I’m going to stick my neck out and make a prediction. I believe that if you ask this question in 5 years time the answer will be NAMA as a catch-all term for the taxpayer support of dysfunctional banks. NAMA fuels the nightmares of the public’s imagination. The amounts are staggering. Effectively Anglo has already cost over 12Bn and could cost another 10Bn. These are just estimates remember. NAMA requires a recovery in the property market to avoid the “fire-sale” losses Lenihan fears in an immediate wind-down.
To say that we could need another 10Bn is like saying that it might be a fine day on March 30th next year. The variables are arguably too complex to give a good prediction. This is partially why Lenihan is so vague about the period in which the promisory note backing the recapitalisation is payable. He just doesn’t know. It assumes a solidity to the rest of the loan book and the Irish economy which appears difficult to justify given what’s transpired over the past 18 months. Ireland Inc’s actual exposure is only limited by the size of the loan book and depositor base. We cannot legally compel depositors to stay with the bank, no matter how tempting the lock-in interest rates are.
Insightful short documentary by Fred Harrison about the boom bust nature of economics and his analyses determining an 18 year economic cycle. Well worth a look.
The simple facts of the matter are that booms and busts are unstable situations exploited for profit by banks and other financial organisations. Banks and bank-employed economists tell punters bullshit fairy-stories about how every recession is different to further the goals of companies profiting from market instability. Unfortunately, complex mathematics and better technology provider the veneer of risk management for what is, essentially, more risky than a poker bluff. This is discussed at length in the Black Swan.
Sometimes quants and economists they get it badly wrong by incorrectly managing risk. It is unfair to suggest this is done entirely consciously as the economic shibboleth is reinforced in many economists minds throughout their college years. Those unwilling to take risks cannot progress. So we see a darwinistic system in place whereby those bankers moving the most money (traders, hedge funders etc.) are the ones most genetically and culturally oriented towards risk taking.
Building an economic and regulatory system on pseudo-“free” market instantaneous valuation of assets (particularly housing) will always produce the same disastrous results. Rolling averages are much more desirable as they protect the valuation of assets of the majority of people. Free marketeers claim this reduces liquidity and risk capital, stifling enterpreneurship. This is mistaken based on a persistently re-inforced view that industry is best funded using asset-backed leverage. i.e. the current banking system. It’s an entirely circular argument. Geoists make a convincing argument that asset-derived income and leverage fundamentally distorts economies and leads by-purpose to market instability. They argue that land taxes should be applied to discourage businesses based solely on the acquisition and leasing/sale of natural assets such as land and minerals. On the face of it, there’s a lot of merit to this suggestion. Milton Friedman saw the value of such taxes as they neither distort economic activity nor excessively burden the labour market. Pretty much exactly what’s happened in Ireland over the past few years.
In many ways the current recession is so bad and so potentially hazardous for international trade BECAUSE we managed to “inflate away” the obvious symptoms of previous recession. These being price falls, unemployment etc. The key to understanding this is to understand what inflation really is. As Peter Schiff points out we often misunderstand the cause/effect of inflation. We’ve had about 3 recessions since the great depression and subsequent war and each one was “fixed” by combinations of printing money and quantitative easing perpetuating what Schiff calls a “phony economy”. Indeed more than the Information Age this could rightly be called the Inflation Age. We’re seeing the culmination of a over 50 years of inflationary delusions coming home to roost.
The doctrine of this wild speculation of the past ~18 years has been “too big to fail”. America’s stimulus package is based on their close economic relationship with China and the belief that both economies are too big to fail. Remember that Chinese workers don’t have pension plans and so invest their savings in Chinese and international markets which are largely reliant on the US remaining the dominant consumer economy. Equally the US is reliant on investment from oil-rich Arabs, Europe is reliant on China as a manufacturing engine and the US as a consumer. Globalisation leads to increasingly internationally entangled economics. Not saying that’s a bad thing, just that it is.
This recession is compounded by environmental factors such as peak oil. Ireland with NAMA debt on board may not leave recession before the initial effects of peak oil hit the economy further. For the global economy to exit this recession the traditional way (through economics brinksmanship like quantitative easing) we may enter a period of hyper inflation to cover the severe losses of the past few years and the effects of peak oil on heating, industry, power generation etc.
The globalised world market resembles a Ponzi scheme that is exposed every 18 years or so but keeps going regardless. In many ways an economically disastrous 2010 for the US, EU and China might force world leaders to reevaluate the economic status quo and negotiate new international accords to improve matters. I often feel we need a new Bretton Woods..
Thanks to a friend on the David McWilliams blog site for making me aware of the documentary.
Between twitter and facebook it’s difficult to find the time to update this blog. An update is due however and a full redesign will happen soon, I promise. In the meantime here’s a colletion of “5’s” I’ve posted to the the McWilliams blog where he’s developing an your ideas section.
I’ve broken the list into short term changes which need to be made immediately and longer term changes which should be implemented over 5 years to help improve the balance and robustness of our economy. This is currently our major problem as we’ve a shallow economic base relying on a few tricks such as construction (gone) and multi-national FDI. Some of my suggesitons are controversial and some are tongue-in-cheek. Short term list
Accept we’re near bankrupt.The world’s dominant lending institutions are either not lending to Ireland or are issuing very short term credit believing we’ll be bankrupt within 6 months. Therefore we’re in an emergecy situation which will affect the lives of everyone living and working here. We need to stop pretending that budget band aids can fix this. It’s patent nonsense. We need to come clean on our financial situation as some builders are currently doing and start negotiating with our bankers to restructure our debt. We’ll also have to flog some of our assets, with all serious offers considered. To aid the flogging we need to end the legislated secrecy regarding house sale prices and start auctioning off unsold houses with no reserve.
Nationalise and consolidate our banking sector into a rebranded good and a nationalised bad bank. The state would maintain a significant interest in the ordinary equity of the good bank and appoint new management with assistance from some of the better members of the current management.
Create an all party government, taking the better of our current TD’s. If anything good could come out of this crisis it would be an interruption in the never-ending cycle of FF led and FG led coalitions. Appoint a council of our top economists and international financial experts with, perhaps, some prominent disapora figures to create policy for the dept. of finance and run the good and bad bank.
Call the ECB’s bluff. Demand a bailout from the ECB on the grounds our bankruptcy will set of a chain reaction that will implode the EMU. Greece seems to be in the same boat. Demand emergency legislation to achieve it. If/when they refuse pull out of the Eurozone and reconstitute a punt pegged against the dollar. Whatever we do, we shouldn’t vote for Lisbon unless the EMU is empowered to bail-out nations in trouble rather than take action against them for running deficits by imposing sanctions/fines. The current situation is farcical!!! Our government is telling us to vote for a treaty that copper fastens a collection of laws which are actively hindering us from dealing with this crisis. The EMU is a joke in it’s current form. If you don’t think so then read this quite reasonable opinion piece in the telegraph
Create the publicly traded recovery and innovation bonds I’ve described before. In a sense this is happening in an ad-hoc manner as we’re seeing consolidation in our research sector and we’ve already had a major national bond issue. The idea of this bond is that the coupon is redeemable as cash at a particular rate of as income or corporation tax relief at a more generous rate.
Long term list (implement over 5 years).
Reform our tax system. Reduce taxes on labour and employment. Eliminate employers’ PRSI. Remove all tax reliefs on property rental income, effective immediately. Don’t make this mistake again. Remove tax relief on house purchases for first time buyers. Lower stamp duty and VRT. All these taxes just contribute to individual debt and are bubble promoting. Use some of the recovery bond income to aid this transition if possible. Increase corporation tax to 15% but keep reliefs on patent income.
Identify wealthy diaspora figures to repatriate using our “ireland bond”. Using these, Create a tax haven for technology investors and investment, partnering with US VC firms. As part of this create research centres which are NOT directly associated with individual academic institutions. Take the largest and leading research groups in particular areas (Biotech, Pharma, IT, Telecoms, Alternative Energy) and give each 5 years of baseline funding for all staff. Consolidate groups from different colleges. Set hard commercialisation targets to gain future funding for another 5 years. These centres should then be separated from their current academic institutions (if applicable) with no budgetary overlap. Inter-college rivalries are mucking up research in Ireland IMHO. Ensure some decentralisation in this process.
Scrap the pension levy and the defined benefit (based on time-served) pension for anyone not in the scheme more than 25 years. Implement a version of the EU regulations regarding pension fund protection regardless of whether we’re in the EMU or even EU.
Reform the public sector. Introduce proper performance related pay. Delegate budgetary control and reward thrift with bonuses. Currently it’s nearly impossible for many PS workers to be thrifty as they don’t control their own budgets. This is a MASSIVE PROBLEM in the health service. Sack employees who get consistently poor reviews. No more jobs for life. Give many senior civil servants early retirement and replace them with new managers on perf-related pay.
Reform the political system. Reduce the number of dail seats by around 20%. Require all political donations exceeding 500 Euro to be on a publicly searchable database. Reward local government for saving money rather than punishing them by reducing budgets for the following year.
Some Extras
Put more effort into weeding-out social welfare abusers. Impose fines or deport foreign abusers.
Cap mortgage size based on a multiple of disposable income. Around 10 times.
Introduce legislation to force lenders to accept a percentage of a property back as part settlement for debt, at the value they accepted at loan time. This would help dissuade lenders from bubble behavior.
Force some jail inmates to do community service. In the US they have inmates making cadillac limousines & RV’s.I want an RV!!
Become the 51st state officially. Failing that join the Commonwealth 😀
Introduce restrictions to limit (not eliminate altogether) the number of unskilled immigrants from all countries including those in the EU
I’d love to ban political parties in this state but (like some other points here) it will never happen 🙂