In These New Times

David McWilliams

2nd September, 2009

The collapse in property values, the fact that the market here is in free-fall and developers and banks are bankrupt presents the single biggest opportunity this country has had in a generation.

With so much prime land now available to the State for a song, the obvious thing is for the State to profit from the bankers’ and developers’ stupidity and greed by buying the land for next to nothing and then putting it to public use.

This will mean the orderly winding down of some banks over the course of the next year. In almost every banking disaster we have seen in the past two decades, the obvious thing to do is let banks go. The State guarantees deposits, transfers these deposits to a new bank and the economy starts again. From the Swedish crisis of the early 1990s to the Asian Tiger collapse and the USA today, banks go bust and the countries recover.

The banking system and the economy are not the same. Our government has migrated from a logical position of trying to save what looked like it might possibly be a good banking system, to trying to preserve what we know to be a bad banking system. This makes no sense and, more crucially, investors don’t like what they see. Investors want to share in success not be party to a policy which is neither credible economically nor clever financially. It is for this reason that no institution bar the ECB will touch the NAMA bonds.

Before I explain why letting a bank go will encourage money to flow into the country (rather than flow out of the country as the Government seems to think), let’s appreciate why this is an opportunity, not a crisis.

Potentially, this could be a one-off windfall gain for the people and the first step towards economic recovery. Yet for some reason, instead of raising a bond to buy cheap land at this once-in-a-generation fire- sale price, the State wants to protect the people who got us into this mess so they can hold on to some gains in the chaos.

Where is this analysis coming from? Think about it, in the boom we couldn’t build infrastructure at a decent price because the price of land was artificially inflated. So the people transferred billions of euros to landowners and developers to allow us to build bridges, schools and roads on hugely expensive land. In effect, this was a tax on the average person to subsidise the very rich.

Now the opposite is the case. We can subsidise the poor by taking the land back now. But instead of seizing the opportunity to buy this land for the State’s use for the next generation, we are being asked to put the interests of the corrupt, greedy and plainly stupid bankers over the interests of the average citizen.

We are being asked to stump up for NAMA based on the reasoning that if we don’t do this then investors will flee the country. This line is hilarious for anyone who has worked in international finance during a banking crisis; it implies that international investors are prepared to risk their money in a country that is being turned into a large debt-servicing agency for old debts.

One of the most depressing aspects of the present policy disaster is that people who are constructing it have clearly no idea how traders or the financial markets think. It is policy framed by civil servants and lawyers, not by traders and as such it scares proper investors who might be willing to take a punt on Ireland. At the moment the place doesn’t seem safe because the State is trying to prevent the inevitable and as long as it does this, money will stay on the sidelines. (The promises made in the good times look silly now when everything has changed and trying to keep them looks incredible.)

In every episode of debt-induced crises, governments break promises made in the boom and the simple reason is that is what they have to do. They don’t have the money and they are not prepared to put the interests of investors above the people.

Most proper investors realise this, which is why money flooded back into Sweden after it let a bank go bust. It is why money flooded back into Finland, the US and Ireland (in 1993) after we broke our promises to bond and currency investors and devalued our currencies. Likewise, in the Asian crisis, investors took their losses on banks and moved on.

When investing, you take the rough with the smooth. You win some you lose some and only the naive believe that they will never make a loss. Having worked in international banking in various countries which experienced banking crisis throughout the late 1990s and early 2000s, I know that no country reacted as we have.

Our desire to protect all bank investors is the behaviour of fanatics. By this I mean that trying to pretend we have the money and the resources to bail out the banks when we do not is the economics of Stalingrad. We are trying to throw everything we have into the banks, exhausting our resources in the process. When investors see that we are being ruled by financial fanatics, they stay miles away because they know investing is pointless.

Inexplicably, NAMA is our economic Stalingrad and it scares all sensible people. It is based on the “big lie” that to lose here would spell disaster. In fact, the opposite is the case. Why wouldn’t you want to invest in Ireland once the banks are wound down? You get a smart population, that isn’t being mortgaged for the mistakes of the few.

The reason we must fight NAMA at every turn is because it is the economics of fanatics and the whole world can see this. It will keep money away from the country, not the other way around.