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.
Forget the past and your are condemed to repeat it!! Not holding those accountable, those financial and political socio-paths and criminals is an affront to decent Irish people and Ireland’s history of struggle over imperialism. The Irish need to make a stand, working people from all backgrounds need to unite, we need a new Republic based on equality, dignity and the right to housing, education and healthcare! Further to your Jack Welch homily David, this is worth reading: John Perkins calls himself a former economic hit man. He has seen the signs of today’s financial meltdown before. The subprime mortgage… Read more »
What about the people who didn’t buy at the inflated prices? They said “this is mad” and waited. Now it is their chance to get a house at a reasonable price. These type of schemes and societies general ‘higher house prices are better’ view mean that we are supporting those who gambled – let’s be clear here, the housing market is a market and no one forced these people to buy and no one complained when the market was going up. I have sympathy for people but it is either a market or it is not. We cannot protect people… Read more »
David.
“when the banks bet on you”.
The banks never loose, only loose out.
Latvia provides the homeowners debt trap ‘get out’.
See link.
BUT, it mean’s facing reality and real market equilibrium prices and we all know the ‘powers at be’ will do anything to stop house prices falling to the real market price.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=asLBSenlBt9A
NAMA and it’s state funded and controlled coercion of the property market finding its real market equilibrium is the BIG QUESTION.
As sure as night follows day, this will be abused by the usual suspects. The whole system is corrupt to the core, and I think only a complete crash will bring people to their senses. The people are still praying that things will pickup, when the reality sets in, I hope we will then see a change. Looking at Mary Hanafin on Pat Kenny with her lip gloss talking rubbish, I actually turned to Channel 4, and missed the excitment. The Government would love to forget the past, while also winking and nodding at their mates “nice earner here lads”.
David, ‘We must forget the past and take control of our future ‘, are you working on a comedy script for the Panel? We Must not forget the past , it is because of our past that we are facing such a quagmire. People are today in Negative equity simply because of a over inflated property bubble brought about by the corporate greed from our institutions. Where we saw The Bankers , golfing and dining with the regulators of their industry, Real estate agents ( sorry Auctioneers ! ) given mortgage agencies. Our National Print Media with PR agencys worked… Read more »
David, I wonder if the house is sold at a (real) loss after 15 years, will the lending institution be prepared to simply write off the downside. I live in the Dundalk area and note that you can buy a 3-bedroom house on the outskirts of town for €215,000. This price is €65,000 above the price of a similar property in Dundalk in 2004. Prices would need to decline a further 30% to get back to the level of 2004. Even then this “entry-level” home costing €150,000 at some time in the future would be valued at 4 times today’s… Read more »
And if we extend the logic of this argument about banksters and the corporates in this country to the global system……… “……Let me give you just ONE statistic, worked out in minutes, because otherwise it’s incomprehensible. Sub-Saharan Africa, which is the POOREST part of the world, is paying $25,000 every minute to Northern creditors. Well, you could build a lot of schools, a lot of hospitals, a lot of job–you could make a lot of job creat…ion, if you were using $25,000 a minute differently from debt repayment. So there’s this drain. ……” From the new documentary: ‘The End of… Read more »
The illusion is that there is a “free” market, but I don’t think this has existed for several hundred years. Monopoly rules, in finance and in industry, we are just a dependant economy – ruled from abroad. The ‘future’ economy must be organised in a planned way, to serve the needs of our society, not the ‘profit motive’. Until this happens we will continue with enslavement to foreign debt, uncertainty etc. There should be emergency laws passed to issue summary justice to criminals who have allowed our economy to sink and who have feathered their nests off the backs of… Read more »
Hi, In order to solve a problem, its often helpful to break it down into its parts. Let’s look at the part related to Ireland. Lets try to rescue the young mortgage holders. Its time the banks in return for bail out offered optional debt for equity swaps of 41% to all mortgage holders. Financial gurus can sweeten the deal by dreaming up switch out deals in return for opting into full repayment schemes. As for cleaning up the mess, it does give the option of allowing the messers to go ahead and make a bigger one! Hapless Hanafin on… Read more »
I suppose a good place to start is breaking up the banks into society serving “High St” units and “Investment” banks as with the old days.
At least that way the staid responsible lenders aren’t polluted by the bonus driven market gamblers.
subscribe.
David, The concept of not living the past is a sound one. Time we stopped talking about the past and figured out what the next steps should be. However in thinking of the future, we should not forget about the present. Re debt for equity: The third outing for this particular idea here I believe. How does this get cash flowing in the economy again? I’m afraid I don’t see the link. If you effectively bail out people who can’t afford their mortgages, on average your returning them to a situation where they can afford their mortgages, but are not… Read more »
What a horror show . I have not been in Ireland in 5 years and this xmas I will be back for a month . From what I am reading and hearing about from Ireland it looks like a nightmare . I was talking to my cousin the other day and her boyfriend is an unemployed electrician with a mortgage of 1900 Euro a month ! I accept the personal responsability part but who let that happen ? It is a complete and utter disgrace what happened in Ireland . Yet the same government sits in power with an equelly… Read more »
In heady celtic tiger Irish people forked out ‘corkage’ to hotels for screwtop wine bottle opening at weddings, €6 ‘platage’ fee for serving up your own wedding cake, now we’re getting ‘screwage’ to bail out the architects of this mess in cluding the accountancy firms that negligently signed off on the accounts. I’m not an FF but George Lee seemed v vague on the detail of what they would do, suggest KEEP six honest serving-men George, (They taught me all I knew); Their names are What and Why and When And How and Where and Who. I send them over… Read more »
We were doomed the day they changed a Marathon to a Snickers. Which happened at the same time as reunification in Germany strangely enough.
David said: “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.” Here’s a suggestion that would generate hope in those who find themselves in negative equity. (Although the details need to be worked out carefully.) Everyone with a house in negative equity, who kept up their mortgage payments, could contribute an additional 5% of that outlay to a lottery fund run by a consortium of lenders. This payment would be matched by an equivalent contribution from their lender. Each week a number… Read more »
Can someone here who is property-inclined do the maths and tell me why the government couldn’t do a debt-equity swap on many of the houses (finished / unfinished) and then charge rent (as they do for public housing)? Wouldn’t this be less risky than loaning money to NAMA? The Majority which will be going towards the underlying land value which is an over-inflated dead duck. Why not acquire commercial units (for all of the unemployed wanna-be entrepreneurs and their follow-on employees) and half-built estates to soak up the public housing building deficit. Oh I forgot, because that stores wealth, doesn’t… Read more »
No-one held a gun to anyone’s head to buy property. If you were suckered by FF, the media, the auctioneers, then you were suckered . You made the decision to buy, not to buy, to rent, to stay with your parents or to emigrate. I got mortgage approval in 2002 (12.5 times my salary at the time as I had a chunky deposit) and looked at buying in Dublin and said – “whoa, this is insane, everything is way overpriced”. I never bought, I rented and ultimately emigrated, chased out by unrealistic property prices. Prices have a lot more to… Read more »
I find this story interesting, Dr Bacon has been a busy man. http://www.irishtimes.com/newspaper/breaking/2009/1111/breaking68.htm Apparantly competition in the Hotel Industry is a good thing….. No, Wait, Just one minute, I got it wrong, its apparently a bad thing. Too many hotel rooms on the market, only 5% of hotels making a profit, I’m sure they’ll open up their books to you if you don’t believe them. Perhaps they could lobby Lenny to scrap the travel tax? Maybe even try to team up with Michael O’Leary and introduce some kind of special deals for foreign tourists? No, Shovel some more money Peter… Read more »
I think I detect a hint of despondency in Davids article .
David, The collective dilemma is a good description for what we are in, however playing musical chairs and doing card tricks with debt does not make the debt disappear in the eyes of our creditors. The collective hole we are in is huge and none of the action taken so far by the banks or Government helped. In fact most of it hinders any kind of recovery. Debt/Equity,Deferral and Debt Forgiveness will have a negative effect on our economy and will only increase the velocity of the downward spiral, and while it may let someone stay in their home a… Read more »
posters –
I see from tim’s post back at 47 last article the NAMA ‘ites are securing the vassal for the toxic assets into non – disclosure of any crucial info that may shed light on who benefited from the bubble years.
ALL data pertaining too 2000 – 2007 bubble years under lock and key held secure in the NAMA trunk.
Folks, just got word: NAMA vote has been passed in the Seanad; some shenanigans involved, with the govt chief-whip blocking the door, either keeping dissenters out or FFers in, I do not know, yet.
Three “Benedict Arnolds”: Eoghan Harris, Joe O’Toole and Ronam Mullens.
Aha! 6 votes missing! That’s what whip was at, once the three boyos had been bought:
http://www.politics.ie/economy/118281-seanad-passes-nama.html#post2268501
Folks, “Here we Go!”
What do we want? (Let’s force the decision):
http://online.wsj.com/article/SB10001424052748703574604574501632123501814.html
Posters. Watchin historian roy foster on bbc and he is offering invaluable insight into ireland s revolutionary past in tandem with the present. I am too seeing a ‘reckoning’ underway of some sort. The NAMA – triple lock is a rubicon of some type. A further erosion of a democratic deficit to such a degree where the center cannot hold and a type of tyranny is loosed upon the citizens. Where will it take us now that it all seems rather unstoppable and inevitable. The nationalisation of one or more banks is next and the triple lock is here. Then… Read more »
posters –
New chief in charge of NAMA / SPV con.
http://www.finance.gov.ie/viewdoc.asp?DocID=5769
He is 41. And in NTMA since 1994.
Folks, it boils-down to cronyism: will the President listen to BL or BC?
One is a shorts man, like his father, the other is a pint man, like his father.
Which will she back?
I had a visit today from Jack Russell, and yes that’s his real name, although when I think of it, his Mother was right to call him Jack, because he is small and contrary and would turn on you in a second with to much drink, so I always put him on my “keep an eye on “ list. Anyway as things are a bit slow in the afternoons, I struck up a conversation about what’s all over the wireless these day’s, namely “negative equity” and what Jack’s take on it might be. “Well it’s a good one right enough… Read more »
To refer to the old 6 month chestnut, here’s what Iceland is doing to move forward.
http://www.huffingtonpost.com/alda-sigmundsdottir/tired-of-waiting-icelande_b_349420.html
Furrylugs: The idea of a tribal assembly (for that is what this is – Icelanders are a genetic tribe) has its roots deep in Irish and Scottish history. Each tribe in Ireland had a “Hill of Sembling” where the Urraghs were inaugurated and tribal business was conducted in the presence of the freemen of the tribe. (Not a random selection of participants.) The freemen were men of substance and discretion who had a family and a stable role in society, not just property owners. In he event that Ireland’s Nama, etc fails to solve our problems, and we are left… Read more »
Hi again David, We should certainly NOT forget the past. I disagree that recriminations are of no use, indeed, they will give many the hope that is needed, and you are right about that, people do need hope. We need to repair any contamination that moral hazard (ie: getting away with it) brings. People need to be treated fairly. I agree, that a debt deferral system for those caught on the hop may help. But in this scenario the banks would be overpaying for the asset. So what is wrong for Nama is wrong for a bank too, although in… Read more »
Hate to burst the bubble further on Australia but also from John Pilger “The head of a UN Working Group on Arbitrary Detention, Louis Joinet, who has made more than 40 inspections of mandatory detention facilities around the world, says he had not seen worse abuse of human rights than in Australia. Under the Howard government, support for Aboriginal health and legal services has diminished. In western New South Wales, the life expectancy for Aboriginal men is 33. Australia is the only developed country on a United Nations “shame list” of countries that have not conquered trachoma, a preventable blindness… Read more »
The head of a UN Working Group on Arbitrary Detention, Louis Joinet, who has made more than 40 inspections of mandatory detention facilities around the world, says he had not seen worse abuse of human rights than in Australia. Under the Howard government, support for Aboriginal health and legal services has diminished. In western New South Wales, the life expectancy for Aboriginal men is 33. Australia is the only developed country on a United Nations “shame list” of countries that have not conquered trachoma, a preventable blindness that affects mostly Aboriginal children, and is a disease of poverty. Six years… Read more »
Folks, some notions on NAMA:
http://www.irisheconomy.ie/index.php/2009/11/11/nama-not-borrowing-from-ecb/#comment-24139
….. and the plot continues to thicken……
Also, at this link is an A-Z guide on how NAMA is funded. MAke sure one has a sick bucket at hand.
http://www.irisheconomy.ie/index.php/2009/09/07/ecb-nama-bonds-and-the-irish-banks-as-issuers-of-sovereign-debt/
William Beveridge published a report in 1942 and recommended that the government should find ways of fighting the five ‘Giant Evils’ of ‘Want, Disease, Ignorance, Squalor and Idleness’. In 1945, the Labour Party defeated Winston Churchill’s Conservative Party in the general election. The new prime minister, Clement Attlee, announced he would introduce the welfare state outlined in the 1942 Beveridge Report. This included the establishment of a National Health Service in 1948 with free medical treatment for all. A national system of benefits was also introduced to provide ‘social security’ so that the population would be protected from the ‘cradle… Read more »
Sorry David, the goal must be to ensure that those who ruined this country — FF and their dear banker and builder mates — don’t get elected into power again for a very, very long time. The Popes Children must suffer the bleak future FF has given them and remember to thank them in every election from here on.
Ok We Need new ideas….well why not go down this road , a new tax and income for the state ?
http://news.bbc.co.uk/2/hi/8221599.stm
Here Tim, got sent this from a American Professor this morning, to show me how much New Thinking is happening now state side
http://www.youtube.com/SSDP
Great News …..NAMA has been passed and Enda Kenny and George Lee , missed the Vote !!!….What is going on here ?
But the REALLY Good news is Brian Lenihian in the house came out and said We will see growth end of next year , if we pass the December Budget !!!
Garlic must have a physiologic effect when taken long term !
BrendanW, thanks for the link; however, I do not see our leaders stopping the waste of money on the war on drugs. Even look at what the authorities have done recently with tobacco seizures: they destroy the product, instead of reselling it. Imagine paying to pulp and incinerate/dispose of a product that has already caused loss of revenue? Just like raising VAT, when those across the border lowered theirs; just like over-paying for toxic assets going into NAMA, when Peter Matthews has shown, clearly, that at the VERY best, it will lose €11,000,000,000. Here is the legend that is “Goodhart”:… Read more »
All that is left now is for the President to refer N-A-M-A, The Beating of the Lambs, to the courts under A45. Tomorrow being Friday the 13th, The Aras might succumb to a sense of the dramatic? If not, our Constitution is nothing more than a guideline document to keep the Proles, Peasants and Impoverished in their place. If that be so, the genesis of a shadow national assembly gains far more credibility than the Putsch of free speech we witnessed today where the future of a country is sold to appease moneylenders. I’m disgusted but that won’t fill the… Read more »
Friday 12 October 2009. Dail Eireann votes 81 to 62 votes in favour of NAMA. NAMA : Needlessly Allocating Millions into an Abyss. Against this backdrop Cowen tells us that there has been deflation and that we should all be delighted because the cost of living is decreasing. He stops short of claiming credit for this because it would imply that he is suckering consumer confidence – which is what IBEC have him there for in the first place – to keep everybody leveraged to the limit. Six-One News 12 October 2009. Headline number 1. Irish Priest is freed in… Read more »
Now I have discoverd that the NAMA monstrosity (with unlimited exposure) was passed by the entire Oireachtas.
And RTE refused to have it in the first 15 minutes of the evening news. Our advertising sponsors and our cronies in Kildare Street who gave us these jobs would not like that.
Posters. NAMA / SPV is a trojan horse to further remove competition. Too further power elites systems of social control. Too further remove any possibilty of ‘rebellion by the proles’ keeping the serfs docile and distracted in fear with questions relating too where is my rent coming from, how will i be able to pay off my mortgage, how can i get a mortgage with house prices so high, all fear driven strategies too keep the sheeples minds busy in worry and fear and away from the facts. Facts like NAMA / SPV three card private banking debt into state… Read more »
Posters; The housing bubble was engineered and blown up and popped on purpose. The power elites carried it out for a number of purposes. They are bringing us all into a complete command economy. No different to the one in the old soviet union. Prices will be completely controlled. Employment will be completely controlled. We will be told we all must be greatfull for the gov taking care of us and be all good boy’s and girls. NAMA / SPV passed introduces a new high tech neo feudal serf culture of corporatist rule, deepening its control over the market economy… Read more »
Folks, NAMA could have been stopped last night in the Seanad, but wasn’t. I was receiving info (via twitter) from someone who was there. Look at what happened, and tell me if I am crazy for smelling a rat: There were six votes missing; Three “Benedict Arnolds” voted against the FoI amendment (O’Toole {he, of the brother-in-law that got the Thornton Hall money}, Mullins{he, of “Cat-Lick” hierarchy shmooser-fame} and Harris {he, of Bertie-appointee fame}). The Govt chief whip was blocking the door of the chamber, to stop others coming in. The three amigos count for 6 votes, don’t forget, when… Read more »
China offloads its toxic assets while we store up on them……..
https://reports.agorafinancial.com/OST_Gold_2000/EOSTKB22/landing.html?o=40985&s=42436&u=28428186&l=62415&r=Milo
Intersting quote from this commercial report; from the guys behind “The Daily Reckoning”: –
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” attr. economist Ludwig von Mises.