Courtesy of Chris Cook, I attended a conference on Nama – the proposed National Asset Management Agency, or bad bank, organised by FEASTA (Foundation for the Economics of Sustainability) and the Environmental Pillar of the Irish social Partnership framework. It was addressed by a number of prominent economists who explained their concerns about the current Government Nama proposals. Not to put too fine a point on it, the general conclusion – reached by a roomful of mostly middle aged people – is that we need an almost immediate revolution in Ireland if disaster is to be averted.
The star of the show was Professor Brian Lucey of Trinity College Dublin, the author of the OP Ed piece signed by 46 economists which drew a virulent response from Government adviser Alan Ahearne.
His central thesis was that by overpaying for toxic assets, the Government was engaging in an enormous transfer of wealth from taxpayers to shareholders and bondholders of the banks. Far better to pay the market rate for those assets (which might yet, indeed, have much further to fall), allow the banks to fail/default over a week-end, and then re-constitute and recapitalise the banks as ongoing businesses the following Monday. Investors should bear the consequences of the risks they have taken, that is capitalism in its essence. Turning a private default into a public national default is the very worst thing we could do.
Ireland, he argued, is about to be hit by a second wave of even more severe recession – as more people lose their jobs, default on their mortgages, are pursued on their credit card debts, and the whole consumer economy grinds to a halt. We are entering into a long term economic cycle of economic decline which typically takes 15-20 years to resolve – peak to peak, or trough to trough as the case may be. In this context, and given the enormous overhang of property on the market, property prices have lot more to fall before they stabilise, and it is sheer madness to pay way over current prices for bank loans which may take 20 years to recover.
The Government have invented a concept of “long term economic value” as a means of overpaying banks for their loan portfolios which is predicated on the notion that previous bubble prices were a norm soon to be recovered. In reality, it is little more than a fig leaf to cover the naked extortion of the taxpayer.
Compounding this madness is the government decision to borrow short to cover long term liabilities. Nama bonds will be issued with but a 1-2 year lifespan, even though the liabilities they are designed to fund are unlikely to be realised only over a 10-20 year period.
In addition, the Banks will continue to “manage” the Nama loan portfolio alongside their own loan portfolios. Are we seriously to believe that a Bank will put a Nama property on the market (thus depressing prices) before they dispose of their own?
Part of his argument was the classic economic “moral Hazard” argument, that if you protect investors from the consequences of their reckless actions, they have no incentive not to act recklessly again. The seeds of the current crisis were sown in the previous Allied Irish Bank bail-out of the 1980’s when the bank was threatened by a very ill-advised takeover of an insurance company. And yet Government Advisor, Alan Ahearne, had the temerity to talk about the need for “Irish banks for an Irish economy”. That should go down really well with the ECB which is expected to stump up the cash to back the Nama bonds.
Brian Lucey went on to dismiss the bizarre arguments against nationalisation being offered by the Government:
- Nationalisation would make it impossible to get funding from international bond markets: Really? Many countries (not private banks) e.g. Russia, Argentina, have defaulted on national debts, and yet have been able to access international bond markets almost immediately afterwards. Often their problem has been the excess availability of debt funding.
- Nationalisation removes market oversight of the banks: Yes, that worked really well over the past few years didn’t it?
- Nationalisation doesn’t have an exit strategy: Anyone ever heard of privatisation?
Once again the Irish elite are engaging in the most banal nationalistic rationalisations for trying to keep in control of a situation they have manifestly mismanaged. T.K. Whitaker, the Irish economist and senior civil servant who masterminded the Irish economic renaissance since the 1960’s would be turning in his grave (except he is still apparently hale and hearty at 93!).
The reality is that the Irish banks have failed. Irish taxpayers had no hand, act, or part in that failure. The banks shareholders and bondholders have failed to exercise due diligence and oversight and now must take the consequences. Nama should take on the toxic debt on behalf of the shareholders – not the taxpayers – and should realise what value it can over the next few years as any receiver or liquidator would. Shareholders and subordinated bondholders should have to write down their investment as happens in any similar situation in the capitalist world.
The conference was followed by a meeting of members of the environmental pillar of the Irish social partnership framework which contained some Green Party activists concerned that the Green Party would be “bounced” into supporting the Government Nama proposals at their party conference this week-end. The short term-frame did not permit the formulation of an agreed considered response, although their was unanimous concern that the Government was initiating a major programme (Nama) without discharging its legal responsibility to conduct a Strategic Environmental Assessment first.
Many parts of rural Ireland are being re-christening “Namaland” because of the presence of “Ghost” housing estates built during the boom and for which there is never likely to be a viable market.
