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.
But we should be. Otherwise we will be stuck in Avidyā and, so, in the continuing cycle of death and birth and death.
Michael,
Interesting post. The background of the banks failure through out the southern state's existence is new to me but interesting.
I recall seeing a story about Michael Collins. The story goes somewhat as follows: The saorstat needed credit but was denied such from a certain bank. Collins went to the bank, laid his pistol on the manager's table, intimated that it would be unfortunate for the new state if it could not get credit, and said he would be back later that day to agree the loan. The manager saw the light and agreed.
Would that our current leaders were so firm with the banks in defence of the national interest
Posted by: jer | August 05, 2009 at 10:41 AM
jer - where are such heroes today?
Posted by: Michael Taft | August 07, 2009 at 09:13 PM
I’m just an Ordinary Joe willing to give everything to the poor bankers
By Fergus Finlay
Tuesday, August 11, 2009
HELLO, how are you old chap?
I thought I’d give you a ring because I know you’ve been going through a rough time. I wanted to see how I could help.
How are things at my end? Not too bad, I suppose.
We’ve had to take a load of cutbacks, of course, and a lot of our friends are suffering quite a lot.
Quite a few of them are out of work, to tell you the truth. It’s the old recession, you know. Can’t be helped.
I’ve a feeling things are a lot worse for you. You’ve suffered a real collapse as far as I can see, and my heart goes out to you.
No, no, not at all. Of course I don’t blame you for what’s happened. Sure what would be the point of that?
This is no time to be playing the blame game. I meet people all the time who say you’re responsible and the last thing we should be doing is bailing you out. But I don’t have any time for that. I just want to help if I can.
So tell me what the story is, anyway. Your share values are worthless. Right, I’d heard that on the news. And you made a massive loss last year. OK, that doesn’t sound too good. And all sorts of people owe you money, mostly builders and developers. And it looks as if they won’t ever be able to pay.
My God, that’s a lot of trouble all right. It’s going to take some doing to get you out of that mess.
And especially since there are all those begrudgers out there who think the whole thing was your own fault.
Ah no, really, they’re going around saying you knew the risk all the time, that you knew property couldn’t keep going up in value.
But like I say, that’s just begrudgery. Nothing more. And I have no time for that. Sorting the problem, that’s what we need to do.
If we can get you back on the road, I’m sure that’ll be good for all of us.
Ah, no. There’s no need to be grateful. I want to help — in fact I think it’s my duty to help.
Sure where would we be without the banks? We have to do whatever is necessary, each of us in our own way, to get you back on the road again.
And if it means a few more cutbacks and sacrifices for the rest of us, sure what of it. Colm McCarthy can look after that side of things.
Do you know him at all, Colm? Sure he’s a great fella. Follows the Dubs all the time — you’ll always find him on Hill 16 — that’s if he’s not having an oul’ pint in Doheny and Nesbitts.
You’d never think to talk to him that he had brains to burn. And the courage of a lion, as well, after recommending all those cuts for the elderly and the disabled.
He’d want to stay well out of their way — they’re nothing but trouble with all their whingeing and moaning!
Anyway, can we get back to your troubles? I know you’ve all these bad debts on your books now and they’re getting in the way of a decent operation. I was wondering what can I do to help at all? Ah, no come on. I want to help. I’ll tell you what — I owe you this much because we need the banks, after all. I’ll take on some of the debt. I’m sure I’ll be able to get something back for all that development land.
How much? Well, how much debt have you got? Oh, Jaysus. That’s a bit more than I thought.
If I got stuck with all that debt it will take me the rest of my life to pay it off — and the kids, and probably their kids too. But still. I feel I should do something. So it’s a deal. I’ll take responsibility for your debt.
Now look, to be fair, you’re going to have to take a bit of a hit too. But I think we can work something out.
What have I in mind? Well, since the collapse of the property market, everyone reckons that the best you’ll be able to do is get back about 30% of what you lent out in the first place.
I know, I know, you can’t afford that. And it wouldn’t be right. It would leave you in a really weak position. So I’ll tell you what ... I’ll give you €70 for every €100 of debt. If I can’t get that back, that’s my problem.
Now, now, now. Don’t go crying on me. There’s no need to feel guilty, no need to say thank you. Like I said at the start, all I want to do is help.
I think we all have to pitch in and do our bit — and I’m sure when I explain to the wife and the kids that it’s in the national interest that we should all take responsibility for your debt, they’ll understand.
Even though, when I look at the sums, it looks a bit as if the kids are going to have to leave school early — I’m not going to be able to afford their education as well as handling all this.
Still, the national interest, eh? What do I want in return? Sure, nothing at all. I just want you to get back to the good old days, when money was no object, when you could look at a deal and not have to worry about any risk involved. Look, I realise it could cost me everything if I have to take on responsibility for your debts. But just let me worry about that, all right?
No, you’re right, of course. I probably could demand total control of your operation in return for taking responsibility for paying off all your debts. But that would be mean, and sure, you’d be left with nothing then.
I’M NOT one of those bloody socialists who wants to nationalise everything. Sure isn’t it enough that we decide to nationalise all the bad debts — why would we want the assets too?
I’m confident that if we do it this way, one of us at least will be earning a big fat bonus in a year or two.
And sure, anyway, what would I do with all the assets of a bank? Sure I’ve no experience in banking. I’m just an ordinary Joe Soap.
The last few years have been good to me, and even if everything went wrong just because of a few lousy property deals and a few misjudged tax breaks, sure wasn’t it great while it lasted?
And after all, things were rough for most of my generation and the generation before that until the Celtic Tiger came along. At least we had a few years of the swanky cars and the posh holidays, didn’t we?
Listen, I’ve got to go. I think it’s time for my medication. But you look after yourself. And don’t you worry about all the bad debts you’ve accumulated. From now on, they’re my responsibility.
This story appeared in the printed version of the Irish Examiner Tuesday, August 11, 2009
http://examiner.ie/opinion/columnists/fergus-finlay/im-just-an-ordinary-joe-willing-to-give-everything-to-the-poor-bankers-98421.html
Posted by: Tipster | August 11, 2009 at 11:50 PM