Friday, August 28, 2009

Preliminary Comments on NAMA

The setting up of NAMA (National Asset Management Agency) here in Ireland is rightly achieving a great deal of attention at present from politicians, economists and the public at large.

It is truly a massive undertaking proposing to transfer to the agency some 90 billion euro of bank loans made to developers amidst the mania of the Celtic Tiger boom, thereby creating perhaps the largest property company in the world.

As the result of so many bad loans the banking system was in dire straits. So the government first rowed in to provide a guarantee to depositors, and then later went some way to recapitalising the banks.

However due to the extent of the crisis (with most loans now likely to realise considerably less than their book value) the Government has now set up this agency in a further dramatic step to restore banking confidence. So the agency intends to take these loans from the banks (a great deal of which are toxic) while promising to pay a sum for them which is likely to be considerably above any realistic estimate of their market value.

So it certainly looks like a good deal for the banks! Now in defence the government could say that this is vitally necessary so that the banking system becomes free again to issue credit as required. Also the reputation of the banking system abroad needs to be restored as it took a severe hammering during the recent financial crisis. And there is certainly truth to this argument with a great deal of the institutional investment coming from overseas in recent years!

However this only goes to show how capitalist economic considerations are far removed in reality from any real notion of economic justice.

The banking directors who profited greatly from their rash lending policies will not be punished in any meaningful fashion. At worst they have lost their positions and reputation but will continue to live in considerable financial comfort. If some leading bank official was to be successfully convicted for fraudulent behaviour it would at least send out a healthy signal, but I do not expect this to happen. Also there will be no action against those in the supervisory regime who failed so miserably to exercise any control over what was happening.

Likewise despite assurances to the contrary I expect the key developers, who literally owe billions to the banks, to continue be be treated with "kid gloves".

It is my belief that the market for property in Ireland is highly artificial at present thus making it nigh impossible to ascertain true market price.

Though property prices have fallen somewhat from their peak (in the case of houses about 30%), given the totally inflated prices they had reached during the boom they would need to fall considerably more before the market would truly bottom out. We have largely a limbo market at present where, in order to keep the prices at a high level, property is just not being sold. And the banks who have shown extreme reluctance to face up to the extent of their bad debt problem have effectively conspired with the largest developers to maintain this situation through granting a continuing moratorium on loan repayments.

But surely all this will change when NAMA takes control? Well, not really!

You see NAMA are likely to guarantee these loans at prices, basing calculations on some notion of current market value, which is totally unrealistic. Therefore to avoid undue criticism later from taxpayers that they have simply sold out, they are likely to wait in many cases - just like the banks before - for market values to recover (whereby they could then hope to justify their initial decision).

Meanwhile the developers likewise will have a vested interest in property prices recovering before making repayments (thus minimising their losses) and can be counted on to use every trick in the book to plead inability to pay.
One unsavoury aspect of this whole scenario is that many of these developers have deliberately set up company structures so complex that no one will be able to ascertain in any case their true financial strength. To put it bluntly I expect that countless millions in profits will remain safely stashed away. So the privileged lifestyles of the best known developers are not likely to change in any appreciable manner and many will surely surface again in the next property cycle fronting new company vehicles.

If things go the way that I broadly expect, then there could be very strong pressure in a few years time to seek an artificial solution through a somewhat premature reflation of the whole property market. Just think about it! The public finances are likely to remain in a dire situation. Growing problems in the operation of NAMA will surface. Property prices will continue to drop with no realistic chance of recovery in the near future. Taxpayers will become ever more irate at having to finance massive losses at a time when their own living standards have dropped considerably.

The pressure could be then irresistible for the Government to artificially incentivise the market pleading that this is now timely with prices already having fallen considerably. At one fell swoop this would bring back the old Celtic tiger feeling with the promise of more jobs, improving public finances, growing consumer confidence etc. And with property prices once again on the rise, NAMA could properly get to work realising all those loans that they had guaranteed (and hopefully at prices not too far from what had been originally offered to the banks).

And if anyone were then to ask then about the longer term consequences of these actions a Government spokesman could perhaps use Keynes' famous quote for justification, that "in the long run we are all dead".

Thursday, August 27, 2009

The Blame Game

Here in Ireland we have sailed into very troubled economic waters which are likely to remain so for a considerable time to come. While most European economies have been suffering due to the financially induced international recession, Ireland's problems have been compounded by the collapse of a greatly over hyped property boom.

Now, as so many false dreams lie in tatters the blame game has started in earnest with the Government, bankers and developers mainly in the firing line.

However the phenomenon of a boom is in fact a lot more complex reflecting a moral deficiency shared to a greater or lesser extent by the whole population.

During the Celtic Tiger years in Ireland a remarkable shift in values took place. The traditional system fostered by the Catholic Church gave way to an increasingly materialistic self serving attitude affecting all walks of life.

From this new perspective everyone seemed to be benefit as long as the Tiger continued. Government revenues soared due to rampant property sales and associated consumer spending. Unemployment effectively disappeared with countless new jobs servicing the boom being created. As house prices rocketed people saw their wealth rapidly increasing. With the banks anxious to provide as much credit as possible, mortgages for all and sundry became easy to obtain. In a continuing seeming win win situation, developers went on a wild splurge with commercial developments and housing estates mushrooming in every corner of the country.

When the home market no longer seemed sufficient to satisfy this insatiable demand, ambitions spread outwards. Around 2004-05 you could find any number of hotels hosting property conferences eagerly marketing new opportunities for buying apartments in Spain, Portugal, Hungary, Turkey, Dubai, Florida etc.

A key moment regarding the extent of this madness struck me when out of curiosity (around 2004) I studied the brochure for a forthcoming Conference in a South Dublin hotel concentrating on the new emerging Eastern European property market. Would you believe at that one Conference alone, 33 different exhibitors were lined up to sell apartments in Bulgaria!

During a prolonged boom such as we had in Ireland (from 1994 - 2007) a phony consensus develops in society where society as a whole unconsciously seeks to preserve the short term momentum of what has been achieved (while effectively dismissing long terms concerns). The general view at the time was that due to the "inherent strengths" of the Irish economy (as the fastest growing in Europe) that we could effectively deal with any downturn. Thus most economists predicted a "soft landing" if and when the property boom eventually stalled.

So in Ireland the Government in power greatly benefited from the boom with Bertie Ahern's Fianna Fail Party winning three straight elections. When it looked that the ruling party might lose the most recent election in 2007, in the final week support for it significantly improved (with the electorate entrusting it to prolong the boom)!

Likewise the construction sector and developers also had a clear vested interest in keeping the Tiger running. And as the increased income generated from this sector then created opportunities for other sectors e.g. hotels, car sales and consumer spending generally, business greatly benefited from the boom. Not least the general consumer electorate - who had seen years of full employment and sharply rising living standards - wanted the Tiger to continue.

In such an atmosphere, cautionary voices are effectively drowned out and accused of being negative and unpatriotic.

Say for example if management of a key bank had accurately foreseen some years ago the current slump thereby attempting to restrict credit, the consequent outrage of customers and shareholders would probably have led to dismissal of the existing directors and a speedy reversal of policy.

Likewise if a political party here in Ireland coming up to the last election had proposed taking immediate corrective measures if elected, it would have been duly rewarded by a dramatic fall in its vote.

When the false consciousness of a phony consensus exists in society, wiser voices are not heard. Rather those who seek to challenge the consensus are very often punished and ridiculed for their foresight.

Thus it is no comfort now to see the widespread condemnation by the electorate of Government, developers and bankers.

This is the same group that voted in the Government (to preserve the boom), who rushed to buy properties both here and abroad and who were only too happy to avail of the easy credit afforded by the bankers.

So, unfortunately these failures (which are very considerable) are shared by all in society to a greater or lesser extent. The requirement to fit in to the prevailing value system leads to an overall shift in behaviour and attitudes that is very difficult to avoid.

The great sin of capitalist Economics is that it attempts to divorce its workings from the moral responsibility of those actually exercising economic decisions.

Then when problems emerge with the system - as at present - the burden of failure is suffered in a greatly disproportionate fashion with those most culpable largely escaping and the truly vulnerable often worst hit. Unfortunately we will have much time to reflect on this glaring injustice in the coming years.