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62 responses to “The Irish morass”

  1. Craig Mc

    It’s “Grauniad”!

  2. FDB

    Yes, we mustn’t misspell things incorrectly.

  3. Don Wigan

    It is certainly worth a post, Kim. It does disturb me that it is the battling punters who get lumbered with the burden of paying for these bailouts. It has happened already in the US, in Greece and in other parts of Europe.

    Between them brokers, financiers, banks, corporate executives and property developers have been responsible for the most selfish and reckless deals since the great depression. But like the scoundrels of that era they are, except for a few more transparent crooks, being allowed to escape the consequences of their own greed and imprudence.

    I had some family connections in the Philippines. Pretty much the same thing occurred cleaning up after the Marcos regime. Yet foreign banks, which among other lending recklessness, had financed GE to build a nuclear power plant over an active volcanic crater (luckily nothing much other than the siphoning of money took place) were paid back pretty much in full.

    Meanwhile the “serious people” Krugman references explain sagely that Argentina is still regarded with disfavour by “markets”, who, of course, remain un-satiated by the Irish deal,

    I missed that story, but it seems to imply that Argentina thumbed its nose at the IMF and other international financial orthodoxies. Any reports on how Argentina is doing? It would be a nice result to know it had survived OK.

    Locally we seem to have survived the GFC through a well-managed neo-Keynesian program, but it has clearly cost us dearly in the political region, with a de-stabilising media campaign only narrowly failing at the election.

    Tricky times.

  4. sg

    It pisses me off that the same people who were lauding Ireland’s small government, low-taxing model in the boom time are now saying that Ireland’s problem is that they didn’t keep spending down during the boom time. They’re trying to pretend that the problem was social spending all along…

    They’ll do anything to try and preserve their tired and useless economics.

  5. Razor

    OK, so just let the banking system fail and see how the taxpayers like the results.

    I’m no fan Obiwan, but I give both he and Bush credit for holding the line in the face of calls to let the big banks fail.

    once the bank bailouts are in place then the government has to work out how to pay for it. unfortunately that causes economic hardship – the question is whether that pain is less or more than letting the baks fail. i think it is probably less and there appears to be a lot of people a lot smater and better qualified than me of the same opinion.

    I have always wondered how a soveriegn nation could allow it’s monetary policy to be handed to an external agency in the way Euro countries have done. However now that they are in a pickle I have to say they are lucky they don’t have an independent floating currency or their overseas debt would have gone through the roof. Then again, the discipline of an independent floating currency might have helped avoid the pitfall they have taken.

  6. sg

    Razor, I don’t have a strong opinion either way on bailout vs. nationalization vs. letting them fail, though I’m inclined towards a combination of the latter (and interestingly, my friends in finance agree with me). But assuming your theory is correct, this just makes the rhetoric being bandied about now all the more odious.

    The people who were pushing this economic model should be grovellingly apologizing for their cockups, rather than brazenly claiming that the problem was always social welfare, and pretending that the bailout is neither here nor there in the calculations.

  7. Lefty E

    “These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.”

    i.e Others must to pay off your debts, or it’ll “get worse for them”. Its somewhere between outright theft and standover tactics.

    They want regulation up the wazoo, and should incur a penal level of taxation until theyve paid it all back, with interest

    In the meantime, we do have socialism – but its exclusively for bankers. Remind me, who else “cant be allowed to fail” in capitalism?

    And what would happen if we did let them fail? Oh we’d “lose jobs” would we? And how exactly is that different to the outcome of saving them with public bailouts?

  8. Lefty E

    I think we should let them fail. How else will the next generation of bankers learn to manage risk like responsible adults?

    The current lesson: as long as you’re too big to fail, the consequences will be put onto others, so take as many risks as possible.

  9. Joe

    But Lefty E, we could lose more jobs

    [T]here appears to be a lot of people a lot smater and better qualified than me of the same opinion…

    In other words, you trust the same people, who have a self-interest in you trusting them, because you think and hope they’re a lot smarter than you are and know important stuff, which they have to keep secret, which you don’t know. Well, why even bother voting? Honestly…

  10. Joe

    I completely stuffed up the above response.. The middle bit is a quote from Razor, and has nothing to do with LE. Sorry LE. Agree with you about this btw.

  11. Lefty E

    Yes, effectively, they dont take any risks. We do.

    I think that makes the public the ‘entrepreneurs’ in the equation, and hence we deserve the payoff – not the banks and their shareholders.

    I therefore say cash the useless bastards in, and let a new lot have a go: highly regulated in relation to lending decisions this time.

  12. Chris

    LeftyE @ 14 – my understanding is that with the big Irish bank failure that it was nationalised and so the bankers and their shareholders would have been left with very little equity (if any). So I think they probably lost quite a bit of money as well. The government ends up owning all of it as well as the profits/losses (all losses atm I think).

    I don’t know enough about the situation to know if in retrospect it would have been better to just let the bank fail and handle the fallout from that.

    We used to have a much more regulated lending system. Back when you had to have a 20% deposit to get a home loan and had to go beg for money from the bank. I’d rather not go back to that situation.

    Kim @ 13 – the bank guarantees in Australia didn’t end up costing the government anything did they?

  13. Lefty E

    “I’d rather not go back to that situation.”

    Why Chris? Serious question. In the light of recent GFCs it seems like a sound lending policy.

  14. terangeree

    What would happen if we just let the banks fail?

    I’m no historian, but I suspect we’d be in for a repeat of the crisis of 1893, with the long economic depression that came as a result.

  15. John D

    Chris @ 15: You say:

    We used to have a much more regulated lending system. Back when you had to have a 20% deposit to get a home loan and had to go beg for money from the bank. I’d rather not go back to that situation.

    And there was none of this nonsense about the wife’s income counting.

    However, when we bought our first home it cost about 2.5 times the wage of a graduate engineer. Tell me what the multiple would be now? The tighter lending criteria meant houses were actually affordable.

  16. Katz

    Irish banks aren’t too big to fail.

    Large European and British funds (“bondholders”) that lent money to Irish Banks and which would collapse if Irish banks defaulted are perhaps too big to fail.

    No one with any power or bail-out money gives a damn about Irish people, the Irish government, or Irish banks.

    The Irish government is merely the designated vehicle through which ECB and IMF money is being circulated in order to save several Large European and British funds (“bondholders”). Irish taxpayers have been given the notional role of paying off these loans over an extended period of time. Can Irish taxpayers afford this bill? Probably not. But for the time being all parties are willing to accept this fiction as an operational truth.

    Systemic risk is back on the table.

  17. GregM

    [email protected] I agree with what you have said in the principle you have stated, in the very appropriate caveat that you have stated the principle should be subordinate to and in your rejection of letting speculators get a free ride on the backs of the taxpayer and everyone whose financial wellbeing they put in jeopardy.

  18. GregM

    Systemic risk is back on the table.

    It has always been on the table. It is just that people who should have known better did not want to see it there so pretended it wasn’t.

    But that is human nature.

  19. Chris

    Kim @ 16 – I thought it wasn’t the bank guarantee, but the other program where the government made money available for the banks and non-bank lenders to lend out that is thought to be behind the reduction in competition. Something to do with the way it was structured such that the big lenders ended up with less overhead per loan than the smaller lenders and so they pushed the smaller lends out with better deals. Probably just an accidental miscalculation on the government’s part in the rush to patch things up.

    LeftyE @ 17 – probably requires a long response, but in brief it seems a bit unfair to me to err on the side of not loaning to a group of people because some may not know what they’re doing rather than being a bit more liberal with lending criteria. Of course I don’t want them to be so liberal that the banks go under, but we don’t really have that problem in Australia. Who was it who said that the only thing worse than a profitable bank is an unprofitable bank?

    Remember its not that long ago that women would find it difficult to get home loans by themselves. They might get pregnant and not be able to pay back the loan! Even just a few years ago a friend was given a loan contract which included a clause that stated she had to inform the lender if she got pregnant!

    John D – I wonder how the ratio of house price to household income rather than single income has changed over the years? Might not look as bad. But from the reports I’ve seen our problem fundamentally is lower average occupancy rate (meaning we need more houses) and not building enough houses to meet demand from immigration. Tightening lending criteria will only advantage the richer who will still be able to borrow money and the rest of the population will be stuck renting.

  20. Razor

    @8 “Remind me, who else “cant be allowed to fail” in capitalism? ” – GM and the union pension funds.

  21. Razor

    @13 – no, I did not support the deposit guaruntee on two grounds. Firstly, it was not required in Australia – our banking system was not under the stress from toxic assets and potential runs on capital that overseas banks were and therefore it was purely a political stunt. Secondly, as soon as it came in it caused dislocations in both the cash and debt markets in Australia that were inefficient. The Mortgage funds that were locked up are still being unwound. Obviously the focus groups found the guarantee to be a winner because the Coalition backed it, too, which was very disappointing but politically understandable – little to gain from opposing it back then.

  22. Razor

    @15 – the guarantee fees were a nice little earner for the government.

  23. Razor

    @20 – looser lending criteria is not the only cause of higher property prices in Australia. Supply not keeping up with demand due to state and local government restrictions on planning and infrastructure development including requiring developers to provide most of the infrastructure that state and local government and utilities used to provide are all significant factors.

  24. Chris

    (a) One of the factors pushing women into the workforce was the decline in real value and purchasing power of a single full time income;

    Not saying that you’re wrong, but how do you know the causation is in the direction you claim? And that instead at least some of it is due to couples realising that they have a significant advantage if both work rather than just one when most other people just have one employed fulltime – which works until most people start doing it.

    Also one other factor would be later marrying and having children so more couples are making house buying decisions while DINKS and more established in their careers.

  25. Joe

    Chris, even if you’re right and it was financial incentive or even a change in the understanding of women’s roles which led to both partners working initially — in the meantime it’s almost become a necessity. It almost makes you wish that income splitting would be reintroduced to give families some help.

  26. Brian

    Kim @ 19

    As opposed to banks lending more than 100% of the value of a property to people who can’t substantiate their income, and on-selling the debt… that’s pretty much the story of the sub-prime mortgage mess, isn’t it?

    With a couple of extra bits, I think, Kim.

    The people who couldn’t substantiate their income could also simply hand in their keys and walk away if they couldn’t pay the interest on the debt.

    At the other end there was all that credit swap stuff and other ‘financial engineering’ which was supposed to insure the debt, which was falsely AAA-rated, and built a casino-like superstructure on the whole thing.

    Someone calculated recently that the US govt would have spent less if it had paid out all the mortgages and bought a house for everyone who couldn’t afford one and had money to spare. The people who had to be bailed out were the ones who leveraged the (crap) debt to play financial games.

  27. Brian

    Katz @ 21:

    Irish banks aren’t too big to fail.

    Large European and British funds (“bondholders”) that lent money to Irish Banks and which would collapse if Irish banks defaulted are perhaps too big to fail.

    The Germans and the French need to bail out the Irish because their banks lent the money to the Irish banks. Ditto for Greece.

    The Irish problem started with a real estate bubble, which burst when the economy went backwards because of the GFC.

    It is also said that the Germans need the Greek and Irish crises as they keep the Euro low against the dollar, so they can make a mozza exporting to the US. Last I saw the German economy was growing at 5%.

  28. Brian

    Chris @ 24, when the GFC hit banks wouldn’t lend to other banks because they couldn’t trust them. Nor would they lend as part of a syndicate of banks to a business, because they couldn’t trust the other banks.

    A fair bit of money lent for housing is sourced overseas. Guaranteeing the deposits effectively guaranteed the bank, which meant they could continue to source money overseas. The non-bank lenders couldn’t at any price. The small banks could, but with a risk premium, so they became uncompetitive.

    The international banks simply folded tents and went home as they rationalised activities to core markets.

    That’s as I understand it.

    I think Swan is now going to introduce an insurance scheme to back the small banks and credit unions, which should allow them to source money competitively.

  29. GregM

    It is also said that the Germans need the Greek and Irish crises as they keep the Euro low against the dollar, so they can make a mozza exporting to the US. Last I saw the German economy was growing at 5%.

    Yes rian that would be nice.

    But,as katz has pointed out bondholder interasts are paramount uhder our law. They get first priiority after the tax man.

  30. Mercurius

    Razor, I’m not trying to put words in your mouth, just trying to get a bead on what is your position on the role of government viz the original post:

    Taking your comments @ 6 and @ 26-29 as an aggregate, you seem to be saying that —

    — the government has an obligation to reduce pain for the public and protect the public from the worst fallout of maurauding threats (eg. terrorists, reckless financial speculators, etc.) and the government has a further obligation to provide assets for public use, such as infrastructure, in return for taxes levied —

    …I mean, you don’t want the banks to fail on the premise that it would cause greater pain to the public if they did; and you want government to provide infrastructure instead of making private developers pay for it…

    Is that a fair characterisation of your view of the role of government? And, if so, welcome to the social contract, comrade!

    Going further, however — there seems to be a very real case where government policies in countries like the USA and Ireland enabled a “maurauding threat” by permitting an environment where financial speculation ran on dodgy property derivatives…as you yourself have mentioned…

    …our banking system was not under the stress from toxic assets and potential runs on capital that overseas banks were…

    …Do you seriously think however that the Australian situation arose as a result of the admirable restraint, prudence and higher ethical standards of Australian bankers? Hardly. It happened because Australian law and government policy wouldn’t permit the creation and trading of the toxic assets to the extent that the banks in other countries choked on.

    That’s the broad brush-stroke of it, no?

    A micro-example: In my town, there’s a “toxic asset”. A house is that is financially underwater is on the market in the main street. The real estate agent explained to me that the bank lent basically 95% of the market value of the house, and then lent another 30% of the market value of the house to the then owner to do renovations, expecting an increase in the asset value. The owner did a runner and declared bankruptcy (a more painful, but financially equivalent situation from the bankers’ perspective, of US homeowners walking away and leaving keys in the door), and the bank is stuck with a distressed asset on which they cannot hope to reclaim all their capital. 85 cents on the dollar is their absolute best hope — a return that US bankers would love to be getting on their distressed assets.

    Question: How come banks in Australia can cope with the frequency and scale of such events that occur here, but US and Irish and other banks couldn’t?

  31. murph the surf.

    The scale of negative financial events here in Australia is still restrained.
    The prudential regulations covering financial institutions here seem to have limited the extent of bank exposure to GFC related toxic products.
    However all the banks had to make substantial loss provisions in their accounts in the last year.It isn’t as if they didn’t suffer losses on these products.
    The Irish government was the first (?) to introduce their bank guarantee and this pressured other governments to follow suite.
    The minor lenders based here who were sourcing their money from short term credit markets all lost their source of funds and were bought out by the major banks.You can’t blame them when they buy a failed business at a good price.
    The guarantee protected deposits I think – as these were a minor source of the minor lender’s funds they couldn’t continue.
    “Do you seriously think however that the Australian situation arose as a result of the admirable restraint, prudence and higher ethical standards of Australian bankers? Hardly.
    —It happened because Australian law and government policy wouldn’t permit the creation and trading of the toxic assets to the extent that the banks in other countries choked on.”
    Did these regulations and policies develop in isolation from the industry they cover? I’m hoping they reflect a well balanced tension between two forces.
    Let’s try to trust that our regulators are able to maintain this independence.The corruption of the ratings agencies in the US was a major ingredient in their mess.

  32. The Low Spark of High Heeled Boys

    Razor.

    I quote glen Stevens from the 2009 Annual report

    ‘The Reserve Bank responded to a surge in demand for banknotes around the time of the global banking crisis, as some depositors withdrew cash from banks. Although this demand was met from the Bank’s contingency stocks, Note Printing Australia stepped up production as these stocks fell sharply. As calm was restored this flow abated, but by the end of the financial year currency in the hands of the public, at about $48 billion, was still about $4 billion higher than would have been expected based on trend growth in the economy. ‘
    yes there was a run which the guarantee was part of the solution in stopping.

    Ireland started it and most countries had to follow.
    They stupidly did not stop shareholders and bond holders having well deserved hair cuts.

    They then introduced austerity policies which exacerbated the situation and created a minor deperession which they are still in and appear want to remain in.

    They would have been much better in copying what the RBA has done in the past here or even Tarp in the US

  33. derrida derider

    It’s generally agreed among macroeconomists of both Right and Left that the big mistake in Ireland was to not merely gurantee bank deposits (overwhelmingly domestic in Ireland’s case) but bank bonds (mostly foreign). Adressing bank solvency rather than liquidity has never been part of the “lender of last resort” theory of stopping bank runs.

    Mind you, there are many who claim it wasn’t a genuine mistake at all, but much worse – prominent figures in Fianna Fail were being personally financially embarrassed (the real estate bubble had deep political involvement).

    And others are wrong about German and French motives here – they’re afraid of Irish bond default not only because of the direct pain it causes German and French banks, but because it might lead to a run of such defaults (especially in Eastern Europe, where the German banks have been extremely greedy and are consequently extremely vulnerable). If Eastern Europe defaults the German economy would face a Great Depression. So the weak Euro is just a short-term bonus of the policy of insisting on repayment, rather than the central motive.

    Fairness and stability have never been capitalism’s prime virtues, and today is no exception.

  34. Katz

    Razor:

    I did not support the deposit guaruntee on two grounds. Firstly, it was not required in Australia – our banking system was not under the stress from toxic assets and potential runs on capital that overseas banks were and therefore it was purely a political stunt.

    That’s not true. As soon as Ireland announced that deposits in Irish banks would enjoy a limitless government guarantee, deposits started pouring out of Australian banks.

    The Irish government led a bidding war for deposits that no national banking regulators could ignore without serious systemic peril.

  35. Brian

    dd @ 39, I want to make clear that I didn’t see the weak euro stemming from the crises in Greece and Ireland as part of Germany’s motivation.

    I was just repeating something that guy Das I think his name is said to Phillip Adams. He reckoned Germany should treasure the Greek crisis and hold it to its breast because their economy benefited from it in their export-led recovery.

    He did from memory use the word “need”, but if anything he was suggesting that German policy didn’t really know what it was doing.

  36. Labor Outsider

    Mercurious

    The answer to your last question involves a few things:

    First, it is a scale issue – the proportion of Australian banks’ loan portfolio that is under stress is simply much smaller than in the US.

    Second, there is the nature of mortgage contracts. A large number of loans in the US are non-recourse, which means that financial institutions can’t go after their non-housing assets following a mortgate default. Non-recourse increases the probability of default.

    Third, the distribution of the rise in indebtedness was far differnet in Australia. In Australia, households in the lower part of the income distribution were more or less spectators to the big run jup in prices and debt. If you look at the sub-prime debacle in the US, what stands out is the scale of the lending to households that could only afford repayments under very benign circumstances.

    Fourth, the underlying price fundamentals are very different. Australia’s housing supply is relatively inelastic (Australia’s price boom has not been accompanied by a construction boom), which has helped to put a floor under prices. In addition, our economy’s exposure to rapidly growing economies in Asia was a key factor why Australia avoided a recession and a sharp rise in unemployment.

    As far as Ireland is concerned, the crisis is the collective responsibility of Europe. On the Irish side the governemnt, regulators and supervisors turned a blind eye while Irish banks (and foreign banks encouraged to domicile there) built up excessive balance sheet positions. The ratio of financial institutions’ domiciled in Ireland assets to GDP is something in the order of 800%. In addition, there were a bunch of domestic policies (tax, etc) that directly encouraged excessive investment in real estate. The state was never going to be able to make good on the bank guarantees if it turned out (as it has) that the underlying value of the assets on banks’ balance sheets were worth a fraction of the value recorded on the books.

    On the non-Irish side, a large share of Irish funding came from UK and German banks in particular, with supervisors in those countries paying insufficient attention to the activities of their banks in those countries. As others have said, Germany isn’t worried about Ireland per se, lending there was small relative to their total portfolios – it is the potential for contagion that is most concerning.

    It is also worth keeping in mind the broader imbalances that contributed to the crisis. In 2007 Germany and the Netherlands were running current account surpluses in excess of 7% of GDP. On the flip side, Greece, Portugal and Spain had deficits even larger than that. Too small a proportion of the excess savings in surplus countries were being channeled into productive investmetn in deficit countries. The large competitiveness gaps that have opened up will not close slowly and it remains to be seen whether the voters in the periphery will be prepared to wear the burden of the internal devaluations that are necessary.

    I do have to feel sorry for the Irish though. They have even been forced to raid their pension fund as a way of setting aside further contingency funds for bank recapitalisation. Imagine if it were your future pension. Talk about losing bets.

  37. Labor Outsider

    Brian, I doubt the Germans are feeling that good about it all. Problems on the periphery can’t be quarantined from the core forever. A reasonable proportion of German exports go to other European countries. And their banks have heavy exposure to those countries as well. Sure, the exchange rate depreciation is beneficial in the short-term. But if the structural problems aren’t sorted out eventually, all Europeans will suffer.

  38. Labor Outsider

    Just some numbers. According to BIS data, German banks have a total Irish exposure (not just to the Irish banks, but also government and the non-bank private sector) of around $US 135 billion. That compares to a total foreign exposure for their banks of over 2 trillion. It is also worth noting that the total European exposure of French banks is slightly larger than that of the German banks. And Irish banks have significant exposures to Greece, Portgual and Spain. Also, for all the wailing about the evils of Anglo-Saxon light touch regulation, continental European banks were actually more highly leveraged going into the crisis than American banks. My point there is not to defend the regulatory approach in the US or the UK, more to point out that the issue is a bit more nuanced than is sometimes understood.

  39. Chris

    Joe @ 31 – I agree for many its become a necessity. Kind of odd how over the years its moved from lobbying for all the things which allow both parents to work (parental leave, heavily subsidised childcare etc) to a situation where many now find it necessary for both parents to work whether they like it or not.

    I don’t really know if what Kim or I suggested is correct, but I think its important to know before trying to fix the situation. For example income splitting may look appealing (if family benefits are based on household income, why shouldn’t income tax paid be based on the household income as well?) but parents may decide to use the extra money to put into buying a better house rather than allow one parent to stay at home. And that will just push up house prices further.

  40. Fran Barlow

    Chris said:

    We used to have a much more regulated lending system. Back when you had to have a 20% deposit to get a home loan and had to go beg for money from the bank. I’d rather not go back to that situation.

    I’d much prefer it. (Well maybe not the begging part) Certainly, though, phasing in (perhaps over 12-15 years) a situation in which ultimately one could not borrow or cause one’s loan to fall below 20% equity in residential property would be a very good thing. It would put an effective cap on real estate prices and reduce competition for home loans in the market place. This in turn would free up funds for more productive areas of the economy. I’d also like to arrange it so that no more than 30% of household disposable income (excluding regular financial commitments such as other loans, provision for dependants etc) could be contracted for loan service.

    On a separate note I note with interest that Ireland is lowering the minimum wage but still doesn’t have a maximum one. It also fought for, and won, the right to preserve a corporate tax rate of just 12%.

    Forget the slogans: follow the money.

  41. Chris

    LO @ 42 – who invented non recourse loans anyway? Seems like the bank holds nearly all the downside risk and the borrower all the upside benefit.

  42. Chris

    Mercurius said:

    and the bank is stuck with a distressed asset on which they cannot hope to reclaim all their capital. 85 cents on the dollar is their absolute best hope — a return that US bankers would love to be getting on their distressed assets.

    The borrower would almost certainly have had to take out loan mortgage insurance (borrowing > 80%) so the bank is probably in not that bad a situation. Some insurance company would not be particularly happy though…

    Fran @ 46 – 80% of value is just one criteria the banks used to use though. What about contractors – there’s a lot more of them these days but they’re the first to go in a downturn and they already find it difficult to get home loans. And for the 30% criteria should the banks take into account both incomes if a couple is of childbearing age? Ultimately I think the fundamental problem of house prices is one of a housing shortage. Fix that (much easier said than done) and house prices will drop or flatline.

  43. moz

    [email protected]:

    phasing in (perhaps over 12-15 years) a situation in which ultimately one could not borrow or cause one’s loan to fall below 20% equity in residential property would be a very good thing. It would put an effective cap on real estate prices

    Yes, and by itself that would be a useful step. It would definitely reduce the number of buyers, if not the actual demand for housing. But I think one obvious consequence would be to further entrench the investors who have the equity to meet that requirement, thus exacerbating the “rent forever” problem faced by poorer and younger people.

    A much more equitable approach would be to change the tax system to favour owner-occupiers instead of investors. I am inclined to make the cost of borrowing for residential property not tax deductable, for anyone. You’d need to make the switch around the time of building completion but it shouldn’t be imp;ossible to work out the details.

  44. dave

    Minimum wages are basically starvation with a few consumer goods for comfort. Like Fran says, follow the money and ask the simply question why the taxpayer (most of society) ends up footing the bill for a risky situation that provided profit only to the reckless.

    This is theft on a grand scale. Wealth was created for the benefit of a few and now is being paid for by the many. The irish just got luckier than some other countries who managed to hide the theft beneath a veneer of economic necessity.

    So goes the steady assault on the state and its ability to provide public services. Meanwhile private wealth and activity moves on to the next available resource. Self interest might blind some to what is going on and semantics might lead the argument into a bog but I doubt there can be much argument about the consequences of protecting the pillars of capitalism from itself.

    Those who think bank failure might be catastrophic miss the obvious point that it is especially catastrophic for those with the most money.

  45. moz

    [email protected]: depends how you look at it. Going from $10M a year to $100k is a 100-fold decrease in income, which is much more dramatic than going from $40k to $8000. But surviving on $100k is much, much easier than on $8000/year. Specifically, people die a lot more often on $8000/year than on $100k.

    So it’s important to look at exactly where the survival line is before getting too excited about forcing a collapse of the banking system. I’m not convinced that even the EU is big enough to survive the sort of failure of the money markets that you’re talking about. Which is one reason why there has traditionally been such strong regulation – the consequences of failure are dire.

    I’m much more a fan of punative tax and regulation regimes being introduced. Yes, a maximum wage and steeply progressive tax rates (for companies too, if possible). Yes, bans on certain types of lending and more emphatic regulation of the whole sector.

    But saying “they stuffed up, they must fail, the market has spoken” is cutting off your head to spite your bank manager.

  46. The Low Spark of High Heeled Boys

    LO,

    it appears now most sub-prime loans were originally prime loans which then became sub-prime loans which were almost rolled over perpetually.

  47. Darryl Rosin

    [email protected]: “A much more equitable approach would be to change the tax system to favour owner-occupiers instead of investors. I am inclined to make the cost of borrowing for residential property not tax deductable, for anyone. You’d need to make the switch around the time of building completion but it shouldn’t be imp;ossible to work out the details”

    The big risk with fiddling with the tax treatment of rental properties is a drastic reduction in the stock of available rental accommodation. Didn’t the Hawke government do something like this in the mid 80s? Quaranting losses from each investment property to the income generated from that property, which produced an awful rental squeeze?

    d

  48. Fran Barlow

    Chris said:

    Fran @ 46 – 80% of value is just one criteria criterion the banks used to use though. What about contractors – there are a lot more of them these days but they’re the first to go in a downturn and they already find it difficult to get home loans. And for the 30% criterion should the banks take into account both incomes if a couple is of childbearing age? Ultimately I think the fundamental problem of house prices is one of a housing shortage. Fix that (much easier said than done) and house prices will drop or flatline.{my edits: FB}

    If contractors (or others) don’t meet any of the decisive criteria for a home loan, why should they have them? Having equity in a residential property isn’t some sort of right. Hubby and I have leased the same property since October 14 1991 and we still feel as if we are citizens. We didn’t qualify for a home loan then and that was that.

    I have no problem with the bank assessing all firm household income. Being of childbearing age shouldn’t be relevant.

    I agree that there is a shortage of housing, but encouraging people to leverage themselves to the hilt to buy 40 miles out of town is a recipe for long term problems and for people who have bought well to regard housing as a vehicle for speculation and enrichment.

    What we need to do is to make it much harder for people to bid up housing costs with easy credit and to discourage people from trying to play the residential commodity market. All that does is exaggerate inequity, price many out of the market and cause the RBA to act with a blunt instrument against the whole economy in an attempt to prevent asset price inflation. NSW has suffered badly from that.

    If people bought housing the way people bought cars — mainly for use value and without assuming/expecting to make a paper profit on the deal, they’d choose places on the basis of convenience and functionality. When their needs changed, they’d move with confidence because they’d be sure they wouldn’t lose money on the deal. Right now, if you owned property in Sydney for example, you’d be loathe to sell and move to someplace else because you’d doubt your ability to buy back in.

    Also, if over time the value of property declined in real terms then the cost of restocking public housing would decline as well. We could start moving public housing back into areas near to where there are existing services or where services could be added at modest ecionomic and environmental cost.

    Not the least thing that has ruined Australia’s polity is the existence on the urban fringes of what has come to be known as the “mortgage belt” — our “aspirational voters”. A recalibration away from a society based on over-leveraged angry folk living both socially and geographically on the fringes in favour of more economically secure less highly leveraged people who live closer to their work, rely less on their cars and who don’t care about mortgage rates and can move when they want to will over time produce a polity less interested in the kind of nonsense one hears from the conservative side of politics and more interested in good public policy. Only one side of politics can benefit from the current arrangements but oddly, both sides support it. These people weren’t called Howard’s battlers for nothing.

    Moz said:

    I think one obvious consequence would be to further entrench the investors who have the equity to meet that requirement, thus exacerbating the “rent forever” problem faced by poorer and younger people.

    I disagree. Over time, the real price of housing would fall until a new equilibrium was reached. As things stand there’s no point from a low-medium income person’s POV of saving for a deposit because even if you could over time save the amount needed, you could never keep up the repayments. If two people earning between them $80,000 per year save 5% of $350,000 (i.e. $17,500) in 2 years if the property appreciates by just 3% pa they are about $4000 further from having the money than when they started. It’s in their interest to borrow the lot, tack on the stamp duty and legals and attempt to hang tough. They are like those bicycle riders who hang onto trucks going up hills.

    On the other hand if they knew that the property would not appreciate very much at all then it’s in their interests to save hard since early purchase confers no significant advantage.

  49. The Lorax

    LO @ 42:

    There’s an awful lot of complacency in Australia ATM isn’t there.

    What if the Australian real estate bubble is simply hitching a ride on the Chinese real estate bubble? Construction is now north of 50% of GDP in China. That’s more than Japan at the peak of the bubble, more than the US at the peak of their bubble, more than Spain, more than Ireland, more even than Dubai before it exploded.

    Ok, so maybe, just maybe the Chinese need all this stuff built. Maybe they need the world’s biggest mall that’s 99% empty. Maybe they need entire new ghost cities. Maybe they need maglev trains. Maybe Party officials need five investment properties each, all empty. Maybe they need to build 5 billion square metres of new floorspace (a few square metres for every man, woman and child). But whatever’s happening over there, its never happened before.

  50. marks

    Razor @ 29

    I am not certain whether making developers pay (and pass the costs onto homeowners), or making Government pay (and pass the costs onto homeowners) makes much difference to the cost of home ownership. Doing it via developer charges means that those who live in hard to service areas (like hillsides and marinas) pay more than others precisely because they are harder to service. Doing it by increasing service charges from the utility, generally hit those who did not live in the harder to service areas. This was a cross subsidy that only those who could afford marina living or hillside vistas supported.

    Unless you think the old system whereby public service engineers, surveyors, drafters and construction gangs could do it cheaper than similar private sector types??

  51. Joe

    Daryl said:

    The big risk with fiddling with the tax treatment of rental properties is a drastic reduction in the stock of available rental accommodation.

    Not if there’s more social housing, student accommodation etc. One of the real reasons why social housing and the like is in crisis is because it’s natural enemy is the private landlord. I mean have any of you been into a boarding house in Sydney– they’re horrible soulless places… There’s not enough compassion in our society. People in comfortable positions shouldn’t be satisfied that people at the bottom pf the pile are increasingly pushed even further down. This effects everyone’s well-being. A certain degree of well-fare, of amenity and security should be affordable for everyone — for the benefit of everyone.

    Chris said:

    income splitting may look appealing (if family benefits are based on household income, why shouldn’t income tax paid be based on the household income as well?) but parents may decide to use the extra money to put into buying a better house rather than allow one parent to stay at home. And that will just push up house prices further.

    But income splitting shouldn’t result in a “family” having more money, as the tax rate itself wouldn’t have to change, but it would go someway toward “paying” one parent for the work s/he does at home. The economy has become to focused on the material and the abstract. Ownership and investment, it needs to be “humanised.”

  52. harleymc

    Razor @ 6

    the question is whether that pain is less or more than letting the baks fail. i think it is probably less and there appears to be a lot of people a lot smater and better qualified than me of the same opinion.

    Well it’s a hypothesis, and we won’t ever know because it’s a non-replicable experiment with no control.
    It’s worth noting that the ‘experts’ are pretty much all from the private financial sector (or ex-private financial sector), so that although they may honestly believe their own hypothesis it does raise questions about their motivations and expertise. They were the ones who made the mess and haven’t fixed it yet.

    Common sense is the sense of the middle class.

  53. Joe

    harleymc:

    It’s worth noting that the ‘experts’ are pretty much all from the private financial sector (or ex-private financial sector)

    Absolutely, it’s worth remembering the role Hank Paulson played in our response to the GFC. (Once again the metaphor was guns, btw. Hank and his freaking bah-zoog-er.)

  54. Katz

    The Lorax is correct.

    China’s property-developing mania is unprecedented in the history of the world.

    As a wise man once said, if something is unsustainable, it will not be sustained.

  55. Mercurius

    And as another wise man (OK, well, Liam, actually) once said on another thread, and as Joe alluded to @ 57, isn’t it a more interesting question to consider why so much of populace is dependent on financial institutions to access a basic human need like shelter??

    That puts a very different light on ‘the Irish morass’ and quite a few other morasses…

    …which is why it’s the one question no “serious” public figure is prepared to discuss.

  56. Katz

    Depends on what interests you Merc.

    In the Anglophone world, until the invention of “social housing” in the 20th century, all urban housing was backstopped by one financial institution or another.

    For most urbanites (the urban poor) that financial institution was the local pawnbroker, (affectionately known as “Uncle”).