless there’s some black magic, they’re not gonna convince me that a progressive society which we all ought to dream of,could ever benefit from the condoning or indeed promotion of any drug that harms People’s Minds.It’s a scourge. Period!That said,a progressive society would have a compassionate-Russel-Brand approach to addiction too.

          Education is the primer.The KEY!

          As usual i’m off topic,sorry David, but a feelow journalist Genie Kerrigan wrote a piece on cannabis some 20+ years back (that i remember like i read it yesterday) and he wrapped up the article with words to the effect- “cannabis rids one of ambition” –

          i wish i had listened better then, but i am, exactly where i should be.Good enough.

          Peninsula (paene insula)

    • crobar

      shut up you idiot.

  2. woodsey

    Absolute rubbish, David McWilliams! The crisis that occurred 7/8 years ago was not caused by lenders, developers or governments. It was caused directly by us. By our inherent greed, driven by our ignorance of the consequences. We didn’t have to borrow to buy things we couldn’t afford. And of course it will happen again. It’s happening now. Imagine, in a broke country that can’t afford health-care, individuals are still shelling out tens of thousands for new expensively-imported cars to be run on expensively-imported fuel on cart-tracks that pass in Ireland as motorways. Get a grip! Banking enquiry? Ego trip?!

    • notourdebt

      The boom/crash was down to lite-touch regulation, brown envelope culture and money from Europe looking for fools to borrow it. Most people believed the hype/spin by media and unqualified auctioneers.
      Yes it seems to be happening again in Dublin as the government see house price increases as the only hope to get them re-elected. Although we are loosing a generation to emmigration its government policy to bring in immigrants for cheap labour and prop up the rental sector. When will Irish people wake up?

    • crobar

      please elaborate on buying things we couldnt afford. I like this one always here it thrown out by the idiots. elaborate with some examples please for us.

  3. SMOKEY

    YES IT COULD! We are ruled by an oligarchy. Nothing changed with the last election and I doubt much change will occur with the next one either. just like Irish radio, same ol shit, and I do mean shit. Steve Jackson or gRay F’Arcy? you decide.
    https://www.youtube.com/watch?v=rzjM-efkFfo

  4. douglaskastle

    It is a classic case of tragedy of the commons. Every one gets to play with a common resource with the hope it will improve the common good, but you always get some sociopathic entity that has no moral qualms about pushing the boat out as far as possible and destroying the common resource in the process. Imagine burning the candle at both ends and the middle, while in an oven.

    There are those of us who are thinking we are dealing with sane people in the system, surely they’ll manage themselves they have to know if they proceed as is they’ll pollute or destroy the common resource? That is where you fail! These guys have no conscience, no morality and in the case of business, where there stated goal to to return a profit to the shareholders, the are purely motivated to take from the common good and put nothing back.

    Is there a solution, I have no idea, it would be nice if there was some kind of feedback, we might call them regulators nowadays, but the have to be strong enough to keep businesses in line but no too powerful to drive all business away. Not an enviable task, as proved by the CB move to limit mortgages, which is unpopular, will affect a portion of the population for the rest of their lives who may never get to buy a house, but maybe the best thing for the country as a whole. It is hard when ultimately you are playing with people lives and the future lives of their children.

    • Deco

      usually the sociopaths are in positions of power in either the corporate or state realm.

      So that they can maximize the level of damage they apply to society.

      • douglaskastle

        Depressingly, this is correct. We are unfortunate that society has set up a river run that these “unique” individual get funneled right to the places they can do the most damage.

    • DB4545

      Tragedy of the commons? We are forced to place half of our income into “common” trust through taxation. This makes some sense for economy of scale and common interests like social security,national defence etc.In essence people place their eggs into two baskets and trust politicians to overview and manage the efficient use of OUR resources in those baskets for the common good. Time and time again the same politicians behave like pigs at a trough for themselves and vested interests. We need to pay attention to what the thieves are doing and vote them out. Most governments have a withholding tax to ensure tax compliance usually for the minnows. Maybe we need a withholding levy on pensions for politicians until their actions have been audited after they leave office. We need solutions because the centre will not hold.

      • douglaskastle

        Not a bad idea, but it could be similar, tie the pension payout to track in some way with GDP or some other performance metric tied to the success of the country as a whole. If the decisions they make during their time in government are good for the country in the long run (read the next 20/30 years) then they get to reap the rewards of such excellent decisions.

        However if the country goes into the toilet due to their unsustainable politic-ing and brown envelopes nonsense, well ya get bubkiss.

        Also if there are politician that have been motivated to make good decisions, but lost power to elections and some muppets get in and start messing up the place, these pension invested people might be encouraged to get back into power and stop the rot setting in again and preserve their retirement plans.

        This is a very idealised idea I discussed with my brother, he pointed out it is destined to fail as a lot of people who go into politics are attracted to the power and not the payoff, they can’t see beyond the next election cycle (even if they did they believed what “the experts” told them anyway). I think the world of career politicians will be the death of us.

  5. michaelcoughlan

    Hi David,

    “could this possibly happen again”.

    Yes most definitely. It is even foretold in the bible as pointed out by you that it will happen over and over again as sure as the tide goes in and out.

    “As I left the inquiry, I asked myself why hasn’t this type of innovation been introduced”

    Because the politicians are in cahoots with the head cases who call the shots. Their agenda is to save the Euro and banking system at our expense.

    Your solution to the problem isn’t fully thought out I respectfully suggest so let me add a bit in. Many people buy houses for homes and some buy them to let them. So you have two buyers: home-owners and investors.

    You mentioned before about deriving price based on a 25 year moving average which was a great idea.

    So Mr wannabe home owner steps up to the plate to buy a home with his 8% deposit and a 92% mortgage which can’t exceed the NPV of the 25 year moving average house for his area. If he wants to add cash to make up the price he can do so at his own risk.

    This is vital for recovery because the banks will be given the green light to extend credit to first time house buyers to buy houses. This will cause the prices to rise and ALLOW small builders to start producing homes and illicit a “supply side response”. This isn’t happening at the moment because cash buyers predominate meaning prices are as a result of CB policy are substantially below the cost of production and will be for years to come until all last distressed assets are disposed of.

    The 20% requirement of a deposit for the second time buyer is a disaster because it chokes demand as on the second buy the couple will probably have a baby on the way or one already and CB policy means they have to save a deposit a second time which will be all but impossible for most people.

    The second aspect is that landlords want to buy houses and apts to rent. The criteria here could be that a mortgage could not be loaned against a BTL which exceeds a sum derived from a gross 8% rental yield. For example: if the rent is 1000 PM that’s 12k PA. If 12k equals 8% then the figure of the BTL which cant be exceeded between the deposit plus mortgage cant be more than 150k. If the landlord wants to add cash to this figure to secure the property then so be it but at least the lending side would be constrained by rental yields.

    Will any of this happen? No. It is unacceptable politically to the establishment. They have to be seen to be doing something and that’s it.

    When I was watching you giving your testimony to the committee the thought crossed my mind that your council was still falling on deaf ears.

    When you mentioned about your moral and patriotic duty to call it like you see it it was delivered sincerely and without pretence lending gravity to the testimony. When I heard Brian Lenihan mention a call to patriotic action I remember my stomach turning. This didn’t happen with your testimony.

    I am not one for blowing smoke up peoples arses David but it was apparent that your performance was worthy of the observation that you are proving your self the Whitaker of your day. This is because you demonstrated above all the moral courage to go in to the chamber and basically tell everyone the complete bollocks they made out of everything the same way Whitaker had the moral courage to tell De Valera that his inward looking top down control (like Cuba) was making the republic unworkable.

    For doing the right thing you will earn their enduring contempt and that of the Drumcondra ditherer plus suds et al but it must be obvious to you their utmost contempt of you really is your greatest badge of honour.

    Respectfully,

    Michael.

    • michaelcoughlan

      “For doing the right thing you will earn their enduring contempt”

      The contempt didn’t take long to show up it did it?

      http://www.sundayworld.com/news/columnists/david-mcwilliams-told-you-so-is-difficult-to-hear

      • That article wasn’t actually that bad.

        At least she understood that David only suggested a temporary guarantee.

        Something which the plebs in all the ‘major’ political parties and many mainstrean economists fail to grasp.

        Although, really, it’s just an outrageous example of them ignoring half the facts to slander David.

        They know very well the crucial difference in what he suggested as compared to what Comical Lenny implemented, but it suits their purposes to tell blatant lies about David to take the heat off themselves.

      • There is not much difference in being in the stocks or placed on a pedestal.

        In both places you get pelted with rotten eggs. Both are likely equally deserving.

    • Colin

      Michael,

      I respectfully disagree about the 20% deposit requirement being a bad thing. As Mr. Tony Brogan pointed out here a few weeks ago, there is a strong correlation between property prices and credit available. Restrict the credit, and the prices come down! Many people cannot make rational decisions about loans, and wrongly believe that they should overstretch themselves as much as possible to get on or up the ladder. Young people benefit most from cheaper property.

      The cost of producing a house must fall. Site costs for houses need to fall. Builders must innovate and cut costs themselves. look at construction costs of houses in Regional areas of England, they are quite low in comparison, so if they can achieve efficiencies there, why can’t it be replicated in Ireland?

      If you are after a rough estimate of the price for a new home, go to homebuilding.co.uk or Jewson.co.uk and use their building cost calculator.

      At Jewson.co.uk for a large three bedroom house at 100 metre squared of good quality materials and inclusions will cost you £90,800 in Yorkshire if you use self-managed contractors

      At Jewson.co.uk for a large three bedroom house at 100 metre squared of good quality materials and inclusions will cost you £94,900 in south west England if you use self-managed contractors

      At Jewson.co.uk for a large three bedroom house at 100 metre squared of excellent quality materials and inclusions will cost you £123,400 in south west England if you use self-managed contractors

      At Jewson.co.uk for a large three bedroom house at 100 metre squared of good quality materials and inclusions will cost you £106,800 in Yorkshire if you use a single main contractor

      http://www.servicemagic.co.uk/tips-and-advice/how-much-does-it-cost-to-build-a-house.html

      • michaelcoughlan

        thanks Colin,

        The point I was trying to make was that mcwilliams had suggested that you restrict credit by the moving average method or the gross yield in a btl situation.

        Id sooner 20% on the first time buyer and 10% on the second time out than the other way round.

        You are correct though a high deposit gives much safer margins and control of credit.

        Michael.

      • DB4545

        They’re fair points but you also have to factor in serviced site costs, VAT and payments to councils etc. If you really want to focus a bank’s attention on lending bring in non-recourse loans. Banks will ensure valuations are realistic and accurate and completed with due diligence if they know that risk is secured on the asset price alone. A 20% deposit just gives the bank a 20% safety valve if prices fall i.e the gobshite who puts the 20% down takes that risk. They’ve already found out that the gobshite who takes the other 80% of the risk is the taxpayer. As it stands the clock is back to zero for the banks and they can roll the dice again with impunity.

        • michaelcoughlan

          +1

          • GF

            +1

            It must become law that all mortgages issued on Principle Private Residences should HAVE to be Non-Recourse Mortgages.

            Watch as the loan underwriters’ quality improves swiftly and permanently. Well until the next rouge FF, or it’s like, gets into power and somehow removes the law.

        • Colin

          DB4545,

          Yes, I agree about non-recourse mortgages. they need to be introduced now.

    • Michael
      It is impossible to correct one set of regulations with the addition of others.
      It is time to be rid of the parasitical regulatory process that assumes the actions of government can solve all ills or provide all benefits.

      The only thing government can do is provide a stable place to operate unencumbered by predatory neighbours or aliens. That is defense of the person and defense of the realm. Otherwise government should stay out of the way!!! :)

  6. DC

    I think Irish Economic commentary can be incredibly insular and parochial especially when a wider world view is what is really needed.

    All the chatter about housing bubbles, economic recovery, banking enquiries really miss the point.

    The last crisis was triggered not in Europe, nor Ireland, but by criminal US Bank lending, criminal wall street practises and zero regulatory oversight fuelled by a mortgage market that was used a vehicle to get as much credit into the system as possible regardless of who was the recipient. Once credit was created, wall street financial instruments of mass destruction infected the credit market and the crash was inevitable.

    yes we borrowed to excess yes the ECB and European banks willing lent irresponsibly, but you have to look up the ladder to see what was the progenitor of all this herd like behaviour. It was the US led financial system. It still is!

    Well guess what – its happening all over again – just different players, and different games. We are in a massive credit bubble US, China and EU are all hopelessly intertwined in this.

    This time around its the FED that is feeding the same credit bubble.

    Any crystal ball gazing about Ireland future is pointless, we are bankrupt, we are dependent on this very credit bubble for our economic survival. We are dependent on ZIRP. We are dependent on deficit spending as our economic model, as are most European countries.

    David Stockman architect of President Reagan’s economic turnaround known as ‘Morning in America’, warns of the looming collapse of free market prosperity and the destruction of American wealth. Stockman is the Canary in the Coal Mine and he is singing LOUD.

    As Dent says the one thing people forget very quickly is Bubbles.
    This massive credit bubble will pop and soon with massive consequences.

    All the West’s economies are now centrally planned – get that? I mean do you really get that?

    Watch the video here – yes there is a bit of a hard sell here nevertheless listen to Stockman’s message, he is calm, rational and full of common sense.

    Harry Dent makes pretty good sense too.

    http://pro.dentresearch.com/BNBSTOCK/PBNBR204?h=true

    • michaelcoughlan

      +1

    • Mike Lucey

      Yes, Stockman and Dent talk some common sense indeed but very few are listening as was the case when DMcW warned of the coming crash on RTE.

      I had to laugh at the politicos at the JOC showing total surprise at what DMcW was saying he forecast, a case of short memories.

      What the ‘reset’ will be like I have little idea except that it will leave an awful lot of folks in a bad place. Maybe we should listen to some of what the ‘preppers’ are advising and at least have the comfort of mind that one should be able to ‘get by’ for a few months until some normality returns.

      In the past, wars have been the way out for the elites and there are a high number of regional wars going on currently. The bear is being prodded quite a bit at the moment. I just hope that we don’t see a full scale war as that would be the end game.

    • woodsey

      @ DC – Like that! ‘Hitting the nail on the head’ comes to mind! Well done!

    • Deco

      Basically, Stockman and Dent are saying the stock market, and indeed much of the economy are now running as a Ponzi racket. And that it is about run out of steam.

      He is 100% correct.

      Only a massive war, which will allow the state system and the corporate system to act in concert, can prevent a disaster.

      This is where we are headed next.

      Irish neutrality has been sold. Not for 30 pieces of silver, but for a pat on the head.

      How will it come about ?

      Well, Hermann Goering had the general idea on how to make it happen. Randolph Hearst knew how to get the people motivated behind it. A decade after Hearst helped bring about the Spanish American war (which launched a century of neo-colonialism in Latin America and the Pacific) the European Press helped drive the frenzy that made stepping back from the brink after Sarajevo impossible.

      Whatever is required to keep the rich, rich will be brought into being.

  7. DJR

    David,

    To continue your analogy about the type of water used to put out the fire (which conveniently excuses your own contribution to the disaster!):
    -we could have used water to quench it (let anglo & nationwide go bust, converted all aib/boi bondholdings to equity or nationalised them)
    -but we decided to put the fire out by smothering it with bank notes (the fabulous guarantee, which you boasted was after catching out the short-sellers of anglo shares a few days afterwards!!!)

  8. Praetorian

    As long as political parties take donations from developers, and as long as governments derive huge revenue from housing/property, can’t possibly see how the cycle of boom and bust will be avoided. The efforts to reheat the property sector are under way which might not be too bad if we had a proper financial regulatory system especially over banks that were bailed out. What has gone on has been deeply cynical. Taxpayer bails banks and then pays charges on virtually all transactions, virtually impossible to get a a loan for a small business, they’ve built up their balance sheets using all means necessary but choked off the economy leading to business closures and growth in unemployment, while the very government that decided the banks were too big to fail issue statement after statement about job creation. Madness personified.

  9. Cassandra

    Hi David, congratulations on your performance in front of the banking inquiry last week. Considering the great calls you made in the run up to the crisis I bet you could not believe your luck to be able to say the biggest ‘I told you so’ ever, and on the record. To be able to replay a recording of your actual forecasts to the politicians in front of you must have been very sweet indeed. Footage of your leaving the inquiry on the news later was classic. It looked as if you were high as a kite! And rightly so. I hope you appreciate the fact that you were representing so many other market forecasters out there who were ignored and ridiculed as you were. It was a fine day to be sure.

    • SMOKEY

      +1 He is a bit of a rock star, albeit in a DEVO or Michael J Fox sort of way, but he can outperform any of them once an audience is in his way.

  10. zapit

    I like the analogy and solution David proposes for preventing it.

    If we are to include the bailing out of the banks into the analogy, would it be as follows: throwing more wood on the fire and hoping it won’t burn?

  11. Rock Star Economist

    Well done David .Your dress attire contributed to your successful presentation . I saw some of the televised event and you were in control all the time. You did not drop the ball and no knock on penalty.
    The moment was a watershed insofar as has the wheel come round only to start again . If all the events repeat themselves again in a few years I do not think the people want to be told the same all over again unless you can impersonate and that requires more stage skills .People were interested in what you said on the day and you were fine tuned in melody to please all of them .Maybe it is time that someone else will do the donkey work next time .

    Re-invention of the wheel comes to mind and new words and ideas need to be produced to maintain the high profile you have enjoyed to now because the next generation will have their own tastes .

    I have no doubt that you can do your own version of a Joshua Tree song with lots of metal and shades.

  12. DB4545

    It’s a fair analogy David so how about learning something from it? Neither the arsonists (the bankers) nor the firemen(the regulators) nor the recklessly incompetent thieves who appointed yes men/women regulators(the politicians) are in jail. All three groups have been handsomely rewarded with jobs, bonuses and pensions paid for by the taxpayer while the taxpayer can go and f**k him/herself. We had a fairly effective method two centuries ago to deal with thieves who placed vulnerable people in odious debt. It was called the boycott, it was used by the land league and it was effective. It’s time to boycott political parties and the businesses who support them. We have elections in the near future. I’m middle of the road politically. I’ve voted FF/FG/Labour when I’ve thought their policies best served my interests. I have no interest in the radical left or right.

    How about operating on these principles?

    Don’t vote for any incumbent of ANY political party or those who pretend to be Independent but who have links to existing political elites who destroyed this State. They’ve shown themselves to be mostly all thieves and we need a complete clear out. We may well elect new thieves but we can limit the effect of their theft and vote them out too.
    Boycott ALL businesses who demonstrate their contempt for the Citizens and honest businesses and taxpayers of this State. Some do this by appointing the arsonists, failed firemen/women and thieves to the boards of their companies. Research and then spend you’re hard earned money with people who respect your trust and your hard earned cash. We whinge problems to death in this State. It doesn’t look like any of thieves are heading to jail so let’s starve the bastards out. If you have a better solution let’s hear it.

  13. “Could it possibly be because the same vested interests that cheer-led and caused the last boom are still in more or less in power and the system hasn’t really changed?
    Surely not – it couldn’t be.
    Could it?”

    Of course it could. you identified the bankers as a primary problem but without stating which bankers.

    If the central banking system is NOT dismantled then nothing else will work. It starts with credit as you identify but you refuse to go far enough.

    You do not address the ultimate credit problem. The fact that our money system is issued as credit. Every single bank note is an IOU. YES every bank loan is a loan.

    It is the issuance of money as credit which is the basic problem. Please address this issue as otherwise all else is in vain.

  14. YES every bank loan is a loan. should read

    ..every BANK NOTE is a loan at interest.

  15. As all economic data is manipulated and hard to ascertain, it is crucial to know where to go for reliable data.

    As a primer try www dot shadowstats dot com

    Here is John Williams

    Some Biographical & Additional Background Information
    Walter J. “John” Williams was born in 1949. He received an A.B. in Economics, cum laude, from Dartmouth College in 1971, and was awarded a M.B.A. from Dartmouth’s Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. During his career as a consulting economist, John has worked with individuals as well as Fortune 500 companies.

    Although I am known formally as Walter J. Williams, my friends call me “John.” For 30 years, I have been a private consulting economist and, out of necessity, had to become a specialist in government economic reporting.

    One of my early clients was a large manufacturer of commercial airplanes, who had developed an econometric model for predicting revenue passenger miles. The level of revenue passenger miles was their primary sales forecasting tool, and the model was heavily dependent on the GNP (now GDP) as reported by the Department of Commerce. Suddenly, their model stopped working, and they asked me if I could fix it. I realized the GNP numbers were faulty, corrected them for my client (official reporting was similarly revised a couple of years later) and the model worked again, at least for a while, until GNP methodological changes eventually made the underlying data worthless.

    That began a lengthy process of exploring the history and nature of economic reporting and in interviewing key people involved in the process from the early days of government reporting through the present. For a number of years I conducted surveys among business economists as to the quality of government statistics (the vast majority thought it was pretty bad), and my results led to front page stories in 1989 in the New York Times and Investors Daily (now Investors Business Daily), considerable coverage in the broadcast media and a joint meeting with representatives of all the government’s statistical agencies.

    Nonetheless, the quality of government reporting has deteriorated sharply in the last couple of decades. Reporting problems have included methodological changes to economic reporting that have pushed headline economic and inflation results out of the realm of real-world or common experience.

    Over the decades, well in excess of 1,000 presentations have been given on the economic outlook, or on approaches to analyzing economic data, to clients—large and small—including talks with members of the business, banking, government, press, academic, brokerage and investment communities. I also have provided testimony before Congress (details here).

    An old friend—the late-Doug Gillespie—asked me some years back to write a series of articles on the quality of government statistics. The response to those writings (the Primer Series available at the top-center of this page) was so strong that we started ShadowStats.com (Shadow Government Statistics) in 2004. The newsletter is published as part of my economic consulting services. — John Williams

  16. Robert Mc Call

    i just now had the pleasure in watching David at the Banking Enquiry.

    in a word – surreal

    Comhghairdeas leat Dáithí

    mise le meas,

    a fan

    • David’s greatest forte is his acting ability. Great presentations delivered with style. But he still exhibits no understanding that it is the central banking Ponzi scheme money system that is the fundamental problem. We are economic serfs until that is destroyed.

    • Mike Lucey

      Interesting that the light sensors do not recognise Mr Christian as a human, his words!

      Listening to him left me clueless but on reading what he says it looks that he is stating in a very roundabout way that we have a complex paper gold ponzi scheme in play. It could not be otherwise. I’ll grant that he is a good spoofer though.

      I wonder when will Russia and China cash in their $$$ for delivered gold? The proverbial should hit the fan about the same time.

  17. Deco

    The Nasdaq is at another peak.

    http://www.marketwatch.com/story/innovation-not-easy-money-is-behind-the-nasdaqs-return-to-5000-2015-03-02

    By the way, marketwatch is owned by Murdoch Media.

    Just like the last Nasdaq peak companies with funny earnings predominate. This time it is different.

    Well, actually….it is not that different. Because, like the last time the PE ratio is built off a very high Price level, and a very low relative earnings level.

    All that is missing now is for that perennial joker the Economist magazine to tell the world that this is only the start and that this bull market will get to 10,000 before 2016. Purely for comedy.

    The Central Bankers printed tsunamis of money. It went to the banks. And the banks brought it into the Casino. The gamblers are having fun. Many of the players are high on Cocaine. A frenzy is building. Temperatures are rising.

    Wolf of Wall Street is a description that is fare more accurate than most people realise.

    • michaelcoughlan

      “Well, actually….it is not that different. Because, like the last time the PE ratio is built off a very high Price level, and a very low relative earnings level”

      Excellent stuff Deco. Prima fascia evidence that the fundamentals themselves are being distorted.

      Michael.

  18. Here is a country moving rapidly into a major recession. Only lies and distortion claimed it ever recovered from 2008.
    The truth is this will come to be called the great depression.

    http://investmentresearchdynamics.com/category/financial-markets/

  19. Paulie82

    This self-correcting lending mechanism which allows only 80% LTV borrowing of the previous 2 years HPI. Has this been adopted in any other countries? If so, where??

  20. It is amusing to watch and read of the adulation of david this week.

    A month ago he was criticized for being wrong by nearly every writer on the blog.

    Beware the mood of the crowd David. Right or wrong they will turn in an instant.

    Davids greatest strengths are his writing and acting ability. He plays to the audience. Observing him on stage I noted not a laugh coming from him was spontaneous. All were stage managed. His smile is that of the joker, painted.

    He is in my opinion wrong in his assessment of the root causes of the financial problems. He is trained as an economist and was hired as a central banker.
    His mind set is developed from there.

    He refuses to debate the central banking issue because he will lose the argument.

    • cooldude

      Good observation Tony. If there had existed an open banking system without any central bank you can be damn sure there would be no reckless lending. In such an open system any bank who didn’t perform proper diligence would be out of business pronto and new ones would be allowed to enter the market with ease. The threat of bankruptcy is the best regulation and is much more effective than a clown like Holahan.

      Banking such simply be another service industry which should benefit society not the parasite it has become under our system of central banks sucking wealth from our society. Also money should be simply another good which should benefit both buyers and sellers not some exclusive franchise which is granted to the privately owned central banks and is mainly used by those close to the system for gambling at the taxpayers expense.

      You are right Tony the current system is a ponzi one which automatically creates the boom/bust cycle and transfers wealth from tax payers to the gamblers.

    • mishco

      I don’t think we can be sure he will lose the argument until we have the debate. I agree it would be an interesting debate, and would suggest the following reasons for David not joining it:

      a) He prefers the “conventional wisdom” of the fiat money system.
      b) He agrees with you but does not want to upset the advertisers.
      c) He would like to change the system, but fears this will create even worse problems than we have now.
      d) He’s buying lots of gold and will come out with a searing article at the propitious moment.
      e) He prefers to look backwards at past glories rather than forwards.
      f) Bits of all the above, plus???

      • so you suspect he is not a part of the solution by way of educating his readers as to the truth about fiat central bank money issued as a debt and subject to usurious practices.

        Corrupt money that corrupts all who touch it. Thus the source of all our problems. See Rob Kirby posted below

  21. Bail ins have started.
    Get your money savings out of the banking system.
    One for you David to warn the people. It will be a fabulous ‘I told you so’
    The G-20 agreed to bailins 18 months ago and Canada for one enacted the legislation 4 months ago

    ———————————————————————————-
    Success Council
    3:01 AM (7 hours ago)

    to tony
    Ok, I need you to pay close attention to what I’m about to tell you.

    There is a threat to your bank account that is real, tangible, and happening right now…

    Europe’s M.O., as its banks begin to collapse, has changed to the “bail in” model, and the rest of the world will likely follow.

    In the most recent example, an Austrian Bank called Hypo Alpe-Adria-Bank International AG, which was nationalized in 2009, has stopped using the tax payer’s pocket as its private piggy bank…

    Instead, it’s using its depositor’s pocket as its private piggy bank.

    “It’s obvious that there is a shortfall due to the bank’s asset review, and the bank’s creditors will have to contribute to fill that shortfall,” Klaus Kumpfmueller, the FMA’s co-head, said Monday on ORF radio.

    It sounds like a bunch of “banker speak”, but the real message is chilling:

    The bank made bad investment decisions, and your deposits are on the line.

    Please heed this warning and watch what happens around Europe for signs of what’s to come.

    To Keeping Your Retirement Safe,

    Max

    • Mike Lucey

      Tony, ‘Bail Ins’ gaining momentum would not surprise me in the slightest.

      Today I was in my local lock and key shop getting a replacement door lock which gave up the ghost. I noticed that they has a lot of small household security safes on display and asked how they were moving. I was told that they were moving quite briskly!

      A lot of ‘thinking’ folks are covering their bets these days. I hope they are wrong but have a gut feeling that they are not.

  22. Honest money provides stability , David. Dishonest money produces strife and war. Which side are you on? The side of honest money, I hope!
    The central bank fiat money system will be the death of millions.
    If the globalist, elites have their way, the death of billions.

    Kirby goes on to say, “It all boils back to the money. And it all boils back to the notion we don’t have honest money because when you have honest money, these excesses don’t occur. Things cleanse themselves, and that is the virtue and the merit of the old relic, the gold standard, because it is honest commerce. When you have honest commerce, generally people are peaceful and get along with each other on a fair basis. Equal value for equal value for exchange of goods, not one country with the God given right to print money to buy the world’s output with freshly created out of thin air fiat money. It’s dishonest commerce. Dishonest commerce is at the root of all the problems we are facing in the world.”

    http://usawatchdog.com/contact/

  23. We are dealing with a psychotic foe when it comes to money and the power it brings.

    Putin forecast an assassination to try to polarize Russian dissent. It has not worked in Russia although in the west it is debatable as people here still think we have a free and honest press.

    http://www.paulcraigroberts.org/2015/03/01/putin-predicted-washington-employ-assassination-tactic-russia-paul-craig-roberts/

  24. michaelcoughlan

    well done David.

    Just goes to show how a good guy can reinvent himself in the face of it all.

    http://www.thejournal.ie/mcwilliams-company-profit-1974075-Mar2015/

    Michael.

You must log in to post a comment.
× Hide comments