Showing posts with label nationalisation. Show all posts
Showing posts with label nationalisation. Show all posts
Saturday, 2 October 2010
What shall we do with our new banks?
Slí Eile: as the sweet tones of the 'People's flag is deepest red it shrouded oft our martyred dead' signalled the end of that very nice protest on Kildare St last Wednesday it became obvious that the authorities were so impressed that at long last they decided by 6.30am the following morning to take majority public control of Allied Irish Banks. The commanding heights are now in full view and socialism (for bankers) is within reach. From each according to their means (higher interest payments to unknown investors) to each according to their needs (the same unknown investors are are senior bondholders). No wonder it can be claimed that some €15bn in senior debt (in Anglo-Irish) has the same status as deposits and this is a legal matter (did I hear some mutter the constitution - they must be talking about private property). Now would readers of this site care to suggest what we the people of Ireland - gnáth phobal na hEireann - might do with this new found resource. This is about democracy. Truly Marx was right when he said that the modern State is but a committee for the management of the common affairs of the bourgeoisie. Except that the international bourgeoisie are not too impressed with the efforts.
Wednesday, 24 February 2010
Triple Lock - a lifetime of debt
Slí Eile: Writing in today's Irish Independent, economist David McWilliams in his typically lucid way calls a spade a spade (It's time to shout stop - NAMA is grand larceny). First the bank guarantee, then NAMA and now forced nationalisation (on less favourable terms than if the issue was confronted earlier). He writes:
Karl Whelan wrote early last year:
A crucial feature of the nationalisation approach is that it dramatically reduces the risk involved in having to value the bad loans.
The triple lock would solder the people to the banking system in a suffocating embrace forcing us to borrow from tomorrow to pay for yesterday and, in the process, destroy the opportunities of today.Alone of the parties in the Oireachtas, the Labour Party got it right in September 2008 on the guarantee. Labour got it right on nationalisation in March 2009. And they were right on NAMA.
Karl Whelan wrote early last year:
A crucial feature of the nationalisation approach is that it dramatically reduces the risk involved in having to value the bad loans.
Tuesday, 15 September 2009
We’re broke (O no we’re not)
Slí Eile: This is September 2009. We’re economically broke. Well not quite…The recent
Commission on Taxation Report has drawn attention to the matter of property tax – usually understood as applying to taxes on houses or residential houses. Residential homes are only one type of wealth. There is a vast array of wealth types from cash, shares, bonds, houses, buildings, lands to other types of immovable assets. Although three years of out date and firmly ensconced in the ‘pre-2008’ world, The Wealth of the Nation report by Pat O’Sullivan, Senior Economist in the Bank of Ireland Private Banking Group makes for interesting reading.
Some of the highlights from that Report include the following:
‘Net wealth’ of Irish households was estimated at €804bn in 2006 (965bn assets less 161 in debt)
Growth in 2006 was ‘one of the fastest growth rates in the OECD’
‘The asset base (excluding residential property) of the top 1% of the population increased by €14bn to €100bn, an increase of 16%’
‘Irish per capita wealth still ranks second among leading OECD countries’
‘We estimate that the number of millionaires increased by 10% to 33,000’
‘the top 1% of the population holds 20% of the wealth, the top 2% holds 30% and the top 5% holds 40%. However, if we exclude the value of housing wealth and focus primarily on financial wealth, the concentration of wealth increases. In this instance, 1% of the population accounts for around 34% of the wealth.’
That was 2006. It would be interesting to know the current position especially in light of the very visible toxic wastelands of half-finished housing estates and non-residential properties around the country. Monuments to hubris, risk gone mad, regulation my hat. For sure, residential and commercial property has been hammered since 2007 (50%?) and equity has taken a battering in 2008 (30%?) with some quiet recovery in recent months. However, the extent to which wealth is concentrated in the hands of very few individuals is incontrovertible. Composition of asset holdings and values are an area where information is somewhat limited and comparisons over time or across countries are hard to arrive at. It is easier to deal in information about income poverty. It is much more difficult to measure the extent of such elusive concepts as negative equity, current market value, long-term ‘hope’ value (otherwise known as Long-term Economic Value) and net assets.
A short-term downturn in the economy leading to a sudden drop in income can be buffeted by drawing on savings or disposal of assets. However, a prolonged period of unemployment or very low income (as in many smaller businesses and farms) can spell ruin for individuals and families.
Economic wealth is a stock at one point in time which potentially yields a flow of benefits over time. Normally, for national or public accounting purposes, expenditure is measured as a flow over 12 months. The total level of liabilities or promises to pay in the future are expressed as a stock of values and divided by the annual flow of income or expenditure. Hence, it is estimated that close to 60% of GDP in 2009 will be accounted for by all types of Government debt. However, some cash reserves and ‘off balance sheet’ assets can be set against the total debt to arrive at net debt. So much for Government debt. The level of personal and corporate debt in Ireland is enormous following the politically and tax-driven commercial & residential property bubble.
It would be interesting to have an overall view of all types of income, expenditure, assets and liabilities in Ireland – distinguishing between Irish households and domestic enterprises, on the one hand, and large-scale financial asset-holding companies parked here on the other. Some idea of the sheer scale of the latter can be gleaned from CSO data on ‘Resident Holdings of Foreign Portfolio Securities’.
The International Investment Position (IIP) comes some of the way to providing an overview of the value and composition of the balance sheet stock of Ireland’s foreign defined as ‘financial assets (i.e. the economy's financial claims on the rest of the world) and its foreign financial liabilities (or obligations to the rest of the world)’
The latest available figures indicate a total of €1.338 Trillion (yes trillion and not billion) in Irish resident holdings of ‘foreign portfolio securities’ (equity, bonds and various money market securities) on 31 December 2007 (claims on the rest of the world). Holdings by Irish ‘residents’ of US Treasury securities, alone, was close to $46billion in June of this year (up from $20billion in June of 2008) according to the US Treasury (table here)
That amount exceeds total holdings of US Treasury securities in any of these countries: India, Canada, France, Netherlands, Norway (Luxembourg holds over $100billion)
In another interesting comparison, as Michael Taft has pointed out
However, an unknown but extremely large proportion of this is accounted for by various financial funds located in Ireland (including, for example, some housed at the IFSC). Some of these include ‘corporate bodies who have a centre of economic interest located here, including branches of foreign-registered companies.’ Along with Luxembourg and Iceland, Ireland appears to be a major hub of cross-national financial flows and deposits – relative to its small size in terms of population and GDP.
The total extent of liabilities to the rest of the world is larger still. If we add Government, corporate debt we get €1.692 Trillion in March 2009
Out of this total, Government debt comes to a mere €60billion in March 2009 (up from €34bn in March 2008)
To get some idea Table 3 of the Report shows that of €2.267 Trillion, €1.181 is accounted for IFSC alone. There are other huge-scale foreign financial interests ‘parked here’ (in referring to such interests as parked I am assuming that such entities are availing of low taxes as well as other benefits). A small proportion of their total asset/liability position is represented by financial service production which enters into Irish GDP.
On the liabilities side, there are equally vast sums – the bulk of which is portfolio investment (obligations to the rest of the world).
Table 1 in that Report shows an additional €831 in ‘financial derivatives and trade credits’ on the asset side matched by €839bn on the liabilities side. To put this in perspective, total annual income in Ireland is projected at about €160 billion this year. So, we are talking about big sums.(The ‘net IIP’ position was just a tiny €31bn in 2007 – merely the entire size of projected tax revenue this year).
Irish banks wouldn’t be so heartless as to invest in overseas bonds rather than job-creating industry here in Ireland would they? Yes they would. An exclusively privately owned banking system runs for profit for people in the first place. What did the regulators ever do for us as Monty Python might have said. We need at least one State retail bank, one National Enterprise Recovery Corporation and one local community bank building on, and extending, the work of Credit Unions.
The best argument for retaining at least one State Retail Bank and not privitising all future nationalised banks is provided by the following:
"We have a growing population, full employment, strong job creation, rising household income, a high savings ratio together with strong retail sales and industrial production. This economy is in great shape and the outlook remains positive," Brian Goggin, Bank of Ireland Chief Executive said at a press briefing on the bank's results (Finfacts June 2007).
As Michael Hennigan wrote on 6 June 2007
“Irish Economy: No crash in sight nor credible strategy to maintain export-led growth in long-term; Overseas commercial property to remain investment of choice”
During the Great Famine of 1848 grain in plenty was being exported as millions starved and over a million emigrated in the immediate aftermath of that calamity. Without signalling a prophecy of doom or attempting to draw a serious comparison between what happened then and what might be coming our way in the coming decade: Is it possible as the Irish exchequer takes on the winding down of fictitious loans and asset values a whole generation is condemned to high personal income taxes, consumption taxes, borrowing to pay off the lenders, economic stagnation and resumption of outward migration? Nobody wants that to happen but if there is any basis for it in the future I cannot see how a much better educated, confident and fair-minded younger generation will put up with it. They might just be prepared to support a political stimulus package involving a different way forward to the neo-liberal Dublin Consensus that is a plague on our house.
Commission on Taxation Report has drawn attention to the matter of property tax – usually understood as applying to taxes on houses or residential houses. Residential homes are only one type of wealth. There is a vast array of wealth types from cash, shares, bonds, houses, buildings, lands to other types of immovable assets. Although three years of out date and firmly ensconced in the ‘pre-2008’ world, The Wealth of the Nation report by Pat O’Sullivan, Senior Economist in the Bank of Ireland Private Banking Group makes for interesting reading.
Some of the highlights from that Report include the following:
‘Net wealth’ of Irish households was estimated at €804bn in 2006 (965bn assets less 161 in debt)
Growth in 2006 was ‘one of the fastest growth rates in the OECD’
‘The asset base (excluding residential property) of the top 1% of the population increased by €14bn to €100bn, an increase of 16%’
‘Irish per capita wealth still ranks second among leading OECD countries’
‘We estimate that the number of millionaires increased by 10% to 33,000’
‘the top 1% of the population holds 20% of the wealth, the top 2% holds 30% and the top 5% holds 40%. However, if we exclude the value of housing wealth and focus primarily on financial wealth, the concentration of wealth increases. In this instance, 1% of the population accounts for around 34% of the wealth.’
That was 2006. It would be interesting to know the current position especially in light of the very visible toxic wastelands of half-finished housing estates and non-residential properties around the country. Monuments to hubris, risk gone mad, regulation my hat. For sure, residential and commercial property has been hammered since 2007 (50%?) and equity has taken a battering in 2008 (30%?) with some quiet recovery in recent months. However, the extent to which wealth is concentrated in the hands of very few individuals is incontrovertible. Composition of asset holdings and values are an area where information is somewhat limited and comparisons over time or across countries are hard to arrive at. It is easier to deal in information about income poverty. It is much more difficult to measure the extent of such elusive concepts as negative equity, current market value, long-term ‘hope’ value (otherwise known as Long-term Economic Value) and net assets.
A short-term downturn in the economy leading to a sudden drop in income can be buffeted by drawing on savings or disposal of assets. However, a prolonged period of unemployment or very low income (as in many smaller businesses and farms) can spell ruin for individuals and families.
Economic wealth is a stock at one point in time which potentially yields a flow of benefits over time. Normally, for national or public accounting purposes, expenditure is measured as a flow over 12 months. The total level of liabilities or promises to pay in the future are expressed as a stock of values and divided by the annual flow of income or expenditure. Hence, it is estimated that close to 60% of GDP in 2009 will be accounted for by all types of Government debt. However, some cash reserves and ‘off balance sheet’ assets can be set against the total debt to arrive at net debt. So much for Government debt. The level of personal and corporate debt in Ireland is enormous following the politically and tax-driven commercial & residential property bubble.
It would be interesting to have an overall view of all types of income, expenditure, assets and liabilities in Ireland – distinguishing between Irish households and domestic enterprises, on the one hand, and large-scale financial asset-holding companies parked here on the other. Some idea of the sheer scale of the latter can be gleaned from CSO data on ‘Resident Holdings of Foreign Portfolio Securities’.
The International Investment Position (IIP) comes some of the way to providing an overview of the value and composition of the balance sheet stock of Ireland’s foreign defined as ‘financial assets (i.e. the economy's financial claims on the rest of the world) and its foreign financial liabilities (or obligations to the rest of the world)’
The latest available figures indicate a total of €1.338 Trillion (yes trillion and not billion) in Irish resident holdings of ‘foreign portfolio securities’ (equity, bonds and various money market securities) on 31 December 2007 (claims on the rest of the world). Holdings by Irish ‘residents’ of US Treasury securities, alone, was close to $46billion in June of this year (up from $20billion in June of 2008) according to the US Treasury (table here)
That amount exceeds total holdings of US Treasury securities in any of these countries: India, Canada, France, Netherlands, Norway (Luxembourg holds over $100billion)
In another interesting comparison, as Michael Taft has pointed out
To put this in some perspective, Ireland’s €1.3 trillion held abroad compares to the foreign holdings of French residents of €2 trillion – even though the French economy is more than ten times larger than the Irish economy.
However, an unknown but extremely large proportion of this is accounted for by various financial funds located in Ireland (including, for example, some housed at the IFSC). Some of these include ‘corporate bodies who have a centre of economic interest located here, including branches of foreign-registered companies.’ Along with Luxembourg and Iceland, Ireland appears to be a major hub of cross-national financial flows and deposits – relative to its small size in terms of population and GDP.
The total extent of liabilities to the rest of the world is larger still. If we add Government, corporate debt we get €1.692 Trillion in March 2009
Out of this total, Government debt comes to a mere €60billion in March 2009 (up from €34bn in March 2008)
To get some idea Table 3 of the Report shows that of €2.267 Trillion, €1.181 is accounted for IFSC alone. There are other huge-scale foreign financial interests ‘parked here’ (in referring to such interests as parked I am assuming that such entities are availing of low taxes as well as other benefits). A small proportion of their total asset/liability position is represented by financial service production which enters into Irish GDP.
On the liabilities side, there are equally vast sums – the bulk of which is portfolio investment (obligations to the rest of the world).
Table 1 in that Report shows an additional €831 in ‘financial derivatives and trade credits’ on the asset side matched by €839bn on the liabilities side. To put this in perspective, total annual income in Ireland is projected at about €160 billion this year. So, we are talking about big sums.(The ‘net IIP’ position was just a tiny €31bn in 2007 – merely the entire size of projected tax revenue this year).
Irish banks wouldn’t be so heartless as to invest in overseas bonds rather than job-creating industry here in Ireland would they? Yes they would. An exclusively privately owned banking system runs for profit for people in the first place. What did the regulators ever do for us as Monty Python might have said. We need at least one State retail bank, one National Enterprise Recovery Corporation and one local community bank building on, and extending, the work of Credit Unions.
The best argument for retaining at least one State Retail Bank and not privitising all future nationalised banks is provided by the following:
"We have a growing population, full employment, strong job creation, rising household income, a high savings ratio together with strong retail sales and industrial production. This economy is in great shape and the outlook remains positive," Brian Goggin, Bank of Ireland Chief Executive said at a press briefing on the bank's results (Finfacts June 2007).
As Michael Hennigan wrote on 6 June 2007
“Irish Economy: No crash in sight nor credible strategy to maintain export-led growth in long-term; Overseas commercial property to remain investment of choice”
During the Great Famine of 1848 grain in plenty was being exported as millions starved and over a million emigrated in the immediate aftermath of that calamity. Without signalling a prophecy of doom or attempting to draw a serious comparison between what happened then and what might be coming our way in the coming decade: Is it possible as the Irish exchequer takes on the winding down of fictitious loans and asset values a whole generation is condemned to high personal income taxes, consumption taxes, borrowing to pay off the lenders, economic stagnation and resumption of outward migration? Nobody wants that to happen but if there is any basis for it in the future I cannot see how a much better educated, confident and fair-minded younger generation will put up with it. They might just be prepared to support a political stimulus package involving a different way forward to the neo-liberal Dublin Consensus that is a plague on our house.
Sunday, 13 September 2009
Beyond NAMA – seeing a bigger picture
Sli Eile: Two television documentaries shown, recently: one called ‘Freefall’ a dramatic story of the current economic climate as it unfolded for individuals in the City and a family; the other a story of the demise of Lehman Brothers last year, leave room to wonder how close the parallel to Anglo-Irish and the late-night agonies in board rooms and Merrion Street this time 12 months ago.
Globally, as well as in Ireland, the world of finance is reminiscent of Hamlet's "an unweeded garden" of "things rank and gross in nature".
The explanations are familiar: greed, lack of adherence to moral codes, lack of regulation, blind faith in markets, senior policy makers and public servants asleep at the wheel. It was and continues to be a systemic failure of huge proportions with devastating results for ordinary people.
One of the features of the current financial turmoil in Ireland is the way in which many sharp differences have opened up across the political, media and socio-economic interests fronts. There is no consensus on how to sort out banking (but there is on most other things - hence the Dublin Consensus).
Each political party in the Oireachtas has its own version of how best to proceed from here (NAMA as is, NAMA modified, ‘Good, bad bank’, Nationalisation of the big two banks and other variations of these). It is probable that a mix of sectional economic interest and remnants of past ideology influence the position adopted. I think that it is also true to say that most people haven’t a clue what the mumbo jumbo means and leave it to the ‘experts’ to work it out (but which experts?). It is also true to say that there are massive uncertainties built into any policy response at this time. We simply do not know what the future holds in terms of growth in GDP, lending, equity valuesor property values, as well as Euro currency movements. In this climate it is little wonder that different groups wish to minimise the risk to themselves:
Political parties are aware of the huge electoral implications of ‘getting it wrong’, not to mention the long-term pay-back in fiscal liabilities that might cripple the exchequer for years;
Bankers (as in those who manage banks) need to defend their capital reserves and avoid a run on their deposits and other liabilities post summer-2010 – and (another small point) they need to safeguard their own remuneration out of maximised short-term profits;
Many people working in the finance sector and their families are worried sick about losing their jobs in any rationalisation of banks (whether through nationalisation, or majority state holding, or some other change);
Depositors – large and small – want to be sure of their savings 3-5 years out from now;
Share-holders have taken a hammering but want to regain something – these include pension savers;
Bondholders – large and small, senior and subordinated – need some acceptable non-dire level of predictability of likely return and security of asset;
And …significant borrowers in the toxic wastelands want to cover their losses, move on and start all over again if they can (they will go to any lengths, as we saw in the Courts recently…).
The ‘Regulators’ and other public officials need to be seen to perform and deliver, especially as they failed so abysmally heretofore.
The truth is you can’t please everyone – at least not all of the time. And you certainly can’t fool everyone – at least not all of them all the time.
Essentially, banking in Ireland today is a lame duck. And when the duck is lame the State moves in, at least temporarily, to either subsidise or take-over. Everyone agrees about that. Even Adam Smith would have signed up to that (but I doubt he would have approved of NAMA). At the moment, it is a question of subsidise as the State takes the risk, while citizens pay the premium through higher debt servicing and taking on the value of future losses on over-paid assets through NAMA. Some ducks in the past didn’t matter so much . Hence, steel, shipbuilding, car assembly, mining and the like eventually went to the wall in many European countries. The problem with banking is that it is too central to everything else, so that it cannot be allowed to wreck the rest of the economy - especially those businesses without credit.
I am sceptical about the claims of unique knowledge, expertise and certainty made by those who said only a year ago that banking is fine and does not need to be recapitalised ... or, it does but only a bit. Twelve months later, why should anyone put too much trust in the judgment of those at the helms of banking, regulation, economics and media punditry? Even today, we simply don’t know the scale of bad loans.
Good old fashioned banking needs to be brought back, except this time as mixed economy.
Let me explain. I think we need a single public retail bank constituted from AIB and BOI in competition with other retail banks, an ICC and ACC as they were for business credit and re-structuring, and the Credit Unions when it comes local economy and households. With a tough regulatory regime, corporate democracy and ethics, and public ownership of at least one key financial institution in each of the three key areas: high-street retail, business/wholesale and local community banking. Let the privately owned institutions compete with that on this home ground, and lets have some mixed economy.
In the meantime, what are going to do with the toxic stuff? Without getting lost in technical and legal detail,we need to see the big picture. To the extent that individuals and corporates lost in their gambling, then let them take the hit with one proviso – that individuals and households suffering large drops in incomes are protected by a basic income floor through the social welfare system, plus some attenuated means-tested compensation payment to shareholders reflecting a fair price for shares. That’s only fair, especially if those on social welfare face cuts this winter.
Playing the stock market has to be understood as a game where losses mean losses and moral hazard is opposed.
Let anything guaranteed to September 2010 stand, but that’s it. Let some version of a State asset agency buy up bank debts at some estimate of current market prices (as the Swedes did in the 90s), rather than some fanciful long-term economic value (implying a huge loss on many assets held by the banks), while the State moves in and nationalises AIB and BOI without further delay and starts putting in place a plan for a National Recovery Bank as proposed by Fine Gael some months ago. Any future windfalls from a recovery in the value of some assets could be re-cycled into credit towards new green businesses, as well as re-structuring of those which have a chance of survival. In other words, instead of over-paying for rotten debts through NAMA, lets use the surplus over current market price to capitalise a National Recovery Bank.
As I understand it, the key point in the Labour Party line on nationalisation (which is exactly what Karl Whelan and Brian Lucy have being saying since the beginning of the year) is that
A crucial feature of the nationalisation approach is that it dramatically reduces the risk involved in having to value the bad loans.
I agree that an asset agency would be useful – once nationalisation has gone through.
I am not proposing a nationalised, but unreformed, banking arrangement and corporate ethos. Old-boy networks are everywhere from company boardrooms to a future asset agency to property developers to estate agencies to the golf course.
….in the year 2020 - sure he is a decent chap and you know how much trouble he has had and we can put it all behind us….an equity stake in return for their helpfulness is in order….a levy on windfall profits needs to take account of international market sentiment… blah blah
Question: If nationalisation of the big two banks, AIB and BOI, is the answer, as more and more people agree(including some very respectable and conservative economists) then why should it be only temporary? What advantages arise from a private sector-owned, only, banking system? Discuss.
Globally, as well as in Ireland, the world of finance is reminiscent of Hamlet's "an unweeded garden" of "things rank and gross in nature".
The explanations are familiar: greed, lack of adherence to moral codes, lack of regulation, blind faith in markets, senior policy makers and public servants asleep at the wheel. It was and continues to be a systemic failure of huge proportions with devastating results for ordinary people.
One of the features of the current financial turmoil in Ireland is the way in which many sharp differences have opened up across the political, media and socio-economic interests fronts. There is no consensus on how to sort out banking (but there is on most other things - hence the Dublin Consensus).
Each political party in the Oireachtas has its own version of how best to proceed from here (NAMA as is, NAMA modified, ‘Good, bad bank’, Nationalisation of the big two banks and other variations of these). It is probable that a mix of sectional economic interest and remnants of past ideology influence the position adopted. I think that it is also true to say that most people haven’t a clue what the mumbo jumbo means and leave it to the ‘experts’ to work it out (but which experts?). It is also true to say that there are massive uncertainties built into any policy response at this time. We simply do not know what the future holds in terms of growth in GDP, lending, equity valuesor property values, as well as Euro currency movements. In this climate it is little wonder that different groups wish to minimise the risk to themselves:
Political parties are aware of the huge electoral implications of ‘getting it wrong’, not to mention the long-term pay-back in fiscal liabilities that might cripple the exchequer for years;
Bankers (as in those who manage banks) need to defend their capital reserves and avoid a run on their deposits and other liabilities post summer-2010 – and (another small point) they need to safeguard their own remuneration out of maximised short-term profits;
Many people working in the finance sector and their families are worried sick about losing their jobs in any rationalisation of banks (whether through nationalisation, or majority state holding, or some other change);
Depositors – large and small – want to be sure of their savings 3-5 years out from now;
Share-holders have taken a hammering but want to regain something – these include pension savers;
Bondholders – large and small, senior and subordinated – need some acceptable non-dire level of predictability of likely return and security of asset;
And …significant borrowers in the toxic wastelands want to cover their losses, move on and start all over again if they can (they will go to any lengths, as we saw in the Courts recently…).
The ‘Regulators’ and other public officials need to be seen to perform and deliver, especially as they failed so abysmally heretofore.
The truth is you can’t please everyone – at least not all of the time. And you certainly can’t fool everyone – at least not all of them all the time.
Essentially, banking in Ireland today is a lame duck. And when the duck is lame the State moves in, at least temporarily, to either subsidise or take-over. Everyone agrees about that. Even Adam Smith would have signed up to that (but I doubt he would have approved of NAMA). At the moment, it is a question of subsidise as the State takes the risk, while citizens pay the premium through higher debt servicing and taking on the value of future losses on over-paid assets through NAMA. Some ducks in the past didn’t matter so much . Hence, steel, shipbuilding, car assembly, mining and the like eventually went to the wall in many European countries. The problem with banking is that it is too central to everything else, so that it cannot be allowed to wreck the rest of the economy - especially those businesses without credit.
I am sceptical about the claims of unique knowledge, expertise and certainty made by those who said only a year ago that banking is fine and does not need to be recapitalised ... or, it does but only a bit. Twelve months later, why should anyone put too much trust in the judgment of those at the helms of banking, regulation, economics and media punditry? Even today, we simply don’t know the scale of bad loans.
Good old fashioned banking needs to be brought back, except this time as mixed economy.
Let me explain. I think we need a single public retail bank constituted from AIB and BOI in competition with other retail banks, an ICC and ACC as they were for business credit and re-structuring, and the Credit Unions when it comes local economy and households. With a tough regulatory regime, corporate democracy and ethics, and public ownership of at least one key financial institution in each of the three key areas: high-street retail, business/wholesale and local community banking. Let the privately owned institutions compete with that on this home ground, and lets have some mixed economy.
In the meantime, what are going to do with the toxic stuff? Without getting lost in technical and legal detail,we need to see the big picture. To the extent that individuals and corporates lost in their gambling, then let them take the hit with one proviso – that individuals and households suffering large drops in incomes are protected by a basic income floor through the social welfare system, plus some attenuated means-tested compensation payment to shareholders reflecting a fair price for shares. That’s only fair, especially if those on social welfare face cuts this winter.
Playing the stock market has to be understood as a game where losses mean losses and moral hazard is opposed.
Let anything guaranteed to September 2010 stand, but that’s it. Let some version of a State asset agency buy up bank debts at some estimate of current market prices (as the Swedes did in the 90s), rather than some fanciful long-term economic value (implying a huge loss on many assets held by the banks), while the State moves in and nationalises AIB and BOI without further delay and starts putting in place a plan for a National Recovery Bank as proposed by Fine Gael some months ago. Any future windfalls from a recovery in the value of some assets could be re-cycled into credit towards new green businesses, as well as re-structuring of those which have a chance of survival. In other words, instead of over-paying for rotten debts through NAMA, lets use the surplus over current market price to capitalise a National Recovery Bank.
As I understand it, the key point in the Labour Party line on nationalisation (which is exactly what Karl Whelan and Brian Lucy have being saying since the beginning of the year) is that
A crucial feature of the nationalisation approach is that it dramatically reduces the risk involved in having to value the bad loans.
I agree that an asset agency would be useful – once nationalisation has gone through.
I am not proposing a nationalised, but unreformed, banking arrangement and corporate ethos. Old-boy networks are everywhere from company boardrooms to a future asset agency to property developers to estate agencies to the golf course.
….in the year 2020 - sure he is a decent chap and you know how much trouble he has had and we can put it all behind us….an equity stake in return for their helpfulness is in order….a levy on windfall profits needs to take account of international market sentiment… blah blah
Question: If nationalisation of the big two banks, AIB and BOI, is the answer, as more and more people agree(including some very respectable and conservative economists) then why should it be only temporary? What advantages arise from a private sector-owned, only, banking system? Discuss.
Tuesday, 1 September 2009
NAMA: If you want to play 'Solve the Irish Banking Crisis', there are several games in town
Terry McDonough: It has been repeatedly asserted over the last few days that NAMA is the only game in town. Below is a list and description of the games currently being played. I would appreciate any corrections from readers of this blog.
“Good Bank” proposal.
The government takes over the deposits of the banks. These are liabilities. In exchange for taking the liabilities the government also assumes the best performing assets of the banks. This creates a clean bank with deposit obligations backed by performing assets. The government then invests in this bank to top up required capital. The bad assets are left with the shareholders and bond holders to work out in the “legacy” bank.
The advantage of this is that it doesn’t cost the government anything, as the bad assets are not bought and the capitalization of the banks confers ownership of a valuable asset, the clean bank. The losses are left to the shareholders and the bond holders.
A complication with this is the government has guaranteed the bond holders until September, 2010. This can be dealt with in several ways. The legacy bank can be required to manage its assets so as to meet all obligations falling due prior to September 2010. The government can withdraw the guarantee. This is not the same as defaulting on sovereign debt but does undermine government credibility. It could be done more easily by a new government. The Fine Gael proposal avoids this by setting up a clean bank from scratch now, and only splitting the private banks into government owned clean banks and bad privately owned legacy banks after the guarantee expires in 2010.
Upsides: Taxpayers leap free. The good bank under government control can decide to extend credit. Shareholders and bond holders take the hit.
Downsides: Bond holders take the hit and the bond markets are mad at Ireland.
Response to downside arguments: Since the Irish government is no longer responsible for the bad debts of the banking system, it is more solvent and better able to borrow on the bond markets. The bond investors are businessmen. They don’t hold grudges. In fact, they respect taking the tough decisions in the national interest.
This solution is often presented as temporary, as the clean bank can be sold eventually perhaps at a profit for the government. The clean bank could also be run into the future, emphasizing public priorities like local business and green investment. Credit is necessary and should be run as a public utility, rather than a gambling den as it is periodically under private control.
Nationalising the banks
This involves purchasing the bank stock by the government. This leaves the government in ownership of both the good and the bad assets of the banks. The government would probably then separate the nationalized banks into clean and “bad bank” divisions and further capitalize the clean division.
Upsides: Taxpayers pay less. If banks are judged valueless on balance, taxpayers pay nothing. Shareholders take the hit. Taxpayers get good as well as bad assets. Government can dictate that banks begin lending again.
Downsides: Bondholders now owed money by state institutions. Paying back bondholders can create substantial losses for the state. It has been argued that lenders in the future will not lend to a state bank. This is historically unsupported.
Like the “good bank” proposal, the nationalized state banks can either be sold off later or retained to provide credit outside the private bank cycle of boom and bust.
NAMA with bad assets purchased at current market prices
NAMA buys bad assets at current market prices. Banks forced to write down their losses. Government recapitalizes banks. Government ends up with majority ownership of banks.
Upsides: Taxpayers do not lose money in creating “bad bank.” Ownership shares could be used to mandate the restart of lending.
Downsides: Bondholders still owed money by clean bank, now majority-owned by government. This could mean substantial losses for the government in the future.
NAMA with Honohan amendment
NAMA pays roughly the market price for the bad assets. In addition, the banks receive shares in NAMA which entitle them to the profits if NAMA makes money after paying back the government. As with the above purchase of bad assets at market prices, the government is required to recapitalize the banks by taking substantial shares.
Upsides and downsides as above, with the added downside that if the bad assets perform better than the market expects the additional money goes to the banks rather than the taxpayer.
NAMA
NAMA acquires bad assets at some markup above market rates. The government then recapitalizes the banks but buys fewer shares because the banks now have capital received from the overpayment for the bad assets.
Upsides: Banks now cleansed of bad assets, but this advantage is shared by all of the above proposals.
Downsides: Government pays the same as under the above modified NAMA proposals for the bad assets and the bank recapitalization, but owns a smaller share in the banks. There is no guarantee that the banks will begin to lend again. Shares in the banks leave the government exposed to losses through payment of the bondholders.
Comment
The “Good Bank” option is clearly superior in that it is the only one which relieves the taxpayer from responsibility for compensating bond holders for losses. It also creates a government controlled bank which can be instructed to begin lending.
“Good Bank” proposal.
The government takes over the deposits of the banks. These are liabilities. In exchange for taking the liabilities the government also assumes the best performing assets of the banks. This creates a clean bank with deposit obligations backed by performing assets. The government then invests in this bank to top up required capital. The bad assets are left with the shareholders and bond holders to work out in the “legacy” bank.
The advantage of this is that it doesn’t cost the government anything, as the bad assets are not bought and the capitalization of the banks confers ownership of a valuable asset, the clean bank. The losses are left to the shareholders and the bond holders.
A complication with this is the government has guaranteed the bond holders until September, 2010. This can be dealt with in several ways. The legacy bank can be required to manage its assets so as to meet all obligations falling due prior to September 2010. The government can withdraw the guarantee. This is not the same as defaulting on sovereign debt but does undermine government credibility. It could be done more easily by a new government. The Fine Gael proposal avoids this by setting up a clean bank from scratch now, and only splitting the private banks into government owned clean banks and bad privately owned legacy banks after the guarantee expires in 2010.
Upsides: Taxpayers leap free. The good bank under government control can decide to extend credit. Shareholders and bond holders take the hit.
Downsides: Bond holders take the hit and the bond markets are mad at Ireland.
Response to downside arguments: Since the Irish government is no longer responsible for the bad debts of the banking system, it is more solvent and better able to borrow on the bond markets. The bond investors are businessmen. They don’t hold grudges. In fact, they respect taking the tough decisions in the national interest.
This solution is often presented as temporary, as the clean bank can be sold eventually perhaps at a profit for the government. The clean bank could also be run into the future, emphasizing public priorities like local business and green investment. Credit is necessary and should be run as a public utility, rather than a gambling den as it is periodically under private control.
Nationalising the banks
This involves purchasing the bank stock by the government. This leaves the government in ownership of both the good and the bad assets of the banks. The government would probably then separate the nationalized banks into clean and “bad bank” divisions and further capitalize the clean division.
Upsides: Taxpayers pay less. If banks are judged valueless on balance, taxpayers pay nothing. Shareholders take the hit. Taxpayers get good as well as bad assets. Government can dictate that banks begin lending again.
Downsides: Bondholders now owed money by state institutions. Paying back bondholders can create substantial losses for the state. It has been argued that lenders in the future will not lend to a state bank. This is historically unsupported.
Like the “good bank” proposal, the nationalized state banks can either be sold off later or retained to provide credit outside the private bank cycle of boom and bust.
NAMA with bad assets purchased at current market prices
NAMA buys bad assets at current market prices. Banks forced to write down their losses. Government recapitalizes banks. Government ends up with majority ownership of banks.
Upsides: Taxpayers do not lose money in creating “bad bank.” Ownership shares could be used to mandate the restart of lending.
Downsides: Bondholders still owed money by clean bank, now majority-owned by government. This could mean substantial losses for the government in the future.
NAMA with Honohan amendment
NAMA pays roughly the market price for the bad assets. In addition, the banks receive shares in NAMA which entitle them to the profits if NAMA makes money after paying back the government. As with the above purchase of bad assets at market prices, the government is required to recapitalize the banks by taking substantial shares.
Upsides and downsides as above, with the added downside that if the bad assets perform better than the market expects the additional money goes to the banks rather than the taxpayer.
NAMA
NAMA acquires bad assets at some markup above market rates. The government then recapitalizes the banks but buys fewer shares because the banks now have capital received from the overpayment for the bad assets.
Upsides: Banks now cleansed of bad assets, but this advantage is shared by all of the above proposals.
Downsides: Government pays the same as under the above modified NAMA proposals for the bad assets and the bank recapitalization, but owns a smaller share in the banks. There is no guarantee that the banks will begin to lend again. Shares in the banks leave the government exposed to losses through payment of the bondholders.
Comment
The “Good Bank” option is clearly superior in that it is the only one which relieves the taxpayer from responsibility for compensating bond holders for losses. It also creates a government controlled bank which can be instructed to begin lending.
Friday, 31 July 2009
NAMA: And then there are the unknown unknowns
Slí Eile: In the immortal words of Donald Rumsfeld: "There are the known knowns and the unknown knowns. And then there are the known unknowns. And then there are the unknown unknowns". Rumsie may have been referring to Iraq but it could have been NAMA.We urgently need a debate now - on what sort of public ownership and control is required.
A curious feature of the debate on NAMA is the extent to which uncertainty, risk and flexibility apply. Notions of 'paying over the true value', 'writing down', flexible bond-equity swaps to free up cash, discretion to impose levies or not. Fintan O'Toole has already pointed to the odd fact that payments into the National Pension Reserve Fund have been fast-forwarded to cover this year and next.
What is odd about this is that we are borrowing to pay into a Fund out of which, already, money is being re-directed temporarily from long-term pension liabilities to recapitlisation of the Banks. What about the fuss over borrowing and the need to bring it down to 3% of GDP quickly and the impossibility of extra borrowing and the risk associated with same (whether off-balance sheet or on). It is all very odd. One rule for bankers (and developers) and another for welfare recipients and users of public services.
If this isn't the biggest reverse bank robbery in history what is it?
Gambling with a total annual budget of around €60billion Euro and a total national (Government) debt of the same amount and more, we are now taking on a cocktail of toxic assets whose book value is €90billion and real value is unknown and purchase value (for you and me) is somewhere in between. It is Rumsfeld's 'unknown unknowns' that scare me. 'What has posterity ever done for us" is one way of dealing with the matter (i.e. transfer the risk and the tax burden to the next generation). But, that is not moral.
Quite clearly, the whole business is an immoral mess. In fairness to those tasked with legislating and dealing with the current mess (for which of course they cannot avoid significant responsibility) it is not so clear exactly what should be done. Nobody is saying that doing nothing is an option. Delaying action is not an option, either (although the NAMA process is extroardinarily long considering the pace of economic events and the credit crunch on businesses). Roughly there are the following options (readers may wish to add a few more or re-phrase these):
Proceed as the Government is doing now through the draft NAMA legislation with all the risks involved;
Change NAMA (e.g. version 2.0 per Patrick Honohan);
Let the banks go to the wall post-guarantee or get taken over by some foreign bank, merge, clean up etc etc;
Set up a new State Bank (and leave the existing banks under guarantee until 2010 without fresh capitalisation);
Nationalise (or take majority interest in) the remaining Irish banks - either temporarily or long-term;
Writing on 22 May, Jim Stewart said (NAMA or nationalisation unlikely to work)
But there is one area in which it is vital that immediate action is taken, and that is to ensure that credit and loans flow to small and medium sized enterprises, and not just those involved in exporting. Large corporate entities and the multinational corporate sector have other sources of finance. Some large firms have no need for additional borrowing. What is needed is a new entity designed to lend funds to the SME sector. Such an entity cannot be “for profit”. It cannot be run on strictly commercial lines, because in the current crisis lending to SMEs is certain to result in losses. This new entity could be funded on the basis that 20% of loans would fail. Lending is thus made with the knowledge that there is an explicit subsidy. The return to the State (and the economy) is indirect in terms of job preservation, so that when the economy recovers there is an existing base which is a potential source of growth and job creation. Such a policy could also act as a certification device to other banks. It would reduce risk to other banks provided claims on collateral were ranked below that of additional funding from other banks
Well, Fine Gael, at least, concur on the need for a new State Bank. Richard Bruton commented, today:
An extremely low level of share prices provides the best of all opportunities to nationalise now. Allied to a National Recovery Bank credit needs to be put on a new footing driven by social need and not profit. What you don't own you cannot control - at least properly. Banking is too important to be left - ever again - in the hands of those who have wrecked the Irish economy and forfeited our children's future.
A curious feature of the debate on NAMA is the extent to which uncertainty, risk and flexibility apply. Notions of 'paying over the true value', 'writing down', flexible bond-equity swaps to free up cash, discretion to impose levies or not. Fintan O'Toole has already pointed to the odd fact that payments into the National Pension Reserve Fund have been fast-forwarded to cover this year and next.
What is odd about this is that we are borrowing to pay into a Fund out of which, already, money is being re-directed temporarily from long-term pension liabilities to recapitlisation of the Banks. What about the fuss over borrowing and the need to bring it down to 3% of GDP quickly and the impossibility of extra borrowing and the risk associated with same (whether off-balance sheet or on). It is all very odd. One rule for bankers (and developers) and another for welfare recipients and users of public services.
If this isn't the biggest reverse bank robbery in history what is it?
Gambling with a total annual budget of around €60billion Euro and a total national (Government) debt of the same amount and more, we are now taking on a cocktail of toxic assets whose book value is €90billion and real value is unknown and purchase value (for you and me) is somewhere in between. It is Rumsfeld's 'unknown unknowns' that scare me. 'What has posterity ever done for us" is one way of dealing with the matter (i.e. transfer the risk and the tax burden to the next generation). But, that is not moral.
Quite clearly, the whole business is an immoral mess. In fairness to those tasked with legislating and dealing with the current mess (for which of course they cannot avoid significant responsibility) it is not so clear exactly what should be done. Nobody is saying that doing nothing is an option. Delaying action is not an option, either (although the NAMA process is extroardinarily long considering the pace of economic events and the credit crunch on businesses). Roughly there are the following options (readers may wish to add a few more or re-phrase these):
Proceed as the Government is doing now through the draft NAMA legislation with all the risks involved;
Change NAMA (e.g. version 2.0 per Patrick Honohan);
Let the banks go to the wall post-guarantee or get taken over by some foreign bank, merge, clean up etc etc;
Set up a new State Bank (and leave the existing banks under guarantee until 2010 without fresh capitalisation);
Nationalise (or take majority interest in) the remaining Irish banks - either temporarily or long-term;
Writing on 22 May, Jim Stewart said (NAMA or nationalisation unlikely to work)
But there is one area in which it is vital that immediate action is taken, and that is to ensure that credit and loans flow to small and medium sized enterprises, and not just those involved in exporting. Large corporate entities and the multinational corporate sector have other sources of finance. Some large firms have no need for additional borrowing. What is needed is a new entity designed to lend funds to the SME sector. Such an entity cannot be “for profit”. It cannot be run on strictly commercial lines, because in the current crisis lending to SMEs is certain to result in losses. This new entity could be funded on the basis that 20% of loans would fail. Lending is thus made with the knowledge that there is an explicit subsidy. The return to the State (and the economy) is indirect in terms of job preservation, so that when the economy recovers there is an existing base which is a potential source of growth and job creation. Such a policy could also act as a certification device to other banks. It would reduce risk to other banks provided claims on collateral were ranked below that of additional funding from other banks
Well, Fine Gael, at least, concur on the need for a new State Bank. Richard Bruton commented, today:
Furthermore, there is no guarantee that this huge gamble will result in a resumption of normal credit flows to struggling Irish businesses. Irish banks will remain poorly capitalised and concern will turn to new categories of non-performing loans. If restoring credit flows is the prime objective of banking policy, taxpayer investment in a new, State-owned bank with a clean balance sheet and an appetite to lend, such as Fine Gael’s proposed National Recovery Bank, would be far more likely to succeed at a fraction of the risk.My view is that, given the absolutely critical nature of banking and finance to the economy and society and the complete failure of the Irish financial system to fulfil its social role, there is no just alternative to nationalisation at this point. As I argued, previously:
An extremely low level of share prices provides the best of all opportunities to nationalise now. Allied to a National Recovery Bank credit needs to be put on a new footing driven by social need and not profit. What you don't own you cannot control - at least properly. Banking is too important to be left - ever again - in the hands of those who have wrecked the Irish economy and forfeited our children's future.
Friday, 22 May 2009
NAMA or nationalisation unlikely to achieve objectives
Jim Stewart: Banks are a vital part of any modern economy. They perform a number of key functions (1) a repository and access to liquid assets; (2) transferring funds; (3) provision of short term credit and lending; (4) provision of financial services and retention of records. Policy actions to date has ensured banks continue to survive and can perform three of the four functions, but expecting banks to start lending is unrealistic. This has not happened in other countries nor is it likely to happen here. Rather than lending to enterprises, eurozone banks have increased their purchase of government bonds. One estimate is that banks bought 75% of the total of €77 billion of eurozone Government bonds issued in January (F.T. 4/3/09). The implications for Ireland is that is that a substantial proportion of recent issues of Irish Government debt was bought by banks and in particular Irish banks. The ECB cannot lend directly to governments but can lend to banks at low interest rates in exchange for many types of collateral including government debt. Banks are then in a position in turn to purchase government debt. This is how the government deficit can be financed. The ECB has recently announced further measures to in crease liquidity which will again support both the banking sector and large borrowers such as Governments.
It is most unlikely that the NAMA will succeed in its stated objective of ensuring households can access credit and that funding will be provided to small and medium sized enterprises (Budget statement April, 2009). This is a similar objective to those stated in the plan to guarantee all the debts of banks last September (the stated aim was to ensure financial stability and “protect the real economy” (Minister for Finance 22nd October, 2008). In the announcement of the government recapitalization plan (11th February, 2009) it was stated that the “recapitalisation package will “reinforce the stability of our financial system, increase confidence in the banking system here, and facilitate the banks involved in lending to the economy”.
The reason this stated aim will be unsuccessful is that it is irrational to expect banks to provide funds to firms or individuals in the context of falling personal incomes, rising unemployment and a rising level of insolvencies in the corporate sector. This is a feature not just of the Irish economy but of all the Eurozone economies. Table 1 below shows that the annual rate of increase in loans to the private sector and in particular the two targeted sectors, Households and Non-financial corporations, have fallen consistently every month since May 2008. This in spite of all the State guarantees, arranged mergers, equity injections, and nationalisations. Much of the increase in lending could be ‘rolled up’ interest as in the case of the Irish Nationwide Building Society.
This is particularly serious for small and medium sized enterprise because bank lending is the main source of finance in the euro zone area.
The most recent bank Lending survey, 2009, reported higher loan margins and more restrictive collateral requirements for five Irish banks participating in the survey. The same survey also reports a decline in demand for loans due to a “reduction in the financing needs of enterprises”.
Current policies have been successful in ensuring banks have survived and continue to perform many valuable services. But it is unlikely that either NAMA or nationalization of the banks would result in additional lending to small business because it is irrational for them to do so, given the overall objective of behaving in a commercial (for profit way). NAMA or nationalization will be extremely costly. Changing ownership does not change the size of the deficit between the value of assets financed by borrowing and the amount borrowed and the likely required State contribution. It is doubtful that changing ownership would result in efficiency gains, for example in realising higher values for assets that are sold. It is also unlikely that a change in ownership would result in losses (transfers in value), other than those already incurred, to bondholders or preference share owners. This did not happen in the Anglo-Irish case (see statement issued by the Government on 30th January, 2009, to the effect that nationalisation would have no effect on Tier 1 hybrid instruments (See: http://www.angloirishbank.ie). It is better to proceed cautiously now than pursue policies that pre-empt all other options because of their cost and size. An early example of delay being the best option was the proposal to seek mergers amongst banks. It was clear to some then but to all now that any bank that merged with either Anglo-Irish Bank or the Irish Nationwide Building Society would reduce the chances of the merged entity remaining viable.
But there is one area in which it is vital that immediate action is taken, and that is to ensure that credit and loans flow to small and medium sized enterprises and not just those involved in exporting. Large corporate entities and the multinational corporate sector have other sources of finance. Some large firms have no need for additional borrowing. What is needed is a new entity designed to lend funds to the SME sector. Such an entity cannot be “for profit”. It cannot be run on strictly commercial lines, because in the current crisis lending to SMEs is certain to result in losses. This new entity could be funded on the basis that 20% of loans would fail. Lending is thus made with the knowledge that there is an explicit subsidy. The return to the State (and the economy) is indirect in terms of job preservation, so that when the economy recovers there is an existing base which is a potential source of growth and job creation. Such a policy could also act as a certification device to other banks. It would reduce risk to other banks provided claims on collateral were ranked below that of additional funding from other banks.
It is most unlikely that the NAMA will succeed in its stated objective of ensuring households can access credit and that funding will be provided to small and medium sized enterprises (Budget statement April, 2009). This is a similar objective to those stated in the plan to guarantee all the debts of banks last September (the stated aim was to ensure financial stability and “protect the real economy” (Minister for Finance 22nd October, 2008). In the announcement of the government recapitalization plan (11th February, 2009) it was stated that the “recapitalisation package will “reinforce the stability of our financial system, increase confidence in the banking system here, and facilitate the banks involved in lending to the economy”.
The reason this stated aim will be unsuccessful is that it is irrational to expect banks to provide funds to firms or individuals in the context of falling personal incomes, rising unemployment and a rising level of insolvencies in the corporate sector. This is a feature not just of the Irish economy but of all the Eurozone economies. Table 1 below shows that the annual rate of increase in loans to the private sector and in particular the two targeted sectors, Households and Non-financial corporations, have fallen consistently every month since May 2008. This in spite of all the State guarantees, arranged mergers, equity injections, and nationalisations. Much of the increase in lending could be ‘rolled up’ interest as in the case of the Irish Nationwide Building Society.
This is particularly serious for small and medium sized enterprise because bank lending is the main source of finance in the euro zone area.
The most recent bank Lending survey, 2009, reported higher loan margins and more restrictive collateral requirements for five Irish banks participating in the survey. The same survey also reports a decline in demand for loans due to a “reduction in the financing needs of enterprises”.
Current policies have been successful in ensuring banks have survived and continue to perform many valuable services. But it is unlikely that either NAMA or nationalization of the banks would result in additional lending to small business because it is irrational for them to do so, given the overall objective of behaving in a commercial (for profit way). NAMA or nationalization will be extremely costly. Changing ownership does not change the size of the deficit between the value of assets financed by borrowing and the amount borrowed and the likely required State contribution. It is doubtful that changing ownership would result in efficiency gains, for example in realising higher values for assets that are sold. It is also unlikely that a change in ownership would result in losses (transfers in value), other than those already incurred, to bondholders or preference share owners. This did not happen in the Anglo-Irish case (see statement issued by the Government on 30th January, 2009, to the effect that nationalisation would have no effect on Tier 1 hybrid instruments (See: http://www.angloirishbank.ie). It is better to proceed cautiously now than pursue policies that pre-empt all other options because of their cost and size. An early example of delay being the best option was the proposal to seek mergers amongst banks. It was clear to some then but to all now that any bank that merged with either Anglo-Irish Bank or the Irish Nationwide Building Society would reduce the chances of the merged entity remaining viable.
But there is one area in which it is vital that immediate action is taken, and that is to ensure that credit and loans flow to small and medium sized enterprises and not just those involved in exporting. Large corporate entities and the multinational corporate sector have other sources of finance. Some large firms have no need for additional borrowing. What is needed is a new entity designed to lend funds to the SME sector. Such an entity cannot be “for profit”. It cannot be run on strictly commercial lines, because in the current crisis lending to SMEs is certain to result in losses. This new entity could be funded on the basis that 20% of loans would fail. Lending is thus made with the knowledge that there is an explicit subsidy. The return to the State (and the economy) is indirect in terms of job preservation, so that when the economy recovers there is an existing base which is a potential source of growth and job creation. Such a policy could also act as a certification device to other banks. It would reduce risk to other banks provided claims on collateral were ranked below that of additional funding from other banks.
Thursday, 7 May 2009
The '07 Smell Test?
Slí Eile: Over on Irisheconomy.ie Colm McCarthy is warning against nostalgia about going back to 2007. We must agree. But that is about the extent of it. The orthodoxy is, to quote McCarthy's own words:
"(i) Government debt ratios stabilised and sovereign credit spreads back to low levels;
(ii) competing banks strong enough to lend (a little);
(iii) a competitive economy producing more exports, less houses, and
(iv) a smaller and less leveraged balance sheet."
The problem with these four is that they leave out another four points without which a recovery is neither feasible or just:
(v) direct measures to arrest job losses through activation, training, re-skilling and emergency credit;
(vi) measures to shift de-leveraging away from welfare recipients and low to middle-income earners to those in high-income and high-wealth owning groups;
(vii) begin the slow and painful process of reforming political, public service, corporate and social institutions (including what remains of social partnership); and
(viii) nationalise banking once and for all and retain at least one State Retail Bank and one State Industrial Bank to compete on financial markets for deposits and lending.
Says Colm McCarthy:
'All policy wheezes emanating from the commentariat over the next few months should be smell-tested for 07 Nostalgia, and rejected at the merest whiff. We have been there and it did’nt work.'
Can we suggest, rather:
All policy wheezes emanating from the commentariat over the next few months should be smell-tested for 1987 Nostalgia, and rejected at the merest whiff. We have been there and it did’nt work. First we had growth without jobs, then we had growth with jobs but light-touch regulation and primitive public services and rising inequality and missed opportunities, then we have revelations of corruptions, bribery, incompetence and recklessness, then we had a credit boom. Finally we had bust. Would you not agree Colm?
"(i) Government debt ratios stabilised and sovereign credit spreads back to low levels;
(ii) competing banks strong enough to lend (a little);
(iii) a competitive economy producing more exports, less houses, and
(iv) a smaller and less leveraged balance sheet."
The problem with these four is that they leave out another four points without which a recovery is neither feasible or just:
(v) direct measures to arrest job losses through activation, training, re-skilling and emergency credit;
(vi) measures to shift de-leveraging away from welfare recipients and low to middle-income earners to those in high-income and high-wealth owning groups;
(vii) begin the slow and painful process of reforming political, public service, corporate and social institutions (including what remains of social partnership); and
(viii) nationalise banking once and for all and retain at least one State Retail Bank and one State Industrial Bank to compete on financial markets for deposits and lending.
Says Colm McCarthy:
'All policy wheezes emanating from the commentariat over the next few months should be smell-tested for 07 Nostalgia, and rejected at the merest whiff. We have been there and it did’nt work.'
Can we suggest, rather:
All policy wheezes emanating from the commentariat over the next few months should be smell-tested for 1987 Nostalgia, and rejected at the merest whiff. We have been there and it did’nt work. First we had growth without jobs, then we had growth with jobs but light-touch regulation and primitive public services and rising inequality and missed opportunities, then we have revelations of corruptions, bribery, incompetence and recklessness, then we had a credit boom. Finally we had bust. Would you not agree Colm?
Monday, 20 April 2009
Erin Go Broke? Krugman's NT Times piece - and some reaction
Paul Krugman has an opinion piece in today's New York Times, arguing - among other points made - that "As far as responding to the recession goes, Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back".
Paul Sweeney comments in response that
"While I agree with much of Krugman’s analysis, he appears to contradict his own statement that “As far as responding to the recession goes, Ireland appears to be really, truly without options,” when he is also critical of the way the bank bailout is being handled by the Government. He seems to favour the bank nationalisation route, which the government is studiously avoiding at all costs. If nationalisation is the alternative route to NAMA, then Ireland does have options. The nationalisation path, which I and others have favoured for some months now and still think may come to pass, by necessity, is preferable (than the NAMA route) as it gives far greater control to the government, the paymaster. It is a clearer path and also allows property valuations to be determined later as the market begins to operate and is not dependent on the guesses of estate agents. The idea that government civil servants would run the banks as articulated by some opponents of full state control, is of course, a distraction. Boards would be set up - as independent as possible and far preferable to the current bunches of cosy capitalists which gambled, not just with the banks’ assets, but with those all citizens of this Irish Republic. It is interesting that Krugman is keeping an eye on us, if for all the wrong reasons."
Any other views?
Paul Sweeney comments in response that
"While I agree with much of Krugman’s analysis, he appears to contradict his own statement that “As far as responding to the recession goes, Ireland appears to be really, truly without options,” when he is also critical of the way the bank bailout is being handled by the Government. He seems to favour the bank nationalisation route, which the government is studiously avoiding at all costs. If nationalisation is the alternative route to NAMA, then Ireland does have options. The nationalisation path, which I and others have favoured for some months now and still think may come to pass, by necessity, is preferable (than the NAMA route) as it gives far greater control to the government, the paymaster. It is a clearer path and also allows property valuations to be determined later as the market begins to operate and is not dependent on the guesses of estate agents. The idea that government civil servants would run the banks as articulated by some opponents of full state control, is of course, a distraction. Boards would be set up - as independent as possible and far preferable to the current bunches of cosy capitalists which gambled, not just with the banks’ assets, but with those all citizens of this Irish Republic. It is interesting that Krugman is keeping an eye on us, if for all the wrong reasons."
Any other views?
Eircom: topsy-turvey economics
Paul Sweeney: The bid last week for Eircom is yet another nail in the coffin of the Anglo Saxon model of liberal economics. Even Fine Gael called for its nationalisation. In the same week, 20 economists, some of them on the hard Right, called for all Irish banks to be nationalised!
The bid of a mere €95m for Eircom is in stark contrast to the market value of €8.4bn when it was privatised almost ten years ago. The taxpayer got €6.2bn on an investment of only €562m (plus a pension contribution of €1bn)
The low offer price is because Eircom is now laden with debts. This is in stark contrast to the debt free, rapidly growing and heavily investing state enterprise which Mary O’Rourke stupidly privatised. Of course, O’Rourke was not alone in 1999. The whole country was gripped by the privatisation hysteria. Nearly everyone with money wanted to make a profit from the sale of the company they already owned. Nearly all got badly burnt and so learned a hard lesson about stock markets.
But the real lesson was strategic. Sadly, it has not yet been absorbed by official Ireland, constrained as it is by ideology. Eircom, as a state company, was investing massively. Broadband was vital for the knowledge economy. The second set of new owners, private equity firms, led by Tony O Reilly and George Soros, sweated the company and used its cash to pay off the cost of buying it. (The new bidders are proposing similar moves, hence the opposition by the unions). The rapidly growing mobile arm was flogged off to Vodafone.
On an investment of €676m, the private equity firm (and the ESOT) made a gain of €954 in a few years (for the details see Chapter 3 of my book Selling Out? Privatisation in Ireland). These gains included huge dividends on losses. Investment was cut to one-third of its peak when it was a state enterprise.
When Forfas, the intellectual arm of the Department of Enterprise and Employment, made a study of the deficiencies of Irish broadband, the strategic error of the privatisation was not mentioned, even in a footnote! This indicates that official Ireland does not learn lessons which are not ideologically acceptable. With mass nationalisations, will Forfas and this government now learn to put aside its out-dated ideas?
The ideology of privatisation and marketisation has collapsed as a panacea for economic efficiency. The state was portrayed as inefficient, plodding and bureaucratic. Commercial State companies, which have contributed much to Ireland’s economy and society since 1927, are not perfect. But they still have a major role to play in the economy, especially given that it is small and open. Ireland, unlike some countries, has some very fine and well-run state enterprises. With some minor changes, the lagging state companies can be made much more efficient.
With the collapse in the Anglo-Saxon model of Capitalism, will a new government learn that commercial state enterprises still have a major role to play in our future economic well being?
Fine Gael, in addition to nationalising Eircom, recently proposed setting up a State Holding Company, (remarkably similar to Congress’ proposal of some years ago). This shows that some Irish politicians are finally shaking off the defunct Anglo-Saxon economic ideology and are being innovative.
One thing is sure. We have seen clearly that banking, as the artery of capitalism, is too important to ever again to be left in the hands of the private sector. When this crisis is sorted out, it is vital, in my opinion, that one substantial Irish bank must remain in state ownership, run at arms length from the government.
In the meantime, we should re-nationalise Eircom. It’s a steal at €100m. We are spending more on subsidies to private firms on haphazard broadband provision.
The bid of a mere €95m for Eircom is in stark contrast to the market value of €8.4bn when it was privatised almost ten years ago. The taxpayer got €6.2bn on an investment of only €562m (plus a pension contribution of €1bn)
The low offer price is because Eircom is now laden with debts. This is in stark contrast to the debt free, rapidly growing and heavily investing state enterprise which Mary O’Rourke stupidly privatised. Of course, O’Rourke was not alone in 1999. The whole country was gripped by the privatisation hysteria. Nearly everyone with money wanted to make a profit from the sale of the company they already owned. Nearly all got badly burnt and so learned a hard lesson about stock markets.
But the real lesson was strategic. Sadly, it has not yet been absorbed by official Ireland, constrained as it is by ideology. Eircom, as a state company, was investing massively. Broadband was vital for the knowledge economy. The second set of new owners, private equity firms, led by Tony O Reilly and George Soros, sweated the company and used its cash to pay off the cost of buying it. (The new bidders are proposing similar moves, hence the opposition by the unions). The rapidly growing mobile arm was flogged off to Vodafone.
On an investment of €676m, the private equity firm (and the ESOT) made a gain of €954 in a few years (for the details see Chapter 3 of my book Selling Out? Privatisation in Ireland). These gains included huge dividends on losses. Investment was cut to one-third of its peak when it was a state enterprise.
When Forfas, the intellectual arm of the Department of Enterprise and Employment, made a study of the deficiencies of Irish broadband, the strategic error of the privatisation was not mentioned, even in a footnote! This indicates that official Ireland does not learn lessons which are not ideologically acceptable. With mass nationalisations, will Forfas and this government now learn to put aside its out-dated ideas?
The ideology of privatisation and marketisation has collapsed as a panacea for economic efficiency. The state was portrayed as inefficient, plodding and bureaucratic. Commercial State companies, which have contributed much to Ireland’s economy and society since 1927, are not perfect. But they still have a major role to play in the economy, especially given that it is small and open. Ireland, unlike some countries, has some very fine and well-run state enterprises. With some minor changes, the lagging state companies can be made much more efficient.
With the collapse in the Anglo-Saxon model of Capitalism, will a new government learn that commercial state enterprises still have a major role to play in our future economic well being?
Fine Gael, in addition to nationalising Eircom, recently proposed setting up a State Holding Company, (remarkably similar to Congress’ proposal of some years ago). This shows that some Irish politicians are finally shaking off the defunct Anglo-Saxon economic ideology and are being innovative.
One thing is sure. We have seen clearly that banking, as the artery of capitalism, is too important to ever again to be left in the hands of the private sector. When this crisis is sorted out, it is vital, in my opinion, that one substantial Irish bank must remain in state ownership, run at arms length from the government.
In the meantime, we should re-nationalise Eircom. It’s a steal at €100m. We are spending more on subsidies to private firms on haphazard broadband provision.
Monday, 9 March 2009
Krugman on bad banks / good banks
Following on from Terry McDonough's post on bank nationalisation, Paul Krugman makes some interesting points on the whole bad bank/good bank argument here. Any comments .....?
Sunday, 1 March 2009
Poll results .... and some questions
Based on the results of our poll - which is now closed - 72 per cent of our readers believe that AIB and Bank of Ireland should be nationalised. Of course, this poll was hardly scientific, but it does throw up a number of questions, as Sli Eile noted on Tuesday. See also Terry McDonough's post on Wednesday. Any comments?
Saturday, 28 February 2009
Nationalisation in the UK
The following link to IPPR discussion on nationalisation in the UK is worth looking at.
Tuesday, 24 February 2009
To nationalise or not to nationalise ?
Sli Eile: Now that the inevitable draws near - questions are asked about how nationalisation of banking in Ireland would operate. It is timely to address this issue. Banking is at the heart of economy. At the heart of banking is trust. That trust has been shattered. Some of the fall-out is a dramatic fall in share values, a crises in credit lines to small and medium-sized enterprises and frightening and unknown levels of bad debt. Proceeding to nationalisation will carry huge risks and - if unaccompanied by a dramatic change in culture and governance - may only serve to spread the risk to taxpayers.
We urgently need a debate now - on what sort of public ownership and control is required. Some questions on which I would welcome discussion are:
how can a viable State Bank be created that will compete on the open market with other banks internationally while offering credit to businesses and individuals?
what forms of democratic control can be used to ensure representation by the whole community including those working in the financial industry?
how can bad debt be written down, transferred and ring fenced?
how would nationalisation work in the context of European law on competition?
what guarantees and compensation are in order for which types of shareholders - especially those many small holders who have been badly burnt by the behaviour of Banks such as Anglo-Irish?
What lessons can be learned from nationalisation in other jurisdictions?
Sli Eile is anonymous. Obviously.
We urgently need a debate now - on what sort of public ownership and control is required. Some questions on which I would welcome discussion are:
how can a viable State Bank be created that will compete on the open market with other banks internationally while offering credit to businesses and individuals?
what forms of democratic control can be used to ensure representation by the whole community including those working in the financial industry?
how can bad debt be written down, transferred and ring fenced?
how would nationalisation work in the context of European law on competition?
what guarantees and compensation are in order for which types of shareholders - especially those many small holders who have been badly burnt by the behaviour of Banks such as Anglo-Irish?
What lessons can be learned from nationalisation in other jurisdictions?
Sli Eile is anonymous. Obviously.
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