Governments four year austerity programme will not work unless people feel safe to spend money again. Even then they may not spend as compulsively as before.
In our Celtic Twilight, the lights will be dimmed, not to be turned up again for a long time to come. Consumer sentiment is one measure of just how dim they have and will become. How safe or vulnerable we feel both predicts and causes changes in consumption behaviour. As billions are sucked from the economy to shrink the gap between what is paid into and out of the public purse, the cure for economic woes may turn the lights too far down and undermine recovery for years to come.
In recent commentary the ESRI warned of a deflationary spiral should consumers and businesses pull too far back from spending. Acutely aware that more pain is to come from a hair-shirt austerity programme, people are budgeting to spend less and save more.
The link between positive sentiment, wealth and consumer spending is well understood. This positive wealth effect, seen more with increasing housing prices than increasing financial asset values, is understood to directly affect consumer behaviour. The wealthier we feel the more we spend and the less we save. And young people tend to spend more than older people. We spend more as we believe our earnings will continue to grow – we expect our future incomes will finance the costs of our current consumption. While some peoples’ mental accounting has them budget to live comfortably within monthly income, others spend to live within their anticipated income. It some it triggers compulsive consumption.
Household liquidity, unlocked using bank credit, fuels spending which in turn fuels growth and rising incomes. This positive multiplier lulls people into a false sense of security. Collapse asset values and deflate income expectations and a negative multiplier causes deflationary spirals lasting years. Should governments strip liquidity through taxation and reduction in spending then a tipping point is reached beyond which deflation undermines any chance of meaningful growth. Taxation revenues shrink, requiring further borrowing pushing nations towards default.
Here we have treated housing as both a store of wealth and a tradable financial asset to be tapped into to fund lifestyle costs. By late 2007, households held over €330bn in financial assets (shares, pensions & savings) with houses worth about €630bn. With €200bn of household debt, of which €140bn was in mortgages, housing equity was about €490bn.
It was the high tide mark of a compulsive consumerism fooled by expectations of ever rising incomes. No more so than a younger generation, the under 35’s, who borrowed more and saved less then any previous generation. Abundant cheap bank credit delayed the inevitable pain of paying for lifestyle purchases. Our national love affair with property as a store of liquidity and tradable financial asset treated homes as cash horde to be tapped into at will. But it was illusory liquidity that could only be unlocked by using bank credit. A dangerous mix of consumer’s compulsive consumption and bankers compulsive gambling created an illusion of wealth and household liquidity that in turn fuelled higher levels of spending.
Within three short years total housing wealth has imploded. The positive income expectation that was an impetus to spend more has become a negative expectation of increasing financial vulnerability causing us to save more. No one knows what the deflationary impact of a massive reduction in household wealth allied to fears for the future, higher marginal taxation rates, declining real incomes and shrinking numbers at work will be. We may still be worth about €520bn but as we still owe €200bn, we feel a lot poorer.
With careers stretching in front of them, younger people spend more and save less. As vanguard lifestyle consumers, their positive sentiment and willingness to spend fuels economic growth encourages business to invest, creates jobs and swells the public purse.
Relative to others we have a larger percentage of younger people whose wealth and liquidity has all but evaporated. Many owe far more than they can ever hope to repay. With the amount of take home pay required to finance debt escalating, they are now caught in a deflationary spiral. The adverse psychological effects on a generation of young skilled professionals both employed and unemployed may cause a permanent shift in behaviour to precautionary saving and prudent spending. There may be no returning to compulsive consumerism.
By unlearning compulsive consumption habits and relearning how to prudently budget, people will probably spend far less and save more of their disposable income for a long time to come. Has this shift to pragmatic value seeking consumerism been factored into economic planning?
The Government’s austerity programme will act as a black hole sucking in a large chunk of what’s left of household wealth and liquidity never to be seen again. Should it dim the lights too far, fatally undermining what confidence remains then ESRI warnings will come to pass. The Celtic Twilight may become a far darker place and last far longer than it’s being planned for.
A version of this article appeared in the Irish Examiner, Business Section Monday 25th October 2010.
Monday, October 25, 2010
Monday, October 18, 2010
Kill off our Dickensian bankruptcy system
Financial institutions caused the meltdown, so make them pay for debt advice, writes Bill Hobbs
When it comes to cleaning up after man-made environmental disasters such as oil spills, chemical spills and explosions, the principle of polluter pays is widely accepted. Surely then our polluting lender’s should pay the clean up costs of the consumer credit crisis?
Chillingly the headline numbers of people in negative equity, the majority of whom are under age 40, illustrate the scale of a household debt crisis that undermines any chance of economic recovery.
Over 750,000 households are now suffering varying degrees of negative equity. 40,000 have had their loans modified and 36,000 are unable to pay their mortgages. These figures are getting worse, not better. It means the number of households needing access to a modern debt advisory, debt management and debt resolution system is somewhere between 90,000 and 750,000.
Last week two influential voices were heard. Economist Peter Bacon, highlighting how household negative equity and unaffordable indebtedness would undermine any plans for economy stability and recovery, spoke of paying down consumer debt to rebuild consumer confidence. Missing his core point, most people focussed instead in his suggestion that state assets could be sold fund the elimination of unsustainable household debt.
With nearly every household experiencing a sudden and permanent reduction in household wealth and close to a million owing the vast bulk of consumer debt, a resurgence in consumer spending some time soon is slim.
The psychological impact of unsustainable levels of consumer debt has long been understood. Credit crisis trigger long a crisis in public confidence which sees a flight to safety. People reduce spending, increase savings and pay down their debts. Confidence can only be rebuilt once people are freed from unsustainable levels of indebtedness.
Three years into one of the most catastrophic of consumer credit crisis will Government finally respond? Will it deliver on a humane just and equitable debt resolution process underpinned by a private citizen’s statutory right to earn debt forgiveness?
The second influential voice of bank regulator Mathew Elderfield, called for urgent revision of our bankruptcy system to deal with the scale of the debt crisis in speech that addressed consumer mortgage debt. It appeared to be an implicit recognition of the contagion in confidence caused by the consumer debt catastrophe and the need for process of debt resolution and forgiveness.
The principle of earned debt forgiveness is widely applied elsewhere. Not so here. We have without doubt the harshest, most inhumane debt collection and bankruptcy system. One that permits the unfettered persecution of honest people who, while willing to repay, are no longer able to repay what they owe in full.
At this time the only process that helps honest people deal with their indebtedness is a public service body established to provide assistance to the most financially excluded and vulnerable in our society.
MABS, the Money Advice and Budgetary Service, while designed to help vulnerable low income households more usually long term unemployed and low income earners, was not designed or resourced to respond to the scale and impact of a national consumer credit crisis that has plunged so many households into negative equity and unaffordable indebtedness.
The costs of funding MABS’ vital and valued public services are being paid in full by the tax payer. The Government’s budgetary allocation last year was about €18m to fund its national network of independent local companies. Severe cutbacks in public service funding under a four year economic recovery plan could mean MABS financial resources will be stretched to breaking point. But should taxpayer’s funds be used to fund its debt advice and management services at all?
When MABS services are properly understood, taxpayer’s are effectively providing an indirect state subsidy to clean up the crisis caused by our banks and other consumer credit providers. As debt advice and management services such as those provided by MABS reduce lenders debt collection costs, they are enjoying all the benefits of a taxpayer funded public service without contributing one cent.
Applying the principle of polluter pays would mean that all lenders, banks, credit unions, building societies, sub-prime lenders, finance houses, credit card companies and others should fund MABS costs. Models where debt advisory and resolution management systems are paid for by lenders exist in other countries. In these they pay their fair share which is the lion’s share.
A version of this article appeared in the Irish Examiner Business Section, Monday 18th October 2010
When it comes to cleaning up after man-made environmental disasters such as oil spills, chemical spills and explosions, the principle of polluter pays is widely accepted. Surely then our polluting lender’s should pay the clean up costs of the consumer credit crisis?
Chillingly the headline numbers of people in negative equity, the majority of whom are under age 40, illustrate the scale of a household debt crisis that undermines any chance of economic recovery.
Over 750,000 households are now suffering varying degrees of negative equity. 40,000 have had their loans modified and 36,000 are unable to pay their mortgages. These figures are getting worse, not better. It means the number of households needing access to a modern debt advisory, debt management and debt resolution system is somewhere between 90,000 and 750,000.
Last week two influential voices were heard. Economist Peter Bacon, highlighting how household negative equity and unaffordable indebtedness would undermine any plans for economy stability and recovery, spoke of paying down consumer debt to rebuild consumer confidence. Missing his core point, most people focussed instead in his suggestion that state assets could be sold fund the elimination of unsustainable household debt.
With nearly every household experiencing a sudden and permanent reduction in household wealth and close to a million owing the vast bulk of consumer debt, a resurgence in consumer spending some time soon is slim.
The psychological impact of unsustainable levels of consumer debt has long been understood. Credit crisis trigger long a crisis in public confidence which sees a flight to safety. People reduce spending, increase savings and pay down their debts. Confidence can only be rebuilt once people are freed from unsustainable levels of indebtedness.
Three years into one of the most catastrophic of consumer credit crisis will Government finally respond? Will it deliver on a humane just and equitable debt resolution process underpinned by a private citizen’s statutory right to earn debt forgiveness?
The second influential voice of bank regulator Mathew Elderfield, called for urgent revision of our bankruptcy system to deal with the scale of the debt crisis in speech that addressed consumer mortgage debt. It appeared to be an implicit recognition of the contagion in confidence caused by the consumer debt catastrophe and the need for process of debt resolution and forgiveness.
The principle of earned debt forgiveness is widely applied elsewhere. Not so here. We have without doubt the harshest, most inhumane debt collection and bankruptcy system. One that permits the unfettered persecution of honest people who, while willing to repay, are no longer able to repay what they owe in full.
At this time the only process that helps honest people deal with their indebtedness is a public service body established to provide assistance to the most financially excluded and vulnerable in our society.
MABS, the Money Advice and Budgetary Service, while designed to help vulnerable low income households more usually long term unemployed and low income earners, was not designed or resourced to respond to the scale and impact of a national consumer credit crisis that has plunged so many households into negative equity and unaffordable indebtedness.
The costs of funding MABS’ vital and valued public services are being paid in full by the tax payer. The Government’s budgetary allocation last year was about €18m to fund its national network of independent local companies. Severe cutbacks in public service funding under a four year economic recovery plan could mean MABS financial resources will be stretched to breaking point. But should taxpayer’s funds be used to fund its debt advice and management services at all?
When MABS services are properly understood, taxpayer’s are effectively providing an indirect state subsidy to clean up the crisis caused by our banks and other consumer credit providers. As debt advice and management services such as those provided by MABS reduce lenders debt collection costs, they are enjoying all the benefits of a taxpayer funded public service without contributing one cent.
Applying the principle of polluter pays would mean that all lenders, banks, credit unions, building societies, sub-prime lenders, finance houses, credit card companies and others should fund MABS costs. Models where debt advisory and resolution management systems are paid for by lenders exist in other countries. In these they pay their fair share which is the lion’s share.
A version of this article appeared in the Irish Examiner Business Section, Monday 18th October 2010
Monday, October 11, 2010
Public's faith in banking vital to its survival
Banking stability is unattainable until the special guarantee is removed, writes Bill Hobbs
Three years ago we trusted banks so much most of us didn’t know of the 1995 deposit protection scheme designed to guarantee compensation to ordinary people, albeit only up €20,000. Billions in household savings with credit unions weren’t covered at all. But that was then.
In 2008 a Rubicon was crossed and there is no going back. It’s not enough for banks to be safe – we need to feel they are safe. Many a bank has been forced to close, not because it was inherently insolvent but because people believed it was. As most people cannot tell a good bank from a bad bank, perception accounts for 100% of trust. Undermine perception and people will only deposit with a bank if their money is guaranteed by the state. In effect, state guarantees stand in for trust in banking and once provided take a long time to safely remove.
As trust in our deposit taking institutions evaporated it was replaced by the Government’s twin deposit guarantee mechanisms. The first is the deposit guarantee scheme which protects up to €100,000 per participating institution.
Designed for normal times, it’s a form of co-insurance system through which its member banks and credit unions insure one another. If the co-insurance system runs short of money or cannot be replenished without undermining its members, the Central Bank may step in.
The second mechanism is a special temporary guarantee for the balance of deposits over €100,000. Extended earlier this year to December, it will undoubtedly have to be extended further.
A state’s financial safety net is designed to do two things; ensure financial stability by preventing banks reckless risk taking; and persuade its citizens not to rush to take their money out at the first sign of trouble. To work the safety net has to have three parts.
Robust laws, regulations and effective prudential supervision; a lender of last resort who provides temporary liquidity support; and deposit insurance to cover some but not all of ordinary people’s savings should a bank fail. These three components are supposed to protect savers’ funds from losses by ensuring financial stability through controlling banks’ risk taking.
Prudential supervision here having failed to ensure financial stability, helped trigger a crisis and the infamous Government blanket guarantee in 2008. Had it not been for ECB lender of last resort assistance since, making available tens of billions in liquidity support, our banks and credit unions would have shut down. And given that deposit protection schemes aren’t designed to deal with a system-wide crisis, the blanket guarantee had to be extended to ordinary people to persuade them not to rush to take their money out.
Since then, both the ECB liquidity lifeline and blanket guarantee has kept our domestic banking systems’ doors open. But banks will have to be weaned off the ECB liquidity lifeline and the special guarantee retired.
For now the supervisory pendulum has swung from the pre-crisis regulatory and political captivity of banking to a post-crisis captivity of banks by the regulatory and political system.
Many bankers have a genuine and legitimate fear the pendulum may get stuck in politically inspired, risk adverse prudential supervision for the next decade. Once banks recover their ability to generate credit again bankers may be unwilling to lend as they may fear making bad loans.
State ownership exacerbates this problem as it may act to stifle normal risk taking. Conversely it may also encourage recklessness as political pressure to finance favoured industrial or services sectors could cause another credit bubble.
On the hook for guaranteeing current and future moral hazard, the Government may find it impossible to wind down the quite extraordinary and unprecedented explicit blanket guarantee when the constructive ambiguity of “we might have to step in to bail out a bank, but only if its too big to fail” became a concrete promise to bail them all out.
The bottom line is this, banking stability will not be achieved until the special guarantee is removed and banks are once again trusted as safe places to deposit money.
Government’s four year austerity programme will not work unless and until banking stability has been achieved.
For now the special guarantee carries an economic cost reflected in the states’ stratospheric bond market prices that reflect banking and economic inter-dependent risks. Bond markets and sophisticated depositors realise that like the chicken and egg, economic and banking stability are co-dependent on each other for survival.
A version of this article appeared in the Irish Examiner, Business Section on Monday 11th October 2010.
Three years ago we trusted banks so much most of us didn’t know of the 1995 deposit protection scheme designed to guarantee compensation to ordinary people, albeit only up €20,000. Billions in household savings with credit unions weren’t covered at all. But that was then.
In 2008 a Rubicon was crossed and there is no going back. It’s not enough for banks to be safe – we need to feel they are safe. Many a bank has been forced to close, not because it was inherently insolvent but because people believed it was. As most people cannot tell a good bank from a bad bank, perception accounts for 100% of trust. Undermine perception and people will only deposit with a bank if their money is guaranteed by the state. In effect, state guarantees stand in for trust in banking and once provided take a long time to safely remove.
As trust in our deposit taking institutions evaporated it was replaced by the Government’s twin deposit guarantee mechanisms. The first is the deposit guarantee scheme which protects up to €100,000 per participating institution.
Designed for normal times, it’s a form of co-insurance system through which its member banks and credit unions insure one another. If the co-insurance system runs short of money or cannot be replenished without undermining its members, the Central Bank may step in.
The second mechanism is a special temporary guarantee for the balance of deposits over €100,000. Extended earlier this year to December, it will undoubtedly have to be extended further.
A state’s financial safety net is designed to do two things; ensure financial stability by preventing banks reckless risk taking; and persuade its citizens not to rush to take their money out at the first sign of trouble. To work the safety net has to have three parts.
Robust laws, regulations and effective prudential supervision; a lender of last resort who provides temporary liquidity support; and deposit insurance to cover some but not all of ordinary people’s savings should a bank fail. These three components are supposed to protect savers’ funds from losses by ensuring financial stability through controlling banks’ risk taking.
Prudential supervision here having failed to ensure financial stability, helped trigger a crisis and the infamous Government blanket guarantee in 2008. Had it not been for ECB lender of last resort assistance since, making available tens of billions in liquidity support, our banks and credit unions would have shut down. And given that deposit protection schemes aren’t designed to deal with a system-wide crisis, the blanket guarantee had to be extended to ordinary people to persuade them not to rush to take their money out.
Since then, both the ECB liquidity lifeline and blanket guarantee has kept our domestic banking systems’ doors open. But banks will have to be weaned off the ECB liquidity lifeline and the special guarantee retired.
For now the supervisory pendulum has swung from the pre-crisis regulatory and political captivity of banking to a post-crisis captivity of banks by the regulatory and political system.
Many bankers have a genuine and legitimate fear the pendulum may get stuck in politically inspired, risk adverse prudential supervision for the next decade. Once banks recover their ability to generate credit again bankers may be unwilling to lend as they may fear making bad loans.
State ownership exacerbates this problem as it may act to stifle normal risk taking. Conversely it may also encourage recklessness as political pressure to finance favoured industrial or services sectors could cause another credit bubble.
On the hook for guaranteeing current and future moral hazard, the Government may find it impossible to wind down the quite extraordinary and unprecedented explicit blanket guarantee when the constructive ambiguity of “we might have to step in to bail out a bank, but only if its too big to fail” became a concrete promise to bail them all out.
The bottom line is this, banking stability will not be achieved until the special guarantee is removed and banks are once again trusted as safe places to deposit money.
Government’s four year austerity programme will not work unless and until banking stability has been achieved.
For now the special guarantee carries an economic cost reflected in the states’ stratospheric bond market prices that reflect banking and economic inter-dependent risks. Bond markets and sophisticated depositors realise that like the chicken and egg, economic and banking stability are co-dependent on each other for survival.
A version of this article appeared in the Irish Examiner, Business Section on Monday 11th October 2010.
Monday, October 4, 2010
Our "lucky to have a job" fallacy has had its day
Studies show work overload combined with job insecurity undermines morale, writes Bill Hobbs
The damage wrought by the violation of two fundamental motivating precepts: our need for security and desire for justice may trigger a national malaise that, unless understood, could undermine economic recovery for years.
Called survivor syndrome, this malaise causes low levels of morale and motivation in those whose jobs are not eliminated. It’s a silent problem as should people raise genuine concerns, they are ignored and told “you are lucky to have a job”.
“Lucky to have a job” frames a problem that unless understood and dealt with will undermine morale, motivation and productivity in many private and public sector organisations. With tens of thousands of jobs already eliminated and more to come, four years of austerity budgets will have profound implications for employers and employees.
First spotted over twenty years ago, survivor syndrome takes organisations and their staff years to recover from. It’s a sickness that effects whole organisations after jobs are eliminated. The majority of Irish political and business leadership will probably knowingly or naively ignore its implications. Yet in an economy with so many of its business and service organisations having to shed jobs, its effects are only barely understood.
Soft language such as downsizing, restructuring and voluntary parting, glosses over the brutality of deliberate decisions to eliminate jobs. The effects on employees who do not lose their jobs, have been studied and documented since the 80’s when the illusionary benefits of a job elimination growth strategy called downsizing, were first exposed.
For years companies have practiced downsizing or re-engineering trying to increase profitability, mainly by trying to do more with fewer people. Countless studies have shown this is an illusion, as most companies do not achieve the savings or productivity planned for. Called the Productivity Paradox, it happens when organisational leadership ignores the welfare of people they continue to employ. Such companies can become anorexic, too thin for their own good and in asking far too much, from far too few staff, they fail.
Organisational psychologists were quick put their finger on why. There are three actors involved in eliminating jobs; the person who enforces the decision, the executioner; the person fired, the victim; and the person left behind the survivor. People who get to keep their jobs react negatively and it can take up to six years to recover from its psychological effects.
These effects are similar to those experienced by people who have survived traumatic events. As job elimination violates two fundamental motivating precepts; our need for security and our desire for justice, people react. They feel guilty, angered, depressed, unsafe and insecure. Work overload combined with job insecurity undermines morale as people switch loyalty to their company for loyalty to their own personal interests.
As insecurity increases, people withdraw into a defensive mode. Unwilling to voice concerns, they live in a state of learned helplessness. It explains in part why battered spouses continue to live with their partners.
Bullying, harassment and intimidation thrives as poorly trained managers are exposed as ineffective leaders. When people complain they are silenced, told they should be grateful to have a job. It’s amplified when people cannot get a job elsewhere and are trapped within the job. Employee motivation and productivity plummets.
Unfortunately there are many public and private sector organisations whose policies and practices will provide fertile ground for survivor syndrome to take hold. Poor leadership and management of job eliminations will damage employee morale, undermine productivity and take years to recover from. How big the problem has or will become is not helped by public discourse on the challenges facing the country.
One of the mistaken assumptions, promoted by politicians, few if any have ever worked in, let alone managed large organisations, is for that greater productivity using fewer resources is possible across the public service.
Trying to be more effective and efficient with fewer people is unrealistic in theory and practice. Having a depressed workforce makes it impossible.
For the past three years, the Government has glossed over the severity of the economic recession and its wholes-scale job elimination.
Its narrative, full of optimistic rhetoric has been exposed and it has lost trust and credibility. We feel less secure and perceive the injustice wrought by a political systems’ promotion of a less than competent parochial mediocrity and cronyism. Our two fundamental motivating precepts; our need for security and desire for justice have been violated.
Do we risk a national survivor syndrome that could significantly negatively impact on economic recovery?
The good news is the syndrome is understood and can be alleviated by a leadership that demonstrates an appreciation of people welfare beyond telling them they are lucky to have a job.
A version of this article appeared in the Irish Examiner, Business Section, Monday 4th October 2010.
The damage wrought by the violation of two fundamental motivating precepts: our need for security and desire for justice may trigger a national malaise that, unless understood, could undermine economic recovery for years.
Called survivor syndrome, this malaise causes low levels of morale and motivation in those whose jobs are not eliminated. It’s a silent problem as should people raise genuine concerns, they are ignored and told “you are lucky to have a job”.
“Lucky to have a job” frames a problem that unless understood and dealt with will undermine morale, motivation and productivity in many private and public sector organisations. With tens of thousands of jobs already eliminated and more to come, four years of austerity budgets will have profound implications for employers and employees.
First spotted over twenty years ago, survivor syndrome takes organisations and their staff years to recover from. It’s a sickness that effects whole organisations after jobs are eliminated. The majority of Irish political and business leadership will probably knowingly or naively ignore its implications. Yet in an economy with so many of its business and service organisations having to shed jobs, its effects are only barely understood.
Soft language such as downsizing, restructuring and voluntary parting, glosses over the brutality of deliberate decisions to eliminate jobs. The effects on employees who do not lose their jobs, have been studied and documented since the 80’s when the illusionary benefits of a job elimination growth strategy called downsizing, were first exposed.
For years companies have practiced downsizing or re-engineering trying to increase profitability, mainly by trying to do more with fewer people. Countless studies have shown this is an illusion, as most companies do not achieve the savings or productivity planned for. Called the Productivity Paradox, it happens when organisational leadership ignores the welfare of people they continue to employ. Such companies can become anorexic, too thin for their own good and in asking far too much, from far too few staff, they fail.
Organisational psychologists were quick put their finger on why. There are three actors involved in eliminating jobs; the person who enforces the decision, the executioner; the person fired, the victim; and the person left behind the survivor. People who get to keep their jobs react negatively and it can take up to six years to recover from its psychological effects.
These effects are similar to those experienced by people who have survived traumatic events. As job elimination violates two fundamental motivating precepts; our need for security and our desire for justice, people react. They feel guilty, angered, depressed, unsafe and insecure. Work overload combined with job insecurity undermines morale as people switch loyalty to their company for loyalty to their own personal interests.
As insecurity increases, people withdraw into a defensive mode. Unwilling to voice concerns, they live in a state of learned helplessness. It explains in part why battered spouses continue to live with their partners.
Bullying, harassment and intimidation thrives as poorly trained managers are exposed as ineffective leaders. When people complain they are silenced, told they should be grateful to have a job. It’s amplified when people cannot get a job elsewhere and are trapped within the job. Employee motivation and productivity plummets.
Unfortunately there are many public and private sector organisations whose policies and practices will provide fertile ground for survivor syndrome to take hold. Poor leadership and management of job eliminations will damage employee morale, undermine productivity and take years to recover from. How big the problem has or will become is not helped by public discourse on the challenges facing the country.
One of the mistaken assumptions, promoted by politicians, few if any have ever worked in, let alone managed large organisations, is for that greater productivity using fewer resources is possible across the public service.
Trying to be more effective and efficient with fewer people is unrealistic in theory and practice. Having a depressed workforce makes it impossible.
For the past three years, the Government has glossed over the severity of the economic recession and its wholes-scale job elimination.
Its narrative, full of optimistic rhetoric has been exposed and it has lost trust and credibility. We feel less secure and perceive the injustice wrought by a political systems’ promotion of a less than competent parochial mediocrity and cronyism. Our two fundamental motivating precepts; our need for security and desire for justice have been violated.
Do we risk a national survivor syndrome that could significantly negatively impact on economic recovery?
The good news is the syndrome is understood and can be alleviated by a leadership that demonstrates an appreciation of people welfare beyond telling them they are lucky to have a job.
A version of this article appeared in the Irish Examiner, Business Section, Monday 4th October 2010.
Sunday, October 3, 2010
We're playing a bad game of bluff
By withdrawing from the bond markets, the Government has entered an uneasy truce until it runs of money, writes Bill Hobbs.
Is this Government going to lose sovereign power to make decisions in the national interest? Are we to become second class EU citizens, consigned to debt serfdom for at least the next decade?
By raising a white flag and withdrawing from the bond markets, Government has entered an uneasy truce until it runs out of money sometime next year, by which time it hopes the bond markets will provide funds at affordable prices. Either that or it will be forced to look for EU sovereign bail out assistance at prices far higher than recently demanded by the bond market.
The Government’s sovereignty protection strategy depends on it producing a credible economic recovery plan, one that demonstrates an ability to repay borrowings. Unless bond markets are convinced of a willingness and capacity to deliver on an unprecedented four year draconian austerity programme, the truce will end.
Yet banking parasites continue to suck capital from the real economy. Yesterday’s Central Bank figures, which are no more than credible best estimates, show how national debt is escalating. Must we tax and cut our way to achieve a wholly unrealistic borrowing target of 3% GDP by 2014? Should we protect bank’s senior bond holders from any losses to protect our sovereign funding independence? If the banking parasite is separated from the host, would the host die? Government believes it would, which is why it’s linked bondholder protection to sovereign protection.
We are told there must be a “credible” multi-year plan to hit this target and that while growing national debt may be horrendous but it is “manageable”. But manageability and creditability is not really ours to define. It’s being defined within a set of demands set by bureaucratic proxies of the EU’s major partners and the ECB.
We are being told we must repay in full our international obligations. Unrealistic French demands of Germany ruined its post war economy in the 1920’s. Is ours to be ruined in the same way?
This Government’s agreement to insure bondholder’s investments was blindly entered into by it in September 2008 under its blanket guarantee. Never before has such a decision been made to capitulate before the first shot was fired. Subsequently faced with imploding state revenues and a monumental banking crisis, its strategy was to bluff until a global recovery kicked in, which it didn’t. Thus, we had bluffer-speak of “cheapest banking bailout”, our “banks were resilient”, “Nama will get credit flowing again” and a “remarkable recovery in the economy”. Is it bluffing to maintain “debts are manageable” when the light at the end of the tunnel may be an onrushing train?
Theoretically affordable on paper, based on optimistic assumptions, it seems we could cut and tax our way to paying our debts. But what’s the human cost of a decade of debt serfdom? What is the opportunity cost of using our borrowing capacity to plough €3bn a year for a decade into two dud banks compared to using the money to fund revenue generating job creation?
In reality we are being told to hold the line by others who are not the least concerned about what happens here. They are more concerned of the political fall-out of facing their citizens with the bill for a just and equitable share of losses.
International investors looked to Irish banks as investment vehicles for returns that could not be achieved at home. They were professionals who willingly lent money without undertaking prudent due diligence. Providing the raw material that fuelled a property boom and knowing there is no such thing as a free lunch, they have not been told they too must share in the pain.
We know that having to adjust budget parameters to offer up a free lunch to others is code-speak for more swinging cuts and higher taxation. This is why many believe we are being sacrificed to maintain a status quo that has not learned from the ruination of the Weimar Republic – demanding all your money back, beggars your neighbour.
A version of this article appeared in the Irish Examiner, Analysis Section, Friday 1st October 2010.
Is this Government going to lose sovereign power to make decisions in the national interest? Are we to become second class EU citizens, consigned to debt serfdom for at least the next decade?
By raising a white flag and withdrawing from the bond markets, Government has entered an uneasy truce until it runs out of money sometime next year, by which time it hopes the bond markets will provide funds at affordable prices. Either that or it will be forced to look for EU sovereign bail out assistance at prices far higher than recently demanded by the bond market.
The Government’s sovereignty protection strategy depends on it producing a credible economic recovery plan, one that demonstrates an ability to repay borrowings. Unless bond markets are convinced of a willingness and capacity to deliver on an unprecedented four year draconian austerity programme, the truce will end.
Yet banking parasites continue to suck capital from the real economy. Yesterday’s Central Bank figures, which are no more than credible best estimates, show how national debt is escalating. Must we tax and cut our way to achieve a wholly unrealistic borrowing target of 3% GDP by 2014? Should we protect bank’s senior bond holders from any losses to protect our sovereign funding independence? If the banking parasite is separated from the host, would the host die? Government believes it would, which is why it’s linked bondholder protection to sovereign protection.
We are told there must be a “credible” multi-year plan to hit this target and that while growing national debt may be horrendous but it is “manageable”. But manageability and creditability is not really ours to define. It’s being defined within a set of demands set by bureaucratic proxies of the EU’s major partners and the ECB.
We are being told we must repay in full our international obligations. Unrealistic French demands of Germany ruined its post war economy in the 1920’s. Is ours to be ruined in the same way?
This Government’s agreement to insure bondholder’s investments was blindly entered into by it in September 2008 under its blanket guarantee. Never before has such a decision been made to capitulate before the first shot was fired. Subsequently faced with imploding state revenues and a monumental banking crisis, its strategy was to bluff until a global recovery kicked in, which it didn’t. Thus, we had bluffer-speak of “cheapest banking bailout”, our “banks were resilient”, “Nama will get credit flowing again” and a “remarkable recovery in the economy”. Is it bluffing to maintain “debts are manageable” when the light at the end of the tunnel may be an onrushing train?
Theoretically affordable on paper, based on optimistic assumptions, it seems we could cut and tax our way to paying our debts. But what’s the human cost of a decade of debt serfdom? What is the opportunity cost of using our borrowing capacity to plough €3bn a year for a decade into two dud banks compared to using the money to fund revenue generating job creation?
In reality we are being told to hold the line by others who are not the least concerned about what happens here. They are more concerned of the political fall-out of facing their citizens with the bill for a just and equitable share of losses.
International investors looked to Irish banks as investment vehicles for returns that could not be achieved at home. They were professionals who willingly lent money without undertaking prudent due diligence. Providing the raw material that fuelled a property boom and knowing there is no such thing as a free lunch, they have not been told they too must share in the pain.
We know that having to adjust budget parameters to offer up a free lunch to others is code-speak for more swinging cuts and higher taxation. This is why many believe we are being sacrificed to maintain a status quo that has not learned from the ruination of the Weimar Republic – demanding all your money back, beggars your neighbour.
A version of this article appeared in the Irish Examiner, Analysis Section, Friday 1st October 2010.
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