US President John F Kennedy, once ignited a nation by challenging people to put a man on the moon. Yesterday people were challenged to buy Booze here, trade in Bangers and invest in Bonds.
Three words – Booze, Bangers and Bonds – captured the extent of budgetary largesse. The unpatriotic Newry day tripper is to shop local for cheaper Booze. Near worthless ten year old Bangers have a trade in value of €1500 and national solidarity Bonds will give households another opportunity finance the costs of economic recovery. What’s more Government is to introduce an entirely new concept in banking – the Second Guess Agency.
To fight an oil fire you need to starve it of oxygen by spraying it with foam. In spraying billions of budgetary foam onto Irish households, Government is threatening to douse any chance of igniting economic recovery for years to come. Rhetoric about hope and the right stuff won’t make it any easier for people to manage deflating incomes and a rising cost of living.
Spraying liberal doses of economic recovery retardant, the Ministers budget will amplify household financial fragility to levels never seen before. With one in four households finding it hard to meet their financial commitments – which is about 750,000 income earners - any reduction in take home pay or increase in living costs will have a disproportionate impact on consumption. Increased consumption encourages business to invest in growth and job creation. And it provides for the all important tax revenues required to plug the huge gap in public finances.
Income reduction and higher taxes suck money from an economy and with banking unable to generate new money, it sets off a deflationary spiral. Most households are already experiencing it, as the proportion of income required to cover debt repayments and other financial commitments increases. Once discretionary income declines, people stop spending and businesses go bust.
How many beleaguered households will be able take advantage of the “cash for bangers” scheme and buy a shiny new fuel efficient car when credit is being rationed by banks?
Yet not one euro was budgeted for the states biggest economic retardant, Anglo Irish Bank, which needs billions more in tax payers funds just to keep its banking license. It’s already cost €4bn. And what of the other banks which have as yet no idea of how much they will require in state aid to keep their licenses?
The costs of financing state borrowing will jump by over €2bn next year even before the costs of finalising the bank bail out are factored in. A national solidarity bond echoes a time when governments used war bonds to finance wars. Used to finance the Napoleonic wars, British consols, issued in perpetuity, never to be redeemed, are still traded today. Government’s version will have a shorter time span and be used to underpin a worsening sovereign debt rating.
Yet by raising money through solidarity bonds, the state will compete for household savings at a time when banks are struggling to rebalance their loan to deposit ratios. Just how much Government intends to hoover up in household savings is unclear. But bankers will not be too happy. Nor should they be as they cannot create credit without raising deposits.
Not content to compete on one side of the banking balance sheet the Minister unveiled a new concept in Irish banking – the Second Guesser. It seems that should a small business or farmer be refused a loan, they can appeal to an independent government agency which might force the bank to lend. And the Minister will also write bank credit policy or at least his appointed agents will. Enterprise Ireland may have a reputation for helping small business but it has no competence as a financial intermediary or as a commercial lender.
It’s a uniquely Irish solution to an Irish problem. As banks are too big to bail out and own outright, we get creeping nationalisation. NAMA will spend billions in cleaning up bad loans. And now a Second Guess loan decision appeal agency is to make certain banks lend. Rather than building a good banking system, which is empowered to lend wisely and prudently, we are seeing an unplanned, haphazard and dangerous nationalisation of banking.
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