As Nat O’Connor on Progressive Economy pointed out, the NAMA Bill does not define what ‘systemically important’ means, when it states: “The Minister shall not designate an applicant credit institution as a participating institution unless he or she is satisfied that— (a) the applicant credit institution is systemically important to the financial system in the State,”
Having a definition would allow us to figure out which are the essentials to provide the first stated objective of NAMA, and which was repeated regularly by Brian Lenihan and Brian Cowen before and during the debate in the Dail yesterday evening, namely (as stated in Section 2 of the Bill):
“To facilitate the availability of credit in the economy of the State”
I’m republishing this post by Michael Taft below on NAMA from the 4th of August, which deals with whether or not NAMA can do this. It is also worth looking at Jim Stewart’s post “NAMA or Nationalisation Unlikely to Achieve Objectives“. The only thing that would get credit moving to enterprises and households, Jim argues, is the setting up of a non-profit making enterprise bank.
“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.”
There is a tendency in political discourse to reach for the apocalyptic. Admittedly, when you read the latest Central Bank report, you can hear the sounds of seals being broken. But take NAMA. Will it be a disaster? Probably not. Will it bring the economy crashing down on us? Doubtful. Will it do irreparable harm to the social fabric? No. Any country that has survived Fianna Fail for so long can pretty much weather anything; even NAMA.
But will it succeed? Within its own limited and partial terms, probably. After all, we’re only trying to take bad assets out of the banks and recapitalise them. There is the concern over haircuts – too little, and NAMA (i.e. you and me) is landed with a portfolio whose worth it will never be recovered. Too much, and the recapitalisation will effectively bring the banks into public ownership. The calculations, though, are part economic, part valuation and part political. Guess which is the biggest part?
Besides, the moment of truth will not be in September – when the legislation is debated – or next June by which time all the assets will have been transferred to NAMA. The moment of truth won’t come for a decade or even longer, when NAMA is wound down. In the meantime, the process has been constructed so that the performing loans can meet the interest on the NAMA debt. If there is a problem, it will be some other Government’s problem, well down the line.
By the time NAMA is wound down, the economy should be up and running, the hit will become relatively smaller, the return on capitalisation may be high, and political pressure will demand that banks, now clean and profitable, face a small levy for the remainder, even if that payback time is extended for yet another decade. There’s a lot of political edge to skirt around here.
The banks could still end up in majority public ownership if the valuators find that no amount of calculation can keep the state from having to reluctantly take a sizeable equity stake. Will that change anything? Probably not. The government is not likely to take an activist role when they are fighting so hard not to be active at all (witness their laissez-faire attitude to mortgage rate increase).
Yes, there are issues of accountability and transparency. Yes, there were better way to deal with this – as Karl Whelan has shown in detail. Yes, we could have bought the banks of systemic importance for a real knock-down price. And, yes, things could still go wrong (will ACC’s solo run throw things off course?). But we are dealing with the politics of postponement – hard to mobilise a progressive politics over an event that may or may not occur for over a decade, even if the facts are on our side.
That’s why if we get mired in the details – important as they are – we will miss the great sleight-of-hand at work here:
‘Clean out the banks (NAMA) = Return to ‘normal lending activity’
Oh? There are two contestable assumptions at work here. First, that NAMA’s success will lead to ‘normal lending activity’. By the time the banks have swapped their NAMA bonds for cash from the ECB, hundreds of businesses will have gone under and thousands of jobs lost.
However, even when they get their cash – will they lend? If they are to operate on commercial criteria (and what else could a private sector concern do without state subsidy) they will not lend to businesses they consider ‘risky’. Doing so might create another set of dubious assets that would impair their loan books. And that’s what NAMA is trying to rectify.
But the real problem is whether this nirvana of ‘normal lending activity’ ever existed. Back in the 1950s Flann O’Brien wrote:
‘It is almost a cliché that this country is chronically undercapitalised, that money for productive capital works cannot be got. The administration recently started capital works concerned with land reclamation and drainage and is about to clear all the rocks out of Connemara. With money borrowed from the banks deposited by thrifty farmers? Not on your life. With borrowed American dollars which are twice as costly as pounds.’
This led Diarmaid Ferriter to rightly interpret O’Brien’s comment as:
‘ . . . an Irish bank, in the sense of a banking concern deducted to furthering the interest of Ireland, did not exist.’
Frank Aiken had his own run-ins. When he attempted to finance an expansionary programme shortly after the war, the Irish banks refused to loan, preferring to keep their money safe in the UK. He declared:
‘I regard their turning down of the request (to loan the government money) . . as an act of undeclared war upon our people’.
The banks won and, Aiken surrendered unconditionally, the people paid the price. But what about recently? Surely, the banks were, if not drivers of the Celtic Tiger, would have been knee-deep in it. Patrick Honohan wrote only a couple of years before the financial crisis:
‘ . . .despite the emergence of the International Financial Services Centre (IFSC) as a leading player in some subsectors of offshore finance; despite the high profitability and unusually high percentage of the banking system not domestically controlled; and despite the absence of any significant bank failures for over a century; there is little evidence to suggest either that recent Irish growth has been finance-rich in the sense understood by the literature, or that the previous low-growth experience was explicable in terms of a weak financial system.’
Not only did the Irish banking and financial system play little role in the Celtic Tiger boom; the prior poor performance could not be blamed on a weak financial system. Indeed, it’s as if Irish banking is in a place apart from the real economy.
In this same vein, Sean O’Riain writes of the activities of the banks in the late 1990s:
‘While capital sloshed around, Irish banks did little to guide it toward the kinds of investments that would have supported medium and long term development. . . . The public sector has been crucial to the provision of funds for investment in high tech and innovation, even as it competed with the rush of money to property and financial speculation induced by the tax decisions of its own government and administered by the banks that contributed relatively little to development.’
So, we may get clean banks; we may recapitalise them to international satisfaction. But there’s little in history to suggest this will make a contribution to national recovery. The progressive agenda remains; indeed, it becomes an economic imperative: credit as a social utility, an instrument of growth, subordinated to the needs of society.
For instance, if the Government had not privatised the Industrial and Agricultural Credit Corporations they would have two instruments to relieve the credit freeze. That’s what these institutions were set up to do in the first place. At the very least, these institutions could have guaranteed the loans from private banks.
And we will need capital for enterprise development, innovation investment, capital projects and infrastructural development. This calls for a state banking system created to meet these needs (or as Sean O’Riain suggests, as part of the solution, to enhance the role of Enterprise Ireland as a venture capital provider).
This even calls for a role for public enterprise in retail banking. As private banks withdraw from local communities, centralise their loan policies, remain indifferent to financial exclusion and tighten up credit to local businesses and households for the foreseeable future (all in the name of restoring capital), the opportunities for public enterprise banking based on the community development model in the US become more significant.
Yes, NAMA may succeed according to it lights. But that light won’t necessarily shine on the economy. If history is anything to go by, it won’t – dim-lit banks in a dark time. For what we need -a strategic and cooperative role for credit in economic recovery – is not something it is concerned with.
Latest posts by Michael Taft (see all)
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