The talk was interesting and largely positive about Ireland's prospects as we emerge from recession. Dr. Ahearn concurred with growth and employment forecasts and indeed with the views expressed by Mr Lenihan late last year - that the "worst is now over". He also attempted to dispel misconceptions about the "bank bailout" -- debunking the idea that the government are bailing out bankers and developers and arguing that the government are in fact bailing out the country and in doing so securing it's future viability and prosperity. The issue of NAMA for the "small-guy" was also convincingly dispelled as an illogical move. (aside: I think a temporary extension of the current '12-month foreclosure rule' for domestic homes is an area worth considering).
In general, I was in agreement with the arguments presented. There is, however, one thing that I want to pick-up and throw out there -- and it relates to the banks.
To me there are three distinct issues muddled up in our thinking about the banks here. The first issues is that the banking system needed to be salvaged to save the country from ruin. The second is that the banking system needs to be recapitalized in order to function. And the third is that the banking system needs to lend and take risks in the future to secure the country's future stability and prosperity. To date the main analysis and discussions have been about the first two issues. However you like it, NAMA is now a shut case; the deal is done and further energies debating its merits or otherwise are a waste. I think the issue that now needs to come into focus is HOW the banks will operate once they are recapitalized and what role the State can play in regulating and directing their operations.
At present we seem to be content with the notion that "if the banks have funds they will lend and all will be well!" This assumption is the height of our sophistication on this issue to date. I would argue that we're being foolish here, at best, and certainly missing an opportunity. I don't think anyone want banking as it was, or anything close to that and we're assuming that the banks will have learned their lesson -- they probably have to some degree but they will also have learned that they are invincible which isn't fortunate for the state. We know that need prudential banking, and we now know that we need banking to operate with some awareness of the macro environment and their role with in it. They certainly need to be willing and able to take risks again but they also need to remain civically responsible.
So what's happening on this issue? Well it appears that the Financial Regulator/Central Bank has been seriously reinvigorated and they are taking clear steps like increasing capital reserve requirements and sharpening their monitoring and intervention functions. This is all sensible, expected, and welcome. But is there room for some innovation here? One suggestion I would make is that we discuss this.
In particular, I think we should discuss whether the government could issue directives (or similar) to the banks, based on the macro-realities of the day, that would guide the types of lending and risks they take. In the current short/medium, such an ability would ensure that banks aren't taking misguided risks from their new knowledge of invincibility (moral hazard!) and, moreover, that they can actually facilitate real prosperity by lending to productive-enterprises rather than speculative-enterprises for example.
Here are two specific ideas that I think should be discussed further:
One, Ireland needs export-led growth yet Irish enterprises struggle to get credit lines open... Can the government do anything new to ensure that our re-capitalised banks will actually lend to Irish companies and enterprises that are seen as being of particular importance to the recovery and real and sustainable growth in the future?
Two, levels of personal debt in Ireland are some 220% of disposable income! This ratio is amongst the highest in the world. Do we want the re-capitalised banks to extend credit along these lines further and just do retail business as usual? Is there any sense, or legitimacy, in capping this level of debt? what is a sustainable and reasonable level for the country?
A lot in here Peter and much of it is already raging on Irisheconomy. NAMA is by no means done. The main work is well in play, namely the extent of discount they apply to the loans that they purchase. This is a debate that will still rage. To dismiss "NAMA for the small guy" is barmy and I wasnt at the talk so I assuming that Alan was dismissing one version of this and not the idea in total. We do not know the percentage but a nontrivial number of mortgage holders are now completely insolvent by any definition of the term. The response to this is now becoming a complete national disgrace with no attempt to examine properly how banks are dealing with such customers. NAMA for the little people may simply involve reforming bankruptcy laws. The argument that this will affect banks balance sheets is ridiculous. Markets already mostly know that a chunk of the mortagages are worthless so this would be a positive move and help bring back some integrity to the country.
ReplyDeleteYes, part of the reform of banking will certainly involve more assertive regulation. But to be honest I dont think the banks will want to lend out stupidly anyway for the forseeable future.