It's all about the debt, stupid.

With German taxpayers being asked to fund Irish civil servants salary increments, no wonder they are pissed off with us.

Once again the surreal world of bland consensus forecasting has caught up with reality. And guess what, the ESRI has confirmed what we all know to be the case – we cannot slash and burn this economy and society back to recovery status.

Austerity is an economic Verdun, consuming the futures of the brightest and the best. 70,000 people will leave for futures elsewhere next year. To make matters worse, 30,000 will come here to take up skilled jobs we are not qualified to fill.

Economist’s use of benign language to ease the pain, is like using a hug and a kiss to treat serious illness. All the headline targets are heading in the wrong direction. Things have moved from being a slowing down in the pace of decline, to a quickening in the pace. National domestic income, the stuff Government relies on to generate its revenue, is heading into negative territory while the Croke Park agreement remains intact.

Let’s face facts here. The agreement was struck using an optimistic anticipation of recovery by a bunch of discredited politicians, who have since lost their jobs. The biggest bunch of bluffers in the history of this state, were blind to their collective hubris. They labelled economic banditry a “boom”.

Some of these bandits were the public service trade unions, which is why the Croke Park agreement cannot stand and Kenny & Co better come clean before year end.

Public sector wage rates have to be slashed again with cuts this time targeted at the medium to higher paid ranks and higher paid pensioners.

The obscenity of the partnership approach resulted in unproductive swathes leveraging enormous income benefits for no return. The senior civil service were delighted to see lower ranks pay increased as their rising tide lifted their boats. And they were very good at benchmarking their salaries to private sector correlates. But theirs is an aberrant version. Upward only salary reviews are unique to the public sector. In the private sector, wages are slashed rates when profits decline.

It’s frankly obscene to argue for increments when the money to pay for them has to be borrowed by a Government with no credit rating. With German tax payers being asked to fund Irish public sector wage increments, no wonder they are so pissed off with us. And no wonder they are so unwilling to let the ECB fund our sovereign debt given so much of it results from banditry.

While none will admit to it, we are once again using the traditional default jobs strategy – exporting people. Do we think because we have a sovereign boundary, that the geographic reality of being a small island within the shadow of a larger one and off the cost of mainland Europe someway meant we could ever economically succeed in generating jobs for all the people, all of the time.

We managed to generate jobs for all of the people some of the time, only because we built houses for them to live in. And to do this we borrowed billions from abroad, much of which will just have to be written off.

The brutal reality is we have too many people living on this island for it to work as anything more than a small, specialist regional economy. National sovereignty means nothing when you cannot afford it.      

We might get to sustainable sovereign independence, where we generate jobs for most of the people most of the time and accept that some will leave to go somewhere else. But we can only do this when the debt we used to give a job to everyone has been slashed – and as we cannot generate enough income to rebuild and repay – we have two choices. Either we starve to pay the mortgage or feed ourselves and pay what we can off our debts.

Someone better tell the well paid cohorts within the protected public sector that “it’s all about the debt, stupid”. We cannot afford to pay you what you think you are entitled to.      

Bruton must take a leaf out of business

Why are our political and permanent governmental systems grossly ineffective in responding in real time to real time crisis? 

Last week, ISME lambasted the Government’s latest announcement of a small business loan guarantee scheme, calling for more action and less waffle. 

“Less waffle” reflects private sector anger and frustration at Governmental lassitude and inability to deliver. 

Should we expect better of what is a centralised machine bureaucracy? The design of bureaucratic organisational systems creates a culture of obedience, deference to authority, silo behaviours and inward looking political managerial systems that organise around task-driven dimensions. 

Frequently rewarding tenure and rigid adherence to rules and procedures, such systems are incapable of change or innovation. Skilled at incompetence, their managers zealously defend the status quo when threatened with change. When it does happen, change is far too slow to matter. Such systems appear to exist in a parallel universe where time moves far more slowly.

We have one of the most centralised of public sector machine bureaucracies. Designed to ensure that all power rests with executive government, its enabling self-perpetuating, self-governing, permanent civil service administration is incapable of innovation and change. Promoting change means rocking the boat. And as innovators know their careers will be shortened if they stick their heads up over the parapet, no one kicks up the dust. Instead they knuckle down or leave.

Politics itself is a transformation show-stopper. Transformational leadership competencies are not part of the successful politician’s CV as they hinder the attainment and retention of power. Politicians deliver compromises that are almost always mere shadows of what should be delivered. 

Recent history is littered with politician’s appeasement, compromise and disastrous policy decisions influenced by permanent public administrators who have never worked in the real world. In the real world time is a precious commodity. In business anything that wastes time is a value destroyer. 

A prime example of value destruction wrought by the political and public administration’s parallel universe is seen in the recent announcement of a “Temporary Partial Loan Guarantee” scheme for small business. 

It’s been 39 months since the full blown collapse of the banking system during which thousands of viable small businesses have needlessly failed with tens of thousands of jobs lost. In this time, two elected political administrations and the permanent administration system have done absolutely nothing to respond. Despite tens of millions spent on staffing job creation organisations little of any relevance has been achieved. Previous enterprise minister, Mary Coughlan said she was “looking into it”. Her successor Batt O’Keefe announced “detailed planning” was in train 14 months ago for a loan guarantee scheme.

No matter how well intentioned people are , no matter how intellectually committed to creating jobs, they will be stifled, inhibited and de-motivated by the very system they work in. The culture, values and “how things are done around here” along with managerial behaviours frustrate initiatives, sucking the energy from those who would lead and implement initiatives in real time. 

While serious about facilitating job creation, Richard Bruton may founder in achieving stretching jobs goals using the organisational systems he has at his disposal. Instead of leaving it to administrators, he should consider taking a leaf from the world of business where good things get done in real time. 

In the private sector, business leaders realise that frequently new initiatives are best build on green field sites. They create the space allowing innovators to develop and launch new businesses. To prevent existing business systems and cultures contaminating innovation, they physically locate their innovators in a separate location. They bring together the brightest and best, equip them with resources and then get out of their way. Riding shotgun, business leaders prevent their line managers from interfering with progress.

The public service is different – because it can never go out of business if it fails to deliver, it can never deliver fast enough when faced with real world challenges. 

Instead of leaving new initiatives to slowly grind through the cogs of a machine bureaucracy, Minister Bruton could take a leaf from business and set up an enterprise innovation system –staffed with and led by the very best people from both the private and public sector. It should have the money, resources and power to cut through red tape, force the pace of change, build innovative solutions and ensure they are implemented. It should have the capacity to cut across silo behaviours and the skilled incompetence of the machine bureaucracy.  

It’s disappointing that things that could have and should have been done in the first 100 days of this Government have not been done. A loan guarantee scheme is but one of the many immediate deliverables that will take far too long to get over the line. 

A version of this article appeared in the Irish Examiner, Business Section, Monday 28th November 2011

National loan 'blue flu' may just work

As the consumer debt crisis escalates, unless it acts to protect consumers soon Government is acutely exposed to a very real threat of a borrower’s run on the banks.

During twelve weeks of this summer, another 5,630 householders technically defaulted on their mortgages. With about 63,000 troubled loans - allowing for secondary top up loans - according to Central Bank estimates, close 55,000 households are in technical default. It says the problem is not confined to those in negative equity, as many distressed homeowners have some equity remaining.

By including restructured “performing” loans together with those yet to reach the critical 90-day default threshold, the number of distressed householders increases to over 115,000. The bank says it’s trying to work out how many more households are vulnerable. But as its published data only covers home mortgages, no one has any idea how bad other consumer loans, buy- to-let loans and personally guaranteed business loans are.

Once again worsening mortgage arrears news was positively spun. Politicians and bankers said that 90% of loans are performing. Imagine responding to news that road deaths trebled in two years, by saying that it’s okay as everyone else is still alive. Their positive spin on “low” repossessions is like saying its okay to keep clinically dead accident victims on life support systems to keep the numbers of deaths down. 

By insisting on keeping dead loans alive on banks’ balance sheets, thousands of people are needlessly suffering. In a properly working debt resolution system, repossessions would number over 9,000 a year. What we are seeing in the data is the outcome of a surreal, fabricated scenario as we all know banking won’t work again until unsustainable loans have been written off.

Yet some banking commentary implies arrears are worsening because people are deliberately defaulting on their mortgages in anticipation of a debt settlement deal. What’s called strategic default happens when people who can’t pay, lose their willingness to repay once they realise their situation is hopeless.

With German parliamentarians better informed on our taxation policy then we are, it seems that Government is no more fiscally empowered than a local county council. But is it powerless to direct banks get down to the business of debt settlement and control their oligopolistic loan pricing behaviour? 

Apart from those struggling with distressed debt, tens of thousands more are paying through the nose for variable mortgages. They are captive of their lenders price gouging as the mortgage market is no longer functioning. 

In the third quarter of 2006 lenders made 54,603 loans totalling €10.9bn. In same quarter this year they made only 3,607 new loans totalling €623m. In normal times, this level of mortgage lending would just about keep one medium sized mortgage bank ticking over. As competitive market forces that should cause a fair market for mortgage rates are non-existent and will be for some time to come, banks are free to charge what they can get away with.

Politician’s excuses for non-intervention in what is a broken market don’t cut the mustard and hinting at passing the buck to the competition authority is a cop out as is the banking regulator’s position on not wanting to control prices. Should a banking regulator not want powers to set prices, surely some other body should be empowered to ensure fair prices are set.

Given the numbers struggling with declining incomes, negative equity, joblessness and increasing taxes, a highly educated and increasingly vocal cohort of concerned citizens realise how disenfranchised they have become. They know banks have been pump primed with billions to get them working again. They know that these funds are not being used to either generate new loans or write down unsustainable ones. They know the money is being invested in Government bonds whose yields give a better return than loans. Yet while banks are profiting from a massive infusion of tax-payer funds, they are unwilling to pass through ECB rate reductions.

Under its "twin pillar bank" strategy, Government policy has consigned competition and consumer protection to third rate status. Disillusioned and angry, reform-driven leaders are beginning to emerge. Using real life stories, theirs is a powerful narrative evidencing the undignified treatment of people who through no fault of their own cannot pay what they owe. They are demanding laws that allow people earn a fresh start and force bankers to treat people fairly.   

While they may not be able to influence the political process, they know that collectively people have the power to reform banking’s relationship with society. Should they get enough people to threaten to take a loan payment holiday, then banking behaviour would have to be rapidly altered. Such a national loan “blue flu” would strike at the heart of the EU/ECB/IMF programme and could threaten to become a European wide phenomenon.

Will over a quarter of a million beleaguered mortgage holders remain silent? Unless Government comes up with meaningful response it risks spawning a grass roots movement that could succeed where it is currently seen to be failing. 

A version of this article appeared in the Irish Examiner, Business Section, Monday 21st November 2011

We need an integrated approach to solve debt crisis

Leaving debt resolution to individual creditors and 'case by case' arrangements is a recipe for disaster, writes Bill Hobbs

Most people have no idea of how to plan a way out of unaffordable debt. Even where they access information and advice, they will not have the expertise and skill to negotiate with their many lenders.

Convened last week to consider the Keane report on mortgage arrears, Social Protection Minister Joan Burton’s stakeholder forum heard from consumer protection advocates of the urgent need to adopt an integrated approach to resolving the consumer debt crisis. 

They maintain that as mortgage debt cannot be dealt with in isolation, any consumer protection response must deal with all debts. Participants also highlighted how, despite the Central Bank’s mortgage arrears resolution process and improved consumer protection codes, lenders are treating indebted consumers as wallets to be sweated to maximise loan repayments. If the intention is to ensure fair treatment, it seems that regulatory codes and supervision are not having the desired effect.

Government’s response to the consumer debt crisis needs to appreciate the totality of consumer protection solutions needed. While the Keane report recommended the establishment of an “independent mortgage advice function” which would “advise and support mortgage holders in assessing their options”, its response falls far short of the protection supports required. Critically it failed to frame its solutions within a properly constructed debt mediation approach through which people are ensured fair treatment and proper standards of customer care by their lenders. 

This is to be expected as one of the problems experts have is they cannot know what ordinary people don’t know. Because financial and legal experts know too much they cannot put themselves in a position of knowing nothing and will always assume people are more skilled than they are. Most people do not have the experience or competence to assess their financial situation. Nor do they have the skills to propose the solutions needed and they do not have the bargaining power or status to negotiate agreements with their many lenders. They are, in effect, powerless and acutely exposed to lenders' exploitative behaviour within a non-transparent system that accommodates bankers’ insistence on a “case by case” approach.

Can all bankers be trusted to treat people fairly and equitably and not to favour some over others? There are indications that some banks would welcome a “total debt” mediation and settlement system that they can themselves can rely on.

It makes absolute sense that mortgage affordability cannot be dealt with without also dealing with all other debts.  The scale of debt settlements and scope of solutions needed to work out billions in unaffordable debt and unsustainable mortgages is seen in what little data is being made publically available. With banking and credit union consumer expected loan losses amounting to over €13bn, chances are that close to 100,000 people will need to arrange over well over 300,000 debt settlement agreements with dozens of creditors that include not only banks and credit unions but revenue, utility companies and local authorities.

Leaving debt resolution to individual creditors and their “case by case” arrangements is a recipe for a social and economic crisis. It’s in Government’s, lenders, other creditors and consumers best interests that a transparent system is established through which people can arrange to settle their debts and creditors can face up to the business of debt settlement.

Consumers will be best protected by a dedicated, expert debt advice and resolution system that proposes and achieves debt settlement arrangements and agreements on their behalf. Such a system would see competent, experience, qualified advisors proposing and agreeing realistic mortgage solutions and other personal debt settlement arrangements with a consumer’s creditors. Properly structured this approach would ensure fair treatment and high standards of customer care. It would also integrate with the state’s new insolvency regime which will see a legally enforceable non-court based debt settlement regime through which people will earn a fresh start after a short period of time. Indications are this regime will include for mortgage debt and allow a fresh start after three years.

The focus of a debt advisory and resolution service should be on establishing and mediating sustainable agreements and getting lender’s agreement on these. It should also be a consumer protection advocate with the status and muscle to get banks and others to treat people fairly and ensure best practice in consumer protection. 

But such a system cannot be shoe-horned into existing state supports as they are not designed to provide the scale and depth of expert based service required. Many observers consider existing services have become captive of banker’s interests.

Any new national debt advice and settlement mediation service will have to be built as a new service and not a bolt-on to existing service providers. It should also have the reputational standing and status of a senior stakeholder with powers to ensure fair treatment. 

A version of this article appeared in the Irish Examiner, Business Section, Monday 14th November 2011.

Reform of business practices is essential

Revelations over the weekend that civil service managers are unable or unwilling to implement a performance  management system designed to ensure higher standards of employee performance come as no surprise.

Illustrating a twin culture of entitlement and subservient acquiesce to preserving a carefully constructed status quo, it’s an admission of leadership failure. As turkeys don’t vote for Christmas, it’s unlikely that civil service managers would ever act to reign in their own salaries, least of all within a system designed to ensure its own sustainability no matter what political administration is in power.

Crafted through years of “partnership” agreements that prevented real change, this state’s largest employer, Government is stuck in a rut of its own making as the latest partnership manifestation, the Croke Park agreement, ensures that undeserved entitlements are ring fenced and protected. 

If this is the case, then there cannot be any real transformative change. We are stuck with funding a dysfunctional civil service unless real transformative leaders emerge. 

These are the people who change the way people act by using narrative intelligence to ensure others are enthusiastically engaged. They get people to change by getting them to imagine and act out a better future. But who is responsible for crafting a fit for purpose civil service?

Politicians should admit to a fact of life, they cannot be transformative leaders. Theirs is the business of compromise, the consensus agreed to ensure re-election. Characterised by the acquisition and retention of power, successful politicians are the ones who are elected and re-elected. They make flexible, generalised campaign promises, to appeal to the broadest electorate and then renege on them. If a politician tries to persuade people to do something different, to show transformational leadership, they guarantee their own demise.

Should we expect politicians to be leaders when we elect them to preside over the body politic? After all what is a minister other than the political head of an administrative department? A Taoiseach, a “prime” minister, who administratively heads the government?

The parable of the boiled frog which remains in the water as the heat is being turned up to be boiled alive is apt. Are we being boiled alive to protect bond holders’ wealth base or is it a case of a collectively hoping a regressive economic cycle will end and people once again feel confident enough to go out and spend money?

As the citizens of Berlin don’t elect Dublin politicians, their narrative differs. In Berlin it’s all about getting errant states to pay their way to protect the might of core EU engine, the German economic model. In Dublin it’s all about regaining economic sovereignty by agreeing to what Berliner’s want: Both hope that we will start spending again. Both act as if economic activity strong enough to pay off borrowings and fund recovery is possible. Both are unwilling to make the decisions needed to re-craft the euro project.

Economist Constantin Gurdgiev says we owe too far too much to have any hope of economic recovery. It seems we will be unable to grow fast enough to fund recovery and fund debt repayments. Translating this to families means the burden of state and personal debt repayments will stifle recovery and government’s austerity programme will snuff out ability to repay. 

The bigger picture is one of some nation states who have excess money and those that don’t have enough. Rebalancing this equation means that as creditor states are as captured as debtors states, debt settlement will have to be shared equally.

Rarely has business, politics and family collided as they have in the past three years. We are living with what happens when business is used by others to achieve their instrumental objectives – wealth and status within a political economy designed to further these business objectives. But it seems this is about to change – not because of transformational leadership – but caused by the social and economic consequence of un-repayable debt.

Government’s muted new insolvency regime indicates a decision that people are to be allowed to fail and get back on their feet again. If a measure of an entrepreneurial society is its capacity to forgive personal failure and allow people to rebuild their lives then it’s a move that shows some responsiveness to a dilemma posed.

That dilemma is encapsulated by a sovereignty status largely dictated by external political forces we have no control over but also framed within our own willingness and capacity to encourage transformational change where we can.

For that to happen ways have to be found to ensure that not only is the civil service reformed but that the society and economic model it’s designed to support is also defined. So far all focus has been on austerity with little or no thought applied to what will be the outcome of years of austerity.  

A version of this article appeared in the Irish Examiner, Business Section, Monday 7th November 2011