NAMA. The McCarthy Report. Bailouts? Confused? You will be.
Does the thought of NAMA concern you? And is the economic crisis and the proposed part solution, the McCarthy Report, a source of anxiety? Are you a bit puzzled as to the rhetoric surrounding it, after all the principals involved seem somewhat hazy on precisely what the effects of the implementation of both those will be. You’re not alone. For this last three days has seen a flurry of reports in the Irish Times that would have one scratching the head…
“So the Government could end up owning the banks or owning most of them. So there’s a kind of false debate goes on sometimes as to whether we should have Nama or nationalise the banks. You could end up nationalising them, or going most of the way towards nationalising them, within the terms of Nama if the haircut is severe enough.”
Mr McCarthy said the “essential difficulty” at present was that nobody knew how big was the “hole” in the banks’ balance sheets and that even those who had been inside the system had not been able to come up with firm figures.
The economist said he wished to “nail” the idea that the taxpayer, through Nama, was “bailing out developers”.
Yes. Let’s nail that idea immediately.
He argues that…
“The developers’ debts are currently to the bank. A lot of the developers obviously can’t meet them. That debt will be transferred to the Government agency. The developers will still owe exactly the same amount to that agency, which will then go off and try to collect it. So there’s no bailout to developers involved in all of this. What developers have got to date is a bit of a stay of execution, but that’s all. As to the banks, there will be no bailout of the banks as such, unless the Government overpays for the loans.”
Instead, and this will no doubt be a massive source of comfort to us…
Mr McCarthy said the “real bailout” was a bailout of depositors to prevent “a complete financial collapse”.
That meant that the taxpayers were going to end up footing the bill to some degree.
But, surely extending preferential repayment terms to developers - the ’stay of execution’ is precisely bailing them out, ‘try’ as NAMA may to recoup them.
Turn to Sarah Carey and one will discover that we should…
…stop asking yourself why we’re bailing out developers (we’re not); how much this will cost us (a lot) or why the little people have to pay (because that’s what little people are for). You should also spare yourself the bother of reading the litany of “Not I” articles spawned by the McCarthy report, for Colm’s €5 billion is a fraction of what the banking problem is going to cost us.
Hmmm… that’s interesting in itself. The sums ’saved’ by McCarthy are as nothing compared to the financial sector? Well, you know, the weird thing is that that’s a line many on the left have been taking for God knows how long now. And yet we’ve been told that that ‘fraction’ is the crucial figure to keep in mind whereas let’s not exercise ourselves overly much about NAMA.
But in fairness to Carey - words I don’t utter everyday - she’s found a bit of a contradiction in the prevailing wisdom as expressed by McCarthy, and it’s precisely in that sentence I quoted at the top of this post.
But then along comes Colm McCarthy, a sober, patriotic man. On Monday, he said on RTÉ Radio One’s Morning Ireland that even if we overpay for the development loans, we could still end up nationalising the banks anyway because they’ve got so many other bad debts. So we could overpay for the sole purpose of avoiding nationalisation, but still end up having to do it? Ah, no.
And that is a fair point she makes. And the answer would be most enlightening, were one to come.
Now, as is usual with Carey, there’s the tilt into oddity of analysis, for example, she expects the Green Party to push for nationalisation and NAMA. What she really wants, and she’s not coy about it, is for the GP to precipitate an election with FF refusing to countenance the nationalisation part. But why should the GP do this, or rather, why should the GP as currently constituted feel obliged to do it. Her exit path for the GP is that…
The hard bit though is that the Greens will have to be ready to walk out if they don’t get what they want and what we need. People will try to scare them out of an election. They will say the last thing the country needs is an election. Rubbish. An election will take three weeks and Nama is taking almost a year to establish.
They will say that the international markets will react badly. Balderdash. Our political parties are the same, so the world will know that it won’t matter who wins. The only people who won’t like it are those who’ve been buying bank shares for the past three months and they shouldn’t matter to us.
They’ll say that the Greens will get hammered at the polls, but the leadership should ask itself this: Would they rather fight a general election which they precipitated over nationalisation or one prompted by Jackie Healy-Rae over rural buses? There’s only one right answer to that question.
It’s a nice proposition, but I fear that for she will be disappointed.
Meanwhile, though, on the saner side of the right side of the street we have Michael Casey, formerly of the Central Bank and now with the IMF. And curiously he’s one of the few on that side to actually, y’know, think a little bit about what the effects on the social fabric of all this stuff coming down the line might be.
Though let’s note that his thoughts on NAMA are oddly similar to those of the left. Not quite identical, I suspect he isn’t quite able to make the conceptual leap, but not that different.
This arises in the course of a discussion on welfare and wedges, although he doesn’t use that term.
By the by he doesn’t really seem to get the idea that welfare wedges are as much a product of low wage rates as ‘high’ welfare rates. Or that we live in one of the most expensive European economies as per costs. In fact he argues rather vaguely that:
The short-sighted profligacy by government (and social partners) has now returned to haunt us. Once benefits are conceded it is virtually impossible to reduce them later on, even if economic circumstances deteriorate. Governments have never learned the basic lesson that prevention is infinitely better than cure. While it is difficult to make international comparisons, it does seem as if Irish benefits are high, even allowing for relatively higher costs of living.
Really? As against where? I’ve got good stats that suggest otherwise. So a little precision in this particular debate might be useful.
But he’s of one mind with McCarthy that the cuts are necessary. Completely necessary and that they must encompass welfare. Again he doesn’t quite say why bar some nebulous stuff about ‘perverse incentives created by government…. inimical to economic growth and job creation’. Hmmm… Well. We didn’t hear too much of that pre 2008 so presumably they weren’t that inimical to economic growth and job creation. And he goes on to say…
Whether the Government accepts in full a cut of €1.8 billion, as put forward by McCarthy, remains to be seen. But anything less than that would scarcely be adequate.
Again with the vagueness. Adequate to what purpose? We know, because the ESRI has told us, that the impact on the borrowing requirement will amount to .6. In a deflationary economy. We know there is no fiscal or economic stimulus package. We also know that in the US and the UK they are attempting to use monies disbursed through those in lower socio-economic brackets to pump prime their economies for… er… growth and job creation. But somehow this state and this economy doesn’t obey any of those new-found rules of economics.
But it is on the political aspects of this that Casey is - as ever - most revealing. For he acknowledges that which McCarthy and Carey cannot…
Although note, as a further aside, the odd idea that our economic discussions are now clogged with issues of a specious equality - albeit only one of pain, and quite quite different you will note from the calls for equality, or even equalisation of the gains of the boom during better times…
Equality could be maintained by other sections of the community, eg public servants, taking larger cuts than welfare recipients. Given the correlation between the growth in public sector pay and social welfare over the last decade, some kind of linking formula could presumably be worked out.
I like the ‘eg public servants’. What about the rest of the community? Why not add them to the list? Why match public sector pay and social welfare alone? Not least because it is the private sector (now awarding themselves at their higher echelons pay increases in order, presumably, to defray further tax increases coming down the line) that has jettisoned those numbers onto social welfare rolls. Still, why explain? But here… this is of interest.
Something along these lines might be regarded as a reasonable prescription in a normal situation. Unfortunately, we are in a completely unprecedented situation which gives opponents of welfare cuts a powerful argument. A huge amount of Government spending is going, or will go, into bailing out the banks. Nama, the National Asset Management Agency, is likely to pay too much for the bad assets of the banks. If they don’t do this they will have to inject more capital into the banks; this may or may not lead to nationalisation. Taxpayers are likely to suffer for years even though shareholders will benefit from recovering bank profitability.
And…
Although most welfare recipients do not pay taxes, any reduction in their benefits could be seen as a contribution to the coffers of banks. A PR genius could not spin this any other way. It comes across as obscene: the poor subsidising the rich. It must be the worst nightmare of spindoctors.
Not just the poor, not only the poor. And note that he doesn’t put a tooth in it. For him this is a transfer from us to them. A ‘bailout’ if you will. If it’s the unemployed poor subsidising the rich, then it’s most definitely the employed workers subsiiding the rich. And he points to a practical aspect of that subsidisation…
To make matters worse, one bank, Irish Life and Permanent (ILP), has been allowed to increase its mortgage rate by a half percentage point even though this is in direct opposition to monetary policy as formulated by the ECB. Instead of cutting its margins like every other firm in the country is having to do, ILP are increasing their margins by using their dominant market position. Having caused unprecedented damage to the country, banks like ILP are not showing any remorse but are ready and willing to exploit their customers all over again. And there is a deafening silence from the Central Bank and the consumer side of the Financial Regulator.
If behaviour like this is allowed by the Government, it will make it all the more difficult for them to bring in welfare cuts. If they do not, then they will have to burden the middle class with even higher taxation, thus undermining job creation for years to come.
Do you know why I like Michael Casey? Firstly he’s nuanced in a way that some of the blowhards who populate this debate with their faux-’tough’ rhetoric aren’t. Secondly he’s willing to say what is what, even if that is difficult for his case. But finally, because at root what he says is so unvarnished and essentially honest (even if I disagree with his analysis), he is actually quite frightening. This is the view of the world, our world, from a certain level. And that is no harm at all to know.
This is what we’ve got to contend with when we get through all the bluster and palaver thrown up by those who keep telling us these are for our own good. Casey doesn’t even pretend that, or rather seems half-hearted about having to make that effort.
And, he’s not slow to identify that…
McCarthy seems to be about right in his estimate of the cuts needed. But there is a wide body of opinion which will not accept this, especially in the light of the banking system bailout. The implications for civil unrest should not be discounted. At some stage the economic merits will have to be balanced against the wider social costs. One way of easing the dilemma might be to propose a special levy on banks.
I think, as it happens, that Casey is wrong on the first proposition. I think McCarthy is overblown, that there are alternatives and that it is a further indication of the massive failure of this polity that those are not being explored with any energy whatsoever. But, and it’s increasingly heartening me, I think he may be right about the second proposition he makes. And those like Carey who point up some of the most obvious contradictions in the official line are, perhaps despite themselves, doing us some service. But as to his last propsition I doubt that any cosmetic pain infliction will get this government, or any potential alternative off the hook.
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Dec 9th 2009