January 20th Lunchtime: The Recession Diaries

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Enough is enough.  Nationalise the banks.  Nationalise them now.  A midnight strike.  Put us and the economy out of our miseries.  And start the long road back, if not to recovery, then at least to the starting point where recovery begins.

The opposition parties should have a field day in the debate over the Anglo-Irish natinalisation bill.  To say the Government has botched the banking crisis is in danger of speaking a tautology.  Now is the time for a road-map. Cataloguing the litany of incompetence – of the banks, the financial regulators and the Government – may well take us past midnight. But we have to get up in the morning. So I’m going to try my hand at financial cartography. And I will be sure not to comment adversely on the health of our banks because Noel Dempsey will have me up before a star chamber on counts of treason and economic sabotage (if you think that’s far-fetched, ask the poor economist in Latvia who dared speculate on the health of their currency).

Nationalising the banks is not a knee-jerk opportunistic call from some leftie hiding in the long grass, waiting for just that moment to have a go at financial capital when its at its weakest.  It is now a rational, common-sense and (and this is just as important) almost inevitable policy choice.  It is also becoming a mainstream proposal.  Professor Willem Buiter, writing in the Financial Times, has made an excellent argument for nationalisation – concentrating on the perverse and contradictory effects of current British policy of drip-drip-drip capitalisation and its effect on lending policies (well worth a read).  Bringing banks under public ownership would allow the Government to pursue a coherent policy, overcome the contradictions, clean out the bad practices (and those that exploited those practices to their own private gain at our economic expense), create a financial system that serves the economy rather than the other way around, and on the way make the taxpayer some money in the medium-term.  If we act now, we can put the situation right in quicker time and on a more equitable basis.  If we don’t we face the spectre of ‘dead banks walking’.

Once we nationalise, what do we do next?

First, turn Anglo-Irish into dump, a financial land-fill if you will (what a fitting legacy Sean Fitzpatrick has left the Irish economy). Let’s take all the bad assets held by other banks and chuck them into the new Anglo-Irish Rubbish Dump, Ltd. (or Economic Amenity Point if you want to euphemise). Under the current system we would have to come up with a price for these bad assets – a tricky enough exercise with huge risks for the taxpayer.  If all the banks were under public ownership it would mean shifting the ‘assets’ from one public body to the next which would simplify the process.

Second, collapse the five banks into two or three or whatever works. Reconfiguring the banking landscape would be a major step forward in creating more confidence in the system and creating a smaller number of banks will allow us to concentrate the necessary recapitalisation more effectively with greater return.

Third, establish a new public enterprise retail banking system. I’ve discussed this before – a new system modeled on the community development banks in the US or something like the BBK in Spain. These could be linked up with An Post or even credit unions, providing a wide range of services through all regions and every strata of society with particular emphasis on those trapped in financial exclusion (over 20 percent have no bank account, rising to a majority in the lowest income groups). Such a bank has the potential of building new public confidence and providing real accountable services to all households and businesses.  It would also help ensure competition.

The total price tag of this could be considerable – but there are no cost-free ways to prevent our banks from shuffling about zombie-like.  However, the cost of public ownership may not be the priciest item.  For instance, with the two major banks trading at mere cents, one more moderate dollop of state capitalisation would pretty much buy up the damn thing, or give the state effective control.  But where could the financing come from?

First, just because an asset is bad doesn’t mean you can’t sweat it. Many of the assets are leveraged against other businesses and individuals’ personal wealth. Well, let’s get that sweat mojo happening: long-term rescheduling, liens, equity, sheriff’s at the door, or just plain patience (e.g. holding on to any land banks that might be in the current asset column would, in the medium-term, increase in value and give the state a direct say in future planning needs).

Second, we could re-tool ICTU’s excellent proposal:

‘If the Irish government borrowed the money to invest in the banks, it could do so at 4 percent interest (it is currently 5 percent, but this is exceptionally high) and lend it on at 12 percent, making a handsome profit for the taxpayer, on shares. If the Irish government took ordinary shares, it could (but not necessarily) eschew interest, but we would share in the upside when the banks’ shares recover.”

Third, we could issue special bonds to credit unions which have considerable surplus savings; or ‘Granny bonds’, bonds specifically direct at over-55s who have high savings ratios. These bonds might deliver higher returns than what can be gotten in ordinary savings accounts.

Fourth, we could make forensic use of the Pension Fund to provide equity.

A total package could be developed so that over the medium-term the banks would discharge the entire cost of cleaning out their balance sheets and recapitalisating them. Indeed, the state could make a profit. Further, there would, hopefully, be no need to maintain the guarantee beyond it’s two-year remit – and that would, hopefully, help arrest the escalating cost of government borrowing.

So there you have it – a road-map, admittedly short on details but with the destination in sight. There are important issues to flesh out – do we take Anglo-Irish under public control or let it fall as Morgan Kelly suggests?  I suspect the cost of letting it fall could turn out high given that we have guaranteed depositors.  Would a ‘bad bank’ under democratic accountability do a better job of sweating assets and negotiating with bondholders?  Quite possibly.  Under this Government?  That’s a big ask.  And what about Irish Nationwide, a smaller Anglo-Irish up to its teeth in dubious property assets?

What is the end game?  Do we privatise the banks when we’re out of this mess and pocket the difference?  We can figure that out later – for if we insist (and we should) that no change of ownership will be tolerated until the total cost has been paid back to the taxpayer, and then some, we will have public-owned banks for some time.  The issue is not what happens in ten years but what happens in two.

Were the Left to make this call, we could start dictating the agenda rather than responding to it.  It would put Fine Gael in the shade since, not only do they not have any idea how to resolve the fiscal crisis, they have no fathomable policy on the banks.  We would be leading the charge against the Government.

And it could be potentially popular.  There is, quite rightly, resentment at bank bail-outs which are effectively pay-offs to management and shareholders who took the money in the good times and now gobble up taxpayer subsidies in the bad.  Nationalizing the banks means we can clear all this dead-wood out – with no golden parachutes.  Further, much of the business sector would welcome the move.  Unlike some of the business lobbyists who are trapped in their ideological prisons, most business people are fairly pragmatic.  If they need credit or overdrafts or loans underwritten – they’re not going to care too much whether that comes from publicly-owned banks or privately-owned ones (and in the case of the latter, they know there’s not much chance there).

So there’s the battle cry.  Three simple words:  nationalise the banks.  Or if you’re not into that whole brevity things: take the banks into public ownership.

Either way, it works for me.  And it can work for the Left.  And, most of all, it can work for the economy.

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One Response

  1. bogdodo

    January 22, 2009 12:52 pm

    Yes, but do it in a way that limit’d the public’s liability. Willem Buiter has proposals which include:

    a) Nationalise all the retail banks.
    b) Removing guarantees apart from on new loans and deposits – let the developers go bust sooner rather than later. (I’m not so sure that smaller depositors should not be protected to some degree – presumably their deposits could be transferred to ‘good banks’.)
    c) Invoking limited liability for the state on existing exposure to defaulting creditors.
    d) Firing all the existing top management without compensation
    e) Setting up of new unencumbered banks (as you have suggested).

    Add to this support for peer-to-peer lending and existing infrastructure such as An Post and it might just fly?