In time, the acronym NAMA may enter into everyday language, much like Catch-22. But we don’t know,yet, with what inflection it will be used. It could end up something like this:
‘Go NAMA off, you low-down, double-dealing, good for nothing son of a NAMA!’
Only time, Peter Bacon and Brian Lenihan will tell. Early indications aren’t encouraging. How much are the assets worth? How much is the proposed discount? How much will the Government have to borrow? How much will this cost? How much of this will we be able to recover – through asset-sweating and/or a levy at the end of the process we don’t know how long will take? How much will the banks have to write down? How much will the state have to fork over to recapitalise? Will this mean nationalisation, part-nationalisation (?) and will the state act as an active or passive owner? And then there’s the billion Euro question: when all these questions are answered and all the state cheques have been written – will this do the trick, will this get credit moving again? We’re rolling some pretty loaded dice here. We could crap out leaving us without even a bus ticket back home.
I don’t intend to run through all the criticisms of NAMA. Ever since the Minister announced the establishment of the body, the media has been filled with analysis (WBS over at Cedar Lounge Revolution provides a good sample). With so few details, it is hard to get a complete picture of the process.
Rather, I’d like to establish alternative premises from which the Left can develop a coherent and progressive alternative and, so, help our critique of current Government policy. It is one thing to curse the darkness, quite another to light a candle. So this is where we might start from:
- We need to accept reality. As opposed to aspiration
- We need a vision of a new financial system, not a return to a failed one; there is no ‘normal’ to go back to, not an economically-desirable one
The end game is simple (if highly difficult to reach): to engineer a viable banking system that is subordinated to the needs of the economy.
First, this is not Sweden and we are not following the Swedish model. The bad debts inherited by the Swedish authorities were comparatively small beer- coming to about eight percent of GDP; ours could comprise 50 percent of GDP. If this were Sweden, we’d be dealing with bad debts of less than €14 billion; instead, this is Ireland so it’s between €80 and €90 billion.
In addition, the Swedish authorities transferred assets from nationalised banks. Indeed, the experience of most asset management agencies set up by governments to deal with a similar situation involved nationalised banks. Fianna Fail is treading a unique, more dangerous path.
Second, fixing this won’t come cheap. Whatever we do, we will pay. We are stuck – with the bank guarantee, mountains of bad debts, and technically insolvent banks. No amount of dissembling will change that reality. In this case, the Swedish example is instructive – they have yet to recoup the full costs of their bank debacle in the early 1990s. But then they weren’t dealing with such our burden.
Third, banks are not islands but are integral to an economy, which is nose-diving. Even the most commercially responsible and highly capitalised bank will hesitate to issue credit due to the unreliability of it being paid back. Commentators and politicians are demanding that banks extend credit to distressed companies. What they are actually demanding is grant-aiding- not a commercial process; they are demanding that banks take up a social role by granting money to companies (and households) who, on the balance of probability may not be able to pay back the loans or overdrafts. This could set up a new (albeit much smaller) set of bad assets. There is a confusion over what banks are doing now (sucking the taxpayer dry), what they should be doing (making money from extending credit into the real economy) and the limits of what they are capable of doing – at least under private control.
From these three points, we can start to work out an alternative.
First, public ownership is the new common sense. Karl Whelan is playing a blinder over at Irish.economy, exposing arguments against bank nationalisation (start here with the first part and make your way back to today’s post). Prof. Whelan is not hoisting a red flag – he wants to privatise the banks as soon as they are fit for purpose, so the state can recoup the costs of rehabilitation. Let’s set that aside for the moment and at least acknowledge the growing consensus from varying different perspectives – public ownership is the best route.
It’s not just a change of ownership. It telescopes the only issue that matters – sufficiently capitalised ‘clean’ banks. The Government is taking a circuitous route –
- It proposes to buy assets – a costly, uncertain process) and then
- Recapitalise – an uncertain cost depending on how much the assets are bought for
Well, cut out the asset-purchasing ‘middle man’ and cut to the chase. Under public ownership, switching bad assets from a nationalised bank to a state asset management agency is, in the first instance, a paper exercise. Having completed this, we can then focus on what kind of capitalisation hole we have to fill. Instead of two processes, we have one. And without private shareholders and bondholders muddying the waters.
Second, as to cost: under public ownership, we needn’t bother with the rigmarole of taking shares to sell them off at some time unknown in the future at some price which is equally unknown. While accepting that the whole situation is fraught with unknowns, let’s work on limiting them.
With nationalised banks, there is only one shareholder. That simplifies the financing mechanism. For instance, some time ago ICTU proposed the Government take preference shares in the banks. This would be financed by borrowing but the return on preference shares would amount to a net 8 percent, return a healthy profit to the state. We can still finance the capital hole through this principle, but on a non-profit basis which will reduce the burden on the banks. In essence, the nationalised banks will be paying the interest on Government borrowing which limits the exposure to Irish citizens.
This can be supplemented by feeding the return on bad assets back into the banks over the long-term. They may be bad assets but that doesn’t mean there isn’t considerable sweat there to capture.
Third is the time-scale. It may well be that our banks can be cleansed and ready to go gangbusters in a couple of years, but I wouldn’t ‘bank on it’. The hole is considerable and the economic conditions not propitious for commercial profitability. Still, even banks on performing at sub-optimal level are still useful to the economy. The perform valuable functions -savings and current accounts, ATMs, still extend credit (though on an extremely limited basis) and operate a range of banking activities (direct debits, standing orders, transfers, etc.). They will still function in the short-term – but not at the aspirational level hoped for.
By accepting this reality, we can more fruitfully address this problem and limit the pressure on the newly nationalised banks by establishing a new ‘business’ bank, along the lines of the old Industrial Credit Corporation. This new bank would be responsible in the short-term (and this means now) for credit to Irish businesses. There is little sense in gambling that, eventually, cleaned out banks will step in and start extending credit to SMEs during the middle of an economic meltdown. Would such a new bank turn a profit? What does it matter? Right now we are faced with saving enterprises. This will cost but it will be less costly than letting them fall because of lack of credit.
Therefore, we can spread out the cost of recapitalisation – rather than absorbing the whole load upfront – because we are not making the same short-term demands. This can be coupled with selling off the banks’ subsidiaries (balancing the current return they make as opposed to the capital they might raise). This will give more manoeuvrability to the National Treasury Management Agency, more time for policies to instil economic growth (something we don’t have) and more time to maximise the returns on the assets.
So where does that leave NAMA? Nowhere. Dump it. We already have a bad bank – Anglo-Irish. That the Government still thinks this bank can be returned to normal shows just how out of touch it is. Transfer the viable assets into the nationalised bodies and turn the whole thing into an asset management agency.
And let’s not get diverted. Having a go at the Government over covering foreign assets is both legitimate and, in comical form, shows the extent of the mess we are in (so does the prospect that only 50 developers are responsible for up 90 percent of all the toxic assets; you just couldn’t make this stuff up). However, those foreign assets will have to be taken over one way or another, disposed of one way or another, be accounted for one way or another. We have to be focussed on the real issues.
But all this will mean nothing if we don’t have a vision for what the banking system should look like after this process. Terence McDonough outlines three options:
‘If you are conservative, the new banks can be privatised after a few years, perhaps at a profit for the state. If you’re a social democrat, the new banks can be kept in public hands and run like utilities providing the basic credit infrastructure of the private economy. If you’re a little more radical, the new banks can become the centre of a popular development strategy to cope with extended bad times.’
This breakdown is useful and I would suggest a dynamic approach would embrace all three.
First, one of the larger banks should be transformed into a public enterprise bank based on the community models operating in the US. This bank (call it a People’s Bank) would be extended into every community – building a larger infrastructure with more employment. It would finance households and businesses on a non-profit basis at the local, regional and national level. But more: it would engage in communities, overcoming financial exclusion, operating out-reach programmes to raise financial literacy, provide extra assistance to credit-stricken households, etc. Its mission statement would allow it to work with An Post banking, MABS and even credit unions -a new network of banking based on people’s needs and capable of competing with commercial banks.
Second, the other major bank could be rehabilitated and privatised, to recoup state bailout costs. However, this dog should have a short, tight choke-chain leash (in this regard, Labour’s regulatory proposals are worth looking at). Even with regulation, the State should maintain a share holding- this would mean recouping funds by refloating the bank, and maintain the possibility of selling off ordinary (or preference) shares down the line.
Third, the smaller banks could be retained in their present form but refigured to concentrate on specialist banking. Take on example: housing. While housing starts are plummeting, the long-term demographics reveal a pent-up demand for housing, once the current over-supply is whittled down and people feel confident enough to re-enter the market.
But let’s not confuse housing with ‘property development and housing estates’. Like the continent, these new specialist banks could participate in a massive upgrading and transformation of the private rental sector (e.g. public-private arrangements). In the future, we will need a healthy supply of rented dwellings that facilitate a range of demographics: families, single people, elderly, etc. We can transform our private rental sector with the right political, planning and financial policies. This is one example which the third set of banks could begin to specialise in – to social and economic benefit.
Lastly, establishing a state bank for SME’s could be extended into a bank providing long-term finance for development companies, infrastructural and venture-capital projects. We would be re-orienting the financial base for economic development by providing an alternative to private equity funds, unreasonable collateral demands and ‘tight’ money.
So that’s the broad schemata:
- Bring the banks into public ownership
- Identify and fill, over an extended period, the capital hole
- Restructure the banking architecture to suit our economic need
Is this approach risky? Oh, yeah. There is no approach without risk. Is this all a bit sketchy? Yes. Proressives not only need to produce a progressive macro-economic framework to show a stimulus programme can work; we also need aworked-out, costed, risk-limitation framework for our banking system. We have neither and we won’t have until some people sit down and start doing the hard work.
But this work will be made easier once we accept reality over aspiration, are willing to use public ownership as a means of refiguring our financial system.
And, most of all, know where we want to go. There is no ‘normal’ to return to. We have to chart a new course. One that ensures that Irish banking – quite probably for the first time ever – serves economic need.
Without that vision thing, we are just flapping in the dark, unable to see the holes that open up into a bottomless pit.
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