Let the Credit Flow. The Recession Diaries – February 24th

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There is probably no one who really believes that NAMA will succeed in its core mission – freeing up credit for the economy. I doubt that even the Minister’s scriptwriters really believe it. Is there anyone out there who believes it? I thought so.

Whatever about the long-term fortunes of the banking sector there is no doubting that Irish indigenous enterprises are hurting from the credit crunch now. This will continue. But I have discovered a solution – one that could be implemented in weeks; and we wouldn’t have to reinvent the wheel.

In 1933, to address the issue of a ‘credit crunch’ for domestic enterprises, the Fianna Fail Government established the Industrial Credit Corporation. The purpose of this agency was to do what financial institutions were failing to do – provide credit for current and new Irish business. There are two interesting and extremely relevant points about this. First, from reading the debate it is apparent there was a real problem regarding credit provision:

‘. . . it has generally been, even under the most favourable circumstances, very difficult for new projects to secure adequate financial backing. That section of our people which had money to invest has hitherto generally fought shy of native enterprises. This Government realised . . . that was a considerable handicap in carrying out. . . any policy to develop this country industrially.’

‘I should like people to realise that this is not a bucket-shop enterprise; not a catch-penny enterprise; that the Government are prepared to put every pennypiece of the £5,000,000 into it, because somebody must accept the initial risks in an undertaking of this sort, so that the deficiency which has hitherto existed . . .in our financial organisation will be repaired, and that Irish industrialists will have here for new Irish enterprises, or for the extension of existing Irish enterprises, the same facilities as are enjoyed by industrialists elsewhere.’

The circumstances are, of course, different. But the effect is very similar.

The second point is also relevant – the speed with which the Government progressed the legislation. It introduced the Industrial Credit Bill on June 21st. It passed through all stages by July 14th with no TD voting against it. It was introduced into the Seanad on July 19th and completed all stages the following week – the 26th. Even the two amendments that the Seanad passed was dealt with quickly – everything was done and dusted by the following day when the Dail accepted the amendments.

So, within five weeks of introducing the bill, it was passed. I don’t know how quickly the agency was established but the process of authorising it – the first step – was done in a matter of days. Given the crisis we are facing now shouldn’t we expect our own Government and legislature to act just as quickly?

Of course, if we hadn’t gone on our privatisation frenzy we would still have an ICC and an ACC. When the recession hit we would have had a public banking infrastructure to deal with the credit crisis – but that’s another story. Starting from here, establishing a new ICC (in movie terms – ICC 2: The Credit Starts Again) wouldn’t mean waiting upon a new infrastructure. It could start with a bare-bone agency that guarantees loans from private sector banks. This would expedite the credit flow and even put guaranteed assets on the books of our beleaguered banks, helping to repair their balance sheets.

How much capital should be put into this ICC 2? In 1933 the country was in a pretty dire economic state and yet the Government put in €5 million capital. In today’s terms this would equate to anywhere between €600 million and €1 billion with a sizeable loan multiplier. This would be a start – and it wouldn’t ‘cost’ the taxpayer that amount. A sizeable proportion of enterprises would repay the debt, others might only be able to pay a proportion back, still others might still go under. But the point is that more may go under without the credit. And any repayments could be re-circulated back into ICC 2 for further provision.

This could be the first step towards a new banking architecture – providing both short-term crisis credit and long-term financing (another area where private sector banks have fallen down on). That this could be done in partnership with a new third banking force, focused on SME and household credit, could strengthen credit provision.

So the template is there. The urgency is there. And if the money was there in 1933, it is certainly here today. Fianna Fail doesn’t need to do anything other than look back over its own policy history. There they might find a number of short and long-term solutions.

But then – in Fianna Fail terms – that was a long time ago in a galaxy far away.

NOTE: The Dail Historical Debates doesn’t allow for linking to particular debates. If you want to read the debate – and it is extremely informative – go to the search engine here. Search for 1933 with ‘Industrial Credit’ in the heading.

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