November 7, 2016
Nama, Kafka and the trial of our public sectorPosted in Sunday Business Post · 99 comments ·
Make no mistake about it, the series of public sector strikes that we have experienced — and are about to see more of — are entirely linked to housing. The fact that middle ranking public sector workers can’t, or at least don’t feel that they can, afford to live in this country is at the root of the latest industrial unrest. For the State, the message should be clear: fix housing and you more or less fix most of the grievance. In contrast, allow the continuation of the dysfunctional market for housing and accommodation in general, and you have a recipe for industrial relations war.
When you stand back, it is not easy to see that the essence of the problem is a total lack of understanding deep inside the Irish policy-making elite about the conflicts implicit in economic policy. Can’t any of the Department of Finance thinkers see that the government is on a crazy hamster wheel whereby it has created a policy framework to increase the price of property (in order to recover value of the bank bailout and make Nama profitable), but at the same time lose all the gains in the form of massively increased public sector costs.
These policies are mutually destructive and the rising public sector costs will undermine the willingness of the rest of the population to pay taxes because they see that higher taxes aren’t going on better public services but on higher public servant salaries. In short, the political upshot of these two mutually incompatible macro policies, risks undermining the entire tax base.
To explain what is happening, let’s take each issue on its own.
First let’s explore the primary short-term objective of trying to claw back as much of the bank bailout as possible and the related objective of making NAMA profitable.
The State can only achieve this by engineering a rise in property prices. The banks went bust in 2008 because they borrowed too much money and lent it to property between 2003 and 2008. Thus on the banks’ balance sheets there was borrowing on the liability side and property on the asset side.
When the property market collapsed, the value of the asset side of their balance sheets collapsed. But the debts on the liability side, they didn’t collapse in tandem. In fact, the State paid all the liabilities – including paying the bondholders. This much we know.
However, the State now owns the banks that it nationalized. If you want to sell them again and get back some money, it means that the State has to engineer an inflation of the assets side of the balance sheet. So the State needs property prices to rise, so that the banks are solvent again and then it can get some money back. But this means that it is State policy to have rising property prices.
Now throw in the objective of making NAMA profitable.
The only way that NAMA can make a profit is if we experience another Ponzi-style scheme in commercial property. This is one whereby foreign funds buy up cheap Irish property. They then hold on, so that supply is restricted. Then prices rise and they get out. And ultimately they sell on to another investor at much higher prices. A great example of this was reported this week where PIMCO – a large American fund – offloaded their so-called “Ulysses” office portfolio to the pension scheme of the ESB.
This story truly highlights the bizarre nature of the Irish property market. The so-called “Ulysses” portfolio (anyone with a passing knowledge of James Joyce would appreciate the wit in naming a property fund after the serial property defaulter Mr Joyce) was sold to the ESB’s pension fund. So the Irish public sector buys expensive Irish property back from foreign investors once the foreigners have made their twist.
The sale price has not been disclosed but is believed to be more than €140 million.
Could you make this up? Not only is one arm of the Irish State, NAMA, facilitating the sale, but the people who are buying the property once the juice has been made by the foreign speculators, is the pension fund of the Irish State electricity board!
This is more Kafka than Joyce, don’t you think?
The higher commercial property goes, the more profit NAMA will make because NAMA inherited all the property in 2010 at the bottom. Look at this the other way. NAMA’s profits have to be the single best warning of another property bubble – this time in commercial property. Rather than being a cause for celebration, NAMA profits should be a cause for concern.
So one arm of the State, for its own short-term aims, is pushing up property prices both commercial and residential. This means that another part of the State, the public sector workers, are being priced out of the property market in the process.
The workers whose disposable income is squeezed because of higher rents, house prices or both, eventually suffer enough and agitate for higher wages because they want to live near the cities that they work in.
Therefore, the State has in fact itself orchestrated industrial unrest because one government objective (driving up property prices) is actively undermining another part of the State (keeping down public sector costs). This inconsistency is due to the fact that no one in government is thinking in any joined up fashion.
Meanwhile, as other tax payers see their higher taxes spent on increasing the wages of public sector workers rather than on better public services for themselves and their families, they will try to avoid taxes because “trust ‘ in the system has broken.
This is where we are going – head first!