Granted, the rescheduling is quite possibly a trivial matter of a poorly communicated announcement by the White House, which the media have been only too happy to sensationalise. Nevertheless, the mere appearance of trying to avoid clashing with a season premiere of Lost gives pause for thought. Obama had better improve his public relations team in the White House. His predecessor, George W Bush, was lucky enough to have a finely tuned PR spinning machine that managed to get a weak leader re-elected for a second term. The current Administration appears to risk suffering from a reverse form of this malaise.

Have serial TV dramas become the latest opiate of the masses in the 21st century, just as religion and football were in the past? The sheer size of the television audience means a lot of people are kept occupied on matters other than politics, so it certainly acts like it. If so, those who believe in grand conspiracy could easily imagine that the strategy must have been carefully designed by previous GOP Administrations – the Democrats have yet to learn about the importance of TV scheduling. A recession, global warming, and history repeating itself in Afghanistan are no-longer sufficient reason for a quite significant section of the US public to switch over to the presidential address, missing crucial plot-defining moments in the process.

So who are these mysterious Lost viewers? Who have managed to dictate the terms of Obama’s biggest PR moment in months? My guess is Generation Y. Generation X are a little on the old side to form a large part of Lost’s audience. Generation Z are too young be bothered with such trivial matters as voting anyway. Incidentally, it seems that there really was a “Lost Generation“, but that referred to notable authors of US literature who found themselves down and out in Europe after the First World War. I’m sure that the Lost viewers would have been considered useful material for the Lost Generation’s own view of the political and social realities of the 21st century if they were with us today.

The background was a high-stakes gamble on property that Liam Carroll made with borrowed money, systematically channelled into the black hole known as Zoe Group (the parent company of Vantive Holdings and Morston Investments among others). He had made it big-time during the bubble years but a collapsing property bubble set the stage for a dramatic show-down. An imprudent speculator in many respects, he had the reliable backing of domestic banks, unconcerned for their shareholders but rather more concerned for their political allies and their network of cronies. There was, however, a dissenter in their midst in the form of ACC Bank.

The old “Agricultural Credit Corporation”, privatised in 2002 and bought by Rabobank, had gone astray in the froth of the speculative bubble, along with the rest of the banking sector. They found themselves in the unfortunate situation of having lent a vast sum to a property developer who had gambled away most of their capital through huge losses on speculative property “investments”. Unlike most of their Irish banking peers, ACC Bank have a wary foreign owner to answer to. Rabobank are a triple-A rated bank – a now rare breed of solid global banks – that can boast of a financial stability and a deep capital base they can dip into during leaner times, which is the envy of the global banking sector. It is no wonder that one of their Irish subsidiaries, ACC Bank, with its mounting provisions for loan losses, was proving to be a thorn in their side, and they needed to bring it under control. As a global bank with its headquarters in the Netherlands, Rabobank is reluctant to allow a large part of their Irish loan portfolio to rot away while the Establishment scurries about making deals to protect their own short-term interests.

In contrast, the two biggest lenders to the Zoe Group were far more willing to compromise to avoid liquidating the company. Allied Irish Banks (AIB) is Irish-owned and subject to the pressures of its fellow crony club members. Bank of Scotland (Ireland) is a subsidiary of HBOS and Lloyds TSB which have also proven their lack of aptitude for risk management. Both banks have been rescued from collapse by government bailouts. When Zoe Group finally breached its loan covenants, ACC called time and applied to the courts to liquidate the company. The other banks which had financed Carroll were still in denial about the severity of the problems of Zoe and of the wider property slump in general and focused only on the short-term consequences. Liam Carroll appealed for court protection and, according to an Irish Times article, his justification for this preferential legal treatment of his groups’ €1 billion deficit was a truly remarkable “single page outlining the hope value of his assets and two short sentences explaining the valuations and citing their source“.

Despite the Zoe Group being clearly insolvent and Liam Carroll proving unable to offer any credible plan for long-term survival, the banks were still prepared to support a deal involving examinership (a process akin to Chapter 11 bankruptcy for US readers) and reorganisation to keep Zombie Zoe on life-support – with the exception of ACC Bank. They fought a legal battle to liquidate the remaining value of their loans and were portrayed in the press as agressive.  Finally, on 11 August, the Supreme court dismissed Carroll’s appeal.

Perhaps ACC Bank is playing hard-ball to strengthen their negotiating position and force an offer from the other banks to buy out ACC’s loans on favourable terms in return for relenting on their petition for liquidation. Ironically, their own self interest is also in the interests of the taxpayer. A forced liquidation of Zoe Group companies would ensure that the banks realise the losses on the loans before they become a taxpayer’s liability when they are transferred to NAMA. It must be said, the Establishment, a crony-capitalist club of bankers, developers and politicians (predominantly Fianna Fáil) with vested interests, put up a good fight – as far as the Supreme Court, exhausting all domestic legal remedies. A continuation of legal proceedings and even a hypothetical victory involving the granting of court protection and examinership would have simply delaying the inevitable liquidation the hopelessly insolvent company. Thankfully, the result is a victory for ACC Bank and possibly even a rare victory for the taxpayer.

So, are we to congratulate our Supreme Court for upholding the rule of law for a foreign-owned company just as it would for a domestic one? Well, perhaps. That is the best answer I can give because my suspicions remain that the Supreme Court had their hands tied. Ever since Ireland joined the European Union in 1973, it has been subject to the supremacy of European Community Law which is within the jurisdiction of the European Court of Justice. The Supreme Court judges know that if they had ruled in favour of Liam O’Carroll and against ACC Bank, any appeal to the European Court of Justice would have been overruled. They would have lost much credibility.

Livestock, specifically cattle, and their produce, are by far the greatest output of the farming sector in Ireland. The bubble referred to in the title of this article, however, refers not to the cows, but the land on which they graze. With the exception of Luxembourg (an anomaly due to its diminutive size), Ireland has the most expensive agricultural land in Europe.

Why, you might ask, is there such as wide chasm between prices for agricultural land in Ireland and its European average? Why do prices bear no relation to agricultural productivity or the income stream one would expect to achieve from such an investment?

I present exhibit A – a listing from Henry O’Leary, a real estate agency that seems to specialise in rural plots of land. Some of these plots are already zoned for residential development (normally a single house). I draw your attention to the purely agricultural land i.e. with no planning permission for residential development.

First up, is 114 acre property with an undisclosed guide-price. I guess they don’t want to scare off potential buyers, so we’ll move swiftly along to the second property:

Dromore, Glandore in West Cork.

(hover the mouse cursor over the blue boxes in the screenshots below to see the pop-up comments)

No doubt this second property is a fine plot of agricultural land and a veritable bucolic wonderland of sea views. Ok. So the price? It comes in at a modest €1,000,000. That’s SIX zeros i.e. €1 million or approaching US$ 1.5 million at current exchange rates.

I hope you were sitting down for that – sorry for not warning you. Once your heartbeat has managed to re-establish its normal rhythm and your grasp of conventional wisdom is sufficiently twisted to accommodate this insanity, allow me to remind you of a very important issue – the emotional welfare of the cud-chewing, methane-farting residents of those fields.

The scenic value of those ocean views for our dear bovine friends more than justifies the 7-figure asking price of this “non-residential agricultural holding with ocean views”. You could even name it Bovine Vista!

But wait, maybe we’ve missed something:

“within walking distance of Glandore village, it has extensive road frontage and given the location this farm could prove an exceptional investment should planning permission be obtained even for just one house”

An important detail indeed. No need to even consider the cows, so. You’ve got a chance that some idiot in the County Council makes a mistake in the planning application process and grants planning permission. The minor detail of actually paying to have the property developed can be overlooked for now.

With my best wishes to the sucker who sinks his current and future life savings into Bovine Vista, I must, lamentably, continue to the next property for sale:

Butlerstown, Bandon, West Cork

Once again, this is land zoned for agricultural use – a whole 17 acres of it – which means only €59,000 per imperial acre (or US$85,000 at current exchange rates) or for a more internationally recognisable figure – a paltry €145,000 per hectare.

In the case of this property, let’s consider for a moment the hypothetical (and fortunate for the buyer) circumstances of the land being rezoned by the County Council. The land would obviously be worth much more than its agricultural output would suggest. The reality is that the guide price of this agricultural holding already prices in a significant chunk of the speculative gains the buyer MAY make in the event of that improbable rezoning. There must be something I’m missing…

“The agricultural qualities of this land which are superb no longer form the foundation upon which the valuation is based, it’s positioning adjoining Barryroe GAA Grounds and being in close proximity to Lislevane Village are far more likely to dictate the outcome of this sale.”

Now I see – I missed the nod and the wink. I guess I was mistaken in relation to the previous property too. It was no idiot in the County Council but a wily opportunist who deftly made a slip of the pen (or more likely an openly agreed determination by collusion), resulting in the fortunate mishap of planning approval for development of the property. So with this infallible investment strategy in mind, we should consider the pricing strategy – pick a very high figure and double it.

Is Ireland “Special”?

Considering that agricultural markets are global, we should expect some convergence of prices among agricultural regions with similar physical and climatic conditions. Only land with similar characteristics should be compared because factors such as soil quality and climate influence productivity greatly. Ireland’s climate is, admittedly, very suitable for livestock farming, but this is insufficient to explain the valuations. In fact, the difference is so large that it cannot be attributed to domestic factors.

The arch-nemesis of the natural environment a.k.a the Common Agricultural Policy of the European Union, is another factor that should not be disregarded. CAP subsidies, however, do not explain the disparity because they should push up agricultural land prices by similar amounts throughout Western Europe (the new EU member states will not benefit from full CAP subsidies until 2014 after the current 7-year budget expires). Even allowing for a recent drop, a recent report by Savills Ireland, a real estate company, reports that average agricultural land prices in Ireland average at about €40,000 per hectare. Even in other parts of Western Europe such as France – itself a wealthy and productive exporter of agricultural produce – the price per hectare in the more expensive regions for agricultural land averages at under €7,000 per hectare. I should mention, though, that other countries show signs of (less severe) bubbles including the UK, Denmark, Benelux and Italy.

No, Ireland is not special and this is simply another bubble waiting to burst. The urban property bubble in Ireland was also “justified” by arguments such as the positive demographics, but that, in hindsight, was obviously was a fallacy. In fact, the Ireland of today is a country of net emigration, as young people once again leave in search of work abroad and recently arrived immigrants return home. Agricultural land will eventually return to levels corresponding to the financial return on its agricultural output just as urban rental property is dropping to a realistic level suggested by its rental yield.

The Fallout – Last Man, NAMA and the Environment

Obviously, the last man in will be worst hit. This is the risk that any individual takes when making an investment (especially in an asset price bubble)  and, as such, does not concern me.

NAMA (National Asset Management Agency), a.k.a the Taxpayer, the subject of much attention recently for its proposed acquisition of much of the toxic property debt of Ireland’s banks, will be exposed to this bubble. As these toxic property loans largely consist of loans to developers, it is to the property developers we should look. Their viability depends to a large degree on the valuations of their “land banks” which are often undeveloped agricultural land adjacent to urban areas. I wonder what NAMA’s bill to the taxpayer will amount to once the developers are faced with the bursting of this bovine bubble.

The two examples above are far from any city, however, the emphasis placed on proximity to any kind of village or hamlet with the objective of inflating the price serves as a warning to accountants now attempting to place a value on the property loan bank assets that NAMA is about to acquire on behalf of the State.

Finally a word of advice to tourists – visit Ireland while you can. Its last remaining remnants of natural coastal beauty are being destroyed thanks to the collusion of property developers and local government officials. Our only hope is that the collapse of the urban property bubble takes this rural property bubble down with it!

In conformanced with the principle of non-discrimination, I assume that the paragraph of the Bill that mentions its application to any “matter that is grossly abusive or insulting in relation to matters held sacred by any religion” will also be enforced in the event of disrespect towards other, non-Christian religions. I would, therefore, like to take this opportunity to warn the cartoon artists who created the controvertial depictions of Muhammad for the Danish newspaper Jyllands-Posten in 2005, to reconsider any possible holiday plans that may involve visiting Ireland. They would be risking a substantial fine and possibly even receiving a criminal record should they enter the Irish state.

Considering that Fianna Fáil, the party that supported the blasphemy law, is the most popular political party in Ireland, the cartoonists should be wary of the possible hostile reaction of Fianna Fáil supporters upon their arrival as they unleash their fury at the insult to Muhammad. Muslim countries with similar regimes to Ireland in this respect experienced much violence in reaction to the cartoons which was directed at European representations in their countries. The Danish Embassies in several countries were set on fire. The cartoonists should, therefore, be made aware that any attempt to seek refuge in the Danish Embassy in Dublin may be futile and dangerous.

Ok, I obviously exaggerate, and there is, admittedly, a clause that exempts the matter concerned if the defendant manages to prove that “a reasonable person would find genuine literary, artistic, political, scientific, or academic value in the matter to which the offence relates“. Nevertheless, proving this could be very arbitrary and, in any case, the point that criminalising blasphemy has no place in Irish law needs to be impressed on the incumbent Fianna Fáil – Green Party government somehow.

I recognise the importance of religion in society, however, it does seem that Fianna Fáil blinked and missed the moment when Ireland entered the 21st century…. or perhaps it is me who does not realise that Ireland has been left in the 19th century while the rest of Europe moves forward, already enjoying, in most part, the freedom of secular government. In 2008, England and Wales abolished their blasphemy laws with the enactment of the Criminal Justice and Immigration Act 2008. The United States considers blasphemy laws to be a violation of the First Amendment and the constitutional guarantee of freedom of speech. The Assembly of the Council of Europe “considers that blasphemy, as an insult to a religion, should not be deemed a criminal offence” (Recommendation 1805, 2007).

Religion should be an intimate, personal dimension of the citizen that the state should refrain from interfering with. This blasphemy provision must rank as one of the worst aspects of the medieval body of law of the Irish Juristiction, alongside criminalised debt default. Another law exists whereby people who are simply unable to repay a loan are criminally prosecuted and imprisoned. The latter offence should be treated as a regulatory offence with punishment involving the seizure of assets or bankrupcy. The former should not even be considered legally as an offence.

In contrast, while these Dickensian artifacts of Irish law are regularly enforced, there has yet to be a single prosecution or even criminal charges resulting from the investigations into possible fraud and negligence involving Irish banking executives and the former Financial Regulator. Those who were conveniently “forced” into retirement after having brought the country to its knees, are currently enjoying the benefits of an extremely generous pension, while the Irish taxpayer tries to pick up the pieces of a country verging on bankrupcy.

Anecdotally, in the process of getting the bill passed (it initially failed), the government had to round-up two missing senators who were  probably (I postulate) in the Dáil bar having a pint of guinness (not the official excuse of course). In addition to Ireland unilaterally establishing the foundations of a new European Bible Belt, the Irish government has aptly demonstrated the waste of space and money that is Seanad Éireann in its current form. Even the senators themselves don’t seem to take it seriously.

Update 11 July 2009:

Further to comments submitted on this article, I think it is only fair to recognise them by adding that the Ministor for Justice, Dermot Ahern, was stating the truth about the need to include the blasphemy clause for constitutional reasons.  He also corrects me in stating that the last prosecution for blasphemy occurred in 1909. See the comments for further details.

Let’s see how long it takes for a referendum to be held to bring our outdated constitution into the 21st century…

The people that originally populated Ireland were hunter-gathers and subsistence farmers whose spiritual beliefs involved worship of the forces of nature. Despite some obvious disadvantages such as poor medical technology, the hunter-gatherers had a highly sustainable system with respect to their environmental impact. Being illiterate is usually considered a disadvantage, however, that view should be placed in the context of our society. It is a disadvantage for a member or our society to be illiterate, however, if the entire society were illiterate, I would consider it to be a characteristic rather than a disadvantage. The first natives were more simple and relied on story-telling and teaching to pass wisdom and folklore down from generation to generation.

Inevitably, successive waves of immigrants and conquerors wiped out their way of life. In contrast to the hunter-gatherers, our current system provides the means, motivation and knowledge for humans to expand and dominate to the greatest extent that the environment can bear, and probably beyond – possibly eventually endangering the survival of entire human populations.

The advantages of using money as a medium of exchange and as a store of value were critical to the evolution of the current system. Once one or a few forms of money such commodities (especially gold) or more sophisticated notes of legal tender became widely accepted, people could benefit from its flexibility to expand, trade and establish commercial enterprises. Eventually, the mercantilism of early colonial expansion began to transform the world. Capitalism and the pursuit of profit provided the motivation for expansion, and the political and social obstacles gradually diminished to the extent that laissez-faire capitalism was unleashed.

Gutenberg’s invention of the mechanical printing press widely dispersed the knowledge required for expansion and spurred the industrial revolution. Another main factor was the development of modern intensive agriculture. This provides people with the surplus of resources that allow them to colonise and dominate vast regions, and in the process, decimate the natural environment  to an even greater extent than industry (more of this in a future article) .

I lament the destruction of the native american way of life… but to be honest (and blunt), it was probably inevitable once any one of the more aggressive civilisations developed the technology to cross oceans en masse. Native americans lived in a vast and fertile land which would be a prime objective of any expansionist civilisation. I suppose human beings are participating in the same darwinian struggle as any other animal – survival of the fittest. Anyway, the point being- which wave of immigrants or conquerers are present-day Irish people from? Actually we’re the end result of many incidences of the peaceful blending of different populations in some cases, and violent mass genocide in others.

It would be unfair to place the blame for the brutality of colonialism on our predecessors in Europe who were ignorant of the dangers and educated differently, or the current citizens of modern democratic countries in the “new world” that were founded on conquest, slavery and exploitation. Any advancement, be it social, political, technological or economic, tends to come before society learns to use its new tools wisely, so it is usually and predictably abused.  We ourselves are products of the system and cannot simply eliminate capitalism and technology which forms the basis of our entire society, however, we can and should tame its extremes with sensible regulation, education, and major changes to our lifestyles. At least, perhaps, now that we have the knowledge, the urgent need for fundamental change will dawn on us.

As for the practicalities like power storage and economic viability, at present these are indeed negative points against choosing wind. Well, there are some positives. Any emerging technology is initially expensive due to:

• the low demand (or even lack of awareness of its targeted market)
• immature and possibly relatively inefficient designs
• lack of economies of scale from the low volumes

I think it is safe to say that costs will come down as volumes rise and designs become more efficient. They may not reach a level that makes it competitive with oil or gas at current market prices (based on conventional accounting), however, we rarely take into account the full cost of being dependent on fossil fuel supplies from the Middle East and Russia. Let’s face it – Ireland’s natural gas supplies will shortly run out, unless we get a lucky break if some exploration company makes a find in the Rockall Basin to replace the Corrib and Kinsale Head gas fields.

Reserves of fossil fuels are finite, but there will always be wind. A lower dependence on fossil fuels will moderate the disruption to our oil-based society due to the coming crunch in supplies once oil extraction reaches its peak. Although the expected date of peak oil is disputed, I think that despite advances in extraction technology, it is safe to say that it will happen during our generation.

Another cost that is often overlooked is the military cost involved in the West defending its “interests”. Ireland is involved thanks to our dependence on US foreign direct investment and our implicit support for US military ventures. While the European Union did not generally toe the line of the most recent Bush Administration in their intervention in Iraq (main exception being the UK), its relatively minor involvement was still hugely expensive. The resulting abhorrence towards the West by the Muslim world did not do anything help reduce the risk of related terrorism, which the EU was affected by.

In addition to gradually reducing costs of wind power, we should consider its predictability – at least over the medium to long term. Sure, there are weather anomolies – Ireland does get some windless days. We can be certain, however, that over a period of weeks, months or years, Ireland WILL receive ample wind to drive those turbines thanks to its temperate oceanic climate. Moaning and grumbling notwithstanding, a windy climate does have its advantages. Reliability of fossil fuel supplies is subject to the possibility of them being used as tools of an aggressive foreign policy, or political instability in already unstable parts of the world. The Eastern half of the European Union was severely affected by the recent political tussle between Russia and the Ukraine, via which, the EU derives a large proportion of its natural gas supplies.

With regard to the issue of power storage, I think Gerard O’Neill’s post on his Turbulence Ahead blog (unwittingly?) stumbles on a possible solution:

“we at least can tap our next door neighbour for some spare electricity should we run low ourselves”

Well, that works both ways. In the increasingly liberalised and interconnected EU power market, surplus power generated in Ireland should manage to find a market in other EU countries. As for the hypothetical possibility of exporting power over a substantial distance, for example, to Spain when its solar power supplies are affected by a cloudy period, perhaps the market will become sophisticated enough for some kind of a chained export.  France would export to Spain with the shortfall substituted by power from the UK and in turn, Ireland. Perhaps someone knowledgeable of the subject could shed some light on this.

If there were some way to financially account for all of these associated indirect costs or externalities of fossil fuels, I think wind would not seem as unattractive as what many people currently suggest. At present, renewables have a minuscule presence in power generation in Ireland which warrants further investment and even subsidies (initially) to stimulate the development of the market, industry and technology. A key principle of managing risk to energy supplies is diversification. There is a place for fossil fuels, nuclear power generation (if environmental concerns are taken seriously) AND renewables.

Progress is already being made by cracking down on tax evasion such as fraudulent mortgage interest relief claims. Other positive moves include reduced relief on mortgages for rented residential property and the obolition of the special 20% tax rate applicable to companies dealing in or developing residential development land. Another important, and as yet overlooked, element of reform is the introduction of property tax.

Property tax would help to:

• moderate speculative property investment
• smooth out the wild cycles in the property market
• broaden the tax base by creating an additional source of revenue
• provide more stable tax revenue

Compared to stamp duty which can be very volatile, property tax is much more stable, dependable and predictable which are desirable traits for a source of government finance. I sincerely hope that this does not fall foul of political and public resistence. Following previous failed attempts at implementing a system of property taxation in the past, this time the government is likely to tread carefully.

The state sponsored Commission on Taxation, with inputs from the Foundation for Fiscal Studies (among others), is currently examining the possibility of introducing property tax as part of a general broadening of the tax base in Ireland. The government explicitly stated that it was to consider options for the future financing of local government. Current policy recommendations in John Gormley’s Green Paper (pdf, html) concerning local government finance defer to the conclusions that will be determined by the Commission on Taxation no later than 30 September 2009.

To ensure a fair system, means-tested measures should be included to avoid taxing residents out of their homes and excessive gentrification. Properties valued below a certain threshold should be exempt. While a change in mindset would be needed to adapt to property tax, the prospect of retirees on modest pensions having to downsize to avoid tax bills need not be the case. A Valuations and Appraisals Register would need to be established and administered by local government. This would detail property values from the obligatory registration of final agreed prices of all property sales, and would form the basis of how much tax to charge.

It would also provide the added benefit of improving the transparency of the property market in Ireland, where property values are, at best, heavily biased guesstimates thanks to the lack of public data on property transactions. Estate agents and auctioneers would no longer be able to misguide people with impunity. Considering that the main house price index available to statisticians, policy makers and house buyers, is compiled with data from a minor commercial mortgage provider in conjunction with the ESRI, an economic think-tank, much remains to be done to improve matters.

Ideally, property tax should be controlled and directly received by local government. This would provide them with an independent means of raising funds. As the structure of government in Ireland is extremely centralised, however, I’ve no doubt that central government will be the beneficiary of revenue raised from the tax. A strong mandate, not to mention political leadership with vision, would be required to implement such an important first stage of structural reform of government in Ireland. Alas, neither the people of Ireland, nor Irish politicians have any desire to support such reforms.

Also from the Local Government Finance chapter of Gormley’s Green Paper:

The Indecon Review of Local Government Financing (March 2006) also makes numerous references to the implementation of a property tax.

The institutional underpinnings of local government, along with the whole area of urban planning, would need to be reformed, of course. Tax raising powers without adequate transparency would be a dangerous combination in the already murky and opaque world of local government and planning in Ireland.

A friend emailed me a link to an article in the Independent, “Taxman ends mortgage relief for 154,000 ineligible homeowners“. The subject line of his email? – “Good news”. Both of us never jumped on the fabled property ladder and had tried, in vain, to ignore the constant smart-arsed remarks over the years about how people had “earned” so much on their property. I’m sure this was a constant conversational annoyance in any country that experienced a property bubble, be it the US, Spain, the UK or Australia, however, it really focuses your attention on what’s going on around you where you live.

For me, one of the ultimate smart arses, is Ciarán Maguire. He was lucky enough to jump on the property bandwagon in a big way with the right connections just as the credit was flowing in the right direction. His group’s website has been tamed, although I remember cringing as I read it in the past when it seemed to me as being little more than an arrogant platform of vanity and self-worship. There were lines like “one of the Worlds Youngest Chairmen and President of a Multi Billion euro Corporation” and he also shamelessly ripped off Warren Buffet with his rules of investing: “1. Never Lose Money 2. Never Forget Rule #1“. I’d love to know what the balance sheet of the Ciarán Maguire Group is like. I would wager a guess that their debt levels are stratospheric, considering how much leverage would be required for his far-fetched ventures. I digress…

For years, property as an “investment” was seen as a one-way bet. So why could a policy to remove incentives for property investment be “good news”? The establishment had tinkered with the tax system to favour property investment at the expense of other, more productive sectors of the economy. The tax authorities turned a blind eye to widespread fraudulent claims for mortgage interest relief such as claims from people who had bought undeclared “buy-to-let” investment properties which they rented out. The average man on the street firmly believed that property prices simply could never fall.

Residential investment (% of GNP/GDP) *

* Alan Ahearne, Juan Delgado, Jakob von Weizsäcker, How to prick local housing bubbles in a monetary union: regulation and countercyclical taxes, VoxEU.org, 27 June 2008

It was an understandable assumption, because Ireland had not experienced a property crash in recent history, and the authorities blatantly ignored the lessons of property crashes elsewhere with spurious justifications such as demographic trends. I can only imagine how cozy ministerial chats over pints of guinness with their construction and property developer buddies, along with the top brass of Anglo Irish Bank, must have provided the basis of their official policy. The Department of Finance extended tax incentives for property investment and the puppet Financial Regulator left open the credit taps on an already frothy economy. Words to the effect of those chimed by Chuck Prince, former CEO of Citigroup, aptly describe the economic strategy of those holding the levers of power in Ireland and top level mandarins – “as long as the music is playing, you’ve got to get up and dance. We’re still dancing…“. Ireland experienced a multi-year nationwide céilí.

Well, that was then, and this is now. As property is such a substantial and all-pervasive sector of the economy, the effects are widespread – house buyers (mortgage holders), banks, construction companies, and, in fact, everybody else, as the rippling impact of the combination of the credit crisis, property crash, and economic recession now clearly demonstrates. Another conversation with a friend of mine some time ago who was about to buy his house springs to mind. His reasoning for buying? It has to be a safe bet. If property were to crash, everybody is in the same boat and then the entire national economy would crash along with it. What he assumed, of course, was that a broad economic collapse was highly unlikely. What a prophetic statement that proved to be.

The state guarantee of the entire banking system meant that we collectively “bet the farm“. I also fear that the taxpayer will be hit yet again when the National Asset Management Agency (NAMA) takes over €80 billion of dodgy loans off the banks’ balance sheets in return for inadequate discounts.  Some reports suggest that property developers used the same assets as collateral for loans from multiple lenders. What a nightmare it will be to recover anything close to the face value of those loans. The capital injections to date have only been to counter the lack of liquidity due to the credit crunch.

For those who think it is all over, think again. Only now are the inevitable bankrupcies of the property developers starting to hit the banks (i.e. the taxpayer), so we are still in for one hell of a ride. As of 29 May 2009, the already nationalised Anglo Irish Bank requires a capital injection of up to €4 billion due to significant defaults on loans they had issued. They anticipate billions more in losses if property markets fall by just another 10%. It is likely to fall by far more.

Getting back to the article, the government has made a shrewd move by freezing existing mortage interest tax relief and “forcing” mortgage holders to re-apply. Hopefully some of those smart arses are shaken out of their comfortable complacency and are obliged to pay their dues. That, however, is not the main point. The main point is that it removes an artificial and informal stimulation of the property sector by enforcing (for once!) existing tax rules. Another important aspect is that it will allow the state to collect more taxes to help fill a gaping hole in the national budget. A common attitude is that if everyone is involved in tax-avoidance, then it’s ok. Well, this is one hell of a way to force cultural change in Ireland. It’s only the start, of course. Another important, and as yet overlooked, element of reform is the introduction of property tax.

Contrary to his namesake “Biffo” and all his past failings, I’m sure that Brian Cowen is a fairly competent political leader. The trouble is that he’s been permanently stained by the dirt that slipped off Bertie “Teflon” Ahern after having been cozily snuggled up in bed together for so long. It must be said that Brian Cowen, and of course, Brian Lenihan, who, as Minister for Finance, must have had a hand in this, are finally making sensible policy decisions. The only problem is that this is yet another case of shutting the stable door after the horse has bolted. Fianna Fáil consists of a bunch of Truman Burbanks waking up to reality.

They’re now trying to fix the problems they created (as members of the Bertie bunch), so they’d better get it right.

Good morning… and in case I don’t see ya, good afternoon, good evening, and good night!

RTÉ, as the Public Service Broadcaster of Ireland, is one of the main sources of news about Ireland. If you want to listen to RTÉ Radio 1, you can use their internet service. This is fine for tuning in occassionally, but it’s rather limiting to have to be in the same room as your computer.

Well, recently I had bought the much vaunted Apple AirPort Express to listen to an audio stream of my MP3s and podcasts in iTunes from another room. I’m going to pick up an old version of the iPod Touch to use it as a remote control for iTunes. The iTunes Remote application for the iPhone / iPod Touch do nicely for that.

The problem? iTunes doesn’t support any of the audio stream formats that RTÉ offer. I tried to solve the problem by converting the audio stream to a format supported by iTunes using VLC. The quality was ok but I wasn’t completely satisfied.

Finally, I found a solution that removes the weakest link (iTunes). Winamp and MediaMonkey can both directly read wma audio streams. I found a plugin that works with both players and is capable of streaming to the AirPort Express:
the Remote Speakers Output Plug-In.

MediaMonkey happens to be my favourite app for organising audio files, so I installed it as a MediaMonkey plugin, although, I imagine most people would go for Winamp.

MediaMonkey can read RTÉ’s wma audio stream (currently mms://live2.rte.ie/wmtencoder/1516.wma).

I’m listening to RTÉ Radio 1 right now. It sounds fine and is stable so far.

The disadvantages of the plug-in:

• It’s shareware so I’ll start by trying it out for the 14 day trial period, but at $10 (currently €7.50), the license isn’t expensive.
• Another downside is that the iTunes Remote application, which I’m planning to use on an iPod Touch, won’t work with Winamp or MediaMonkey, however, a remote control won’t really be necessary for just listening to a radio stream.

The real news, however, was the sudden disappearance of their report from RTÉ’s website and the subsequent events. All the machinery of the state had suddenly sprung into action to defend the Taoiseach against the evil powers. According to the Sunday Tribune:

• The government press officer Eoghan Ó Neachtain was infuriated by the tone of the piece. He placed a direct call to RTÉ director general Cathal Goan… ( – which seems to have resulted in the RTÉ apology. )
• by Tuesday, Fianna Fáil TD Michael Kennedy was calling on RTÉ ’s director general to “consider his position”, while the national broadcaster made arrangements to broadcast its apology…
• plainclothes detective arrived at the studios of Today FM on Tuesday morning. He demanded access to the station’s email system and told the programme’s producer Will Hanafin that “the powers that be want action taken”…
• [Casby] was finally under real investigation on suspicion of three offences, namely: incitement, indecency and criminal damage [for hammering a nail into the wall of the National Gallery].

It really does seem like excessive government interference. If they are willing to take a heavy hand against something as trivial as that, then what hope is there for freedom of the press in Ireland? RTÉ was (IMHO) forced by the Taoiseach to retract the report and issue an apology:

“RTÉ news would like to apologise for any personal offence caused to Mr Cowen or his family, or for any disrespect shown to the Office of the Taoiseach by our broadcast”

Personal offence? Possibly – but haven’t politicians and other public figures been fair game for non-slanderous parody and satire by the formerly stifled press since Ireland threw off the shackles Charles Haughey and the Catholic Church and joined the ranks of modern Europe? Offence to the family? I don’t see how. Disrespect to the Office of Taoiseach? His Imperial Majesty, Emperor Cowen’s reaction to the prank unnervingly echoes the story of poor Australian writer, Harry Nicolaides, who was thrown in jail for 3 years in Thailand for insulting the Thai monarchy.

In the portrait, Cowen appears in all his glory parading the uniform Fianna Fáil delegates have been sporting during the bubble years. The only problem is that the crisis has unmasked bubble Ireland for what it is. A small child cries out that the emperor has no clothes on, and everybody suddenly emerges from their denial and property-inspired, taboo-enforced hysteria. The cold, unforgiving light of day lays bare the deficient, short-sighted leadership of Ireland.

I only wish the portrait had been of Bertie Ahern, although perhaps the visual impact wouldn’t have been quite the same   Thanks to his bashfulness, Cowen has been caught with his pants down – twice. Hands off, Cowen!

So, in the interest of freedom of the press (and with thanks to Damien Mulley for the YouTube upload) , enjoy:

We all know by now that the credit crunch caused a liquidity crisis at Irish banks. When the international markets effectively shut off funding, they turned to the ECB for their expensive short-term funding facility, and ultimately, to the Irish government for a recapitalisation bailout. The state itself could usually rely on foreign buyers to purchase government bonds to fund national budget deficits. Well, now it seems that the state is feeling the pinch of liquidity drying up on international markets as foreign buyers either turn up their noses or charge a huge risk premium to buy Irish government bonds. How much longer will it be until the whole desperate State of affairs buckles under its own weight?

Astonishingly, investment bankers now seem to be braving the waters of public fury by striking back at limits imposed on their earnings according to an article in the Financial Times.

It amazes me that these people actually think they are entitled to claim a bonus while their companies are in the process of being bailed out by the taxpayer in an attempt at avoiding financial oblivion. I was obviously naïve in believing that a bonus (in the sense of remuneration) was an additional reward paid to employees if certain goals were achieved or if they performed well according to some measure or benchmark.

Investment bankers and financial traders were paid vast sums simply because of their use of leverage to amplify the result of any financial transaction they made – both positive and negative. Any percentage, however small, of the gains earned by a trade, inevitably amounts to a huge sum when the value of individual trades can reach into the equivalent of hundreds of millions of euros. When a trade goes wrong, however, the bank incurs huge losses thanks to leverage. On what basis can the traders possibly claim to have earned a “bonus” for losing money?

The taxes on bonuses are not fundamentally about seeking revenge on individual traders. The importance of making concessions to public opinion at this critical time should not be under-estimated. This is especially true in countries where the crisis is so severe that no funds are available for fiscal stimulus. The government needs the support of the people to push through tough measures and to raise funds to fight the crisis. A relatively minor penalty on high-earning employees of bailed-out financial insititutions is a small price to pay to garner support.

Yet again, the tactic of using fear to manipulate the decision-makers is used. As reported by the Financial Times, a memo sent by Vikram Pandit, Citigroup’s chief executive tries to imply that a tax on bonuses will cause “talented” people to leave the company and imperil efforts to stabilise the financial system:

“The work we have all done to try to stabilise the financial system and to get this economy moving again would be significantly set back if we lose our talented people because Congress imposes a special tax on financial services employees…”

Well, let them leave! The traders will be fleeing reckless institutions without effective risk control procedures. They will then be at the mercy of the jobs market like anyone else which will hopefully purge some of the incompetence from the system. Don’t forget that the tax on bonuses only applies to banks that have been bailed out by the government. Other, more stable banks that are strong enough to continue without needing government funds would, in my opinion, probably provide a much more controlled environment and would benefit from the “talents” of these traders while minimising risk by controlling their activities.

“Bankers at Deutsche Bank said it could benefit from the proposed legislation by poaching its US rivals’ most talented employees.”

As for the argument that the likes of AIG and Citigroup need these people to restructure their companies – I thoroughly disagree. Speculative traders are not required to unwind risky trades – accountants would do the job perfectly well, even if it means bringing in a government-appointed third party to manage the process. So, call their bluff – cap their salaries and tax their bonuses. Even if they flee, fewer traders would be a small price to pay to win public support for the rescue of the financial system.

Vikram Pandit’s predecessor, Charles O. “Chuck” Prince, III, famously said to the Financial Times in July 2007:

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing…”

A systemically important bank such as Citigroup with an incompetent board that stupidly employed Chuck Prince as CEO, is prime candidate, along with AIG, to be dismembered and have any non-viable units wound-down. AIG and Citigroup, and any other financial organisation that kept “dancing”, are dysfunctional entities that can only increase the threat of systemic risk thanks to their reckless management. Let Schumpeter’s creative destruction kill off the beasts that cannot survive. Their government-assisted survival only serves to weaken and punish other banks that were well-run and increases the tendency towards moral hazard in the long run. An orderly winding-down also avoids the massive disruption of a Lehman-esque bankruptcy. Their extinction would help to create a stronger financial system.

The media in the US seems rather unaware of how mixed the responses to the crisis are in the rest of the world. China announced strong measures which were subsequently understood to be a re-packaging exercise of already budgeted spending. Germany, the economic core of the European Union, has taken a rather conservative approach. France, keen to protect its national champions, offered capital injections to avoid some significant likely bankruptcies. Spain is currently debating whether to significantly increase its budget deficit to stimulate its economy and draw the wrath of the European Commission in the process.

So what is the best approach is to tackle this crisis? It is true that fiscal stimulus is needed to counter a sharp downward swing, but that is a typical counter-cyclical approach. What we are seeing here is the precipitous correction of a huge credit bubble in (mostly) anglo-saxon countries, partly financed by a savings glut in China and elsewhere. Japan has already had to face a similar situation when its asset price bubbles (including Japanese property and the Tokyo stock market) burst in the early 1990’s. Japan entered a prolonged economic stagnation, also known as the “lost decade”, despite huge stimulus measures (although some were ill-conceived). The legacy of that stimulus has led to Japan’s dubious honour of being the world leader in public debt among developed nations- approaching 200% of GDP. Its “lost decade” is now turning into its “lost quarter-century”.

Ireland, although small, presents an interesting case. In a previous post, I addressed the fiscal crisis with regard to Ireland’s public finances. It is accepted wisdom in Ireland that the over-riding priority is to stabilise public finances to maintain the confidence of the markets and to avoid being obliged to seek a bailout. This situation was inevitable due to the huge risky bet – now gone sour – that the country’s banking system collectively placed on the property sector. It is clear that the austerity measures will remove demand, however, Ireland’s economic policy-makers have no choice but to reverse previous policy and harshly cut spending and increase taxes despite the…

… fear of a demand-led collapse if spending were to be cut on a public or private level – thus realising a Keynesian Paradox of Thrift. On the contrary – the collapse is due to de-leveraging of the credit bubble and cannot be stopped. It can only be managed, to moderate its worse effects.

Of course, it will only be possible to determine if this is actually a successful course of action in hindsight, once the crisis has ended. Greece, a small economy with a similar risk profile to Ireland at present (although for different reasons), is taking the opposite approach, as reported by the Sunday Tribune.

Significantly, Greece, whose debt pile is larger than ours, raised €7.5bn last Wednesday from selling long-dated 10-year bonds by paying a huge interest rate. The National Treasury Management Agency here appears unwilling as yet to pay huge premia to raise new money.

They intend to spend their way out of this crisis and they are paying the elevated risk premium on the debt they are currently issuing. Obviously, they will be in  worse shape than Ireland from the point of view of public finances, although it is probable that further bad news from the Irish banks may mean continued fiscal crisis in Ireland and an unavoidable increase in national debt. As is the case with the US, future generations will be burdened with the new debt now accumulating. The Irish approach will mean an even worse recession – approaching levels normally associated with an economic depression, however, it could be argued that the adjustment in Ireland, while difficult, will be swifter and more effective, because it will focus on de-leveraging – the unwinding of the credit bubble.  It remains to be seen which approach will work.

Daft.ie, as anyone who has ever seeked accomodation in Ireland well knows, is one of the main Irish websites for buying, selling and renting property. A huge proportion of properties for rent will have the following text prominently shown: “Rent Allowance Not Accepted“.

In any civilised country, the mere suggestion of denying somebody their rights would be completely illegal. In Ireland, rent allowance is a benefit that can be claimed by all tenants to some extent. If the tenant insists on claiming rent allowance, however, landlords often implicitly threaten to terminate the contract or raise the rent correspondingly, knowing that they may be flagged as a landlord on Revenue Commissioner databases.

For many tenants trying to make ends meet, this injustice of this kind of behaviour is incredible but, as the Revenue Commissioners are too lazy to pursue these people, tenants are forced to tolerate it. It does not seem to be the most difficult task in the world to go online, identify these landlords, and prosecute them for tax evasion. Tenancy protection laws in Ireland are pathetic enough as it is, without having to subsidise landlords as well.

A major flaw, however, is that Fianna Fáil do not lead by example. People on low or middle incomes will resist any cuts unless they feel that all sectors of society are hit and not just them. The privileged should be faced with severe cuts – especially the well paid banking executives and the bank directors that conveniently retired over the last few months with a windfall golden handshake and lucrative pension. Politicians and government ministers should accept particularly heavy cuts to their salary. People who exploit tax-avoidance loopholes should be brought into the fold, and, above all, tax evaders should be prosecuted. If this does not take place, the government will be faced not only with an end to social partnership, but also social unrest on the streets of the capital.

While the pensions levy is only a start, it does send the right signals that the rapidly worsening fiscal problems are being taken seriously and are being responded to. The best case scenario can only be achieved if difficult measures are taken to make a swift adjustment, however, it would still involve a severe economic contraction. If the action taken is inadequate, however, national bankrupcy may be inevitable. A consequential rescue by our European Union partners or the IMF would come with unwelcome strings attached, in addition to even tougher budget cuts and tax increases. A sharp downward adjustment in prices, spending, lifestyles and expectations cannot be avoided – we can only try to manage the adjustment to minimise the pain inflicted.

The high levels of public sector pay and an over-staffed civil service is something from an era of exuberance. During difficult economic times it is a major drain on the exchequer finances. The pensions levy partially addresses this, however, a likely rise in bad debts on the banks’ balance sheets (now guaranteed by the taxpayer) would undo all the efforts so far. More fat needs to be cut. The Health Service Executive springs to mind, however, not a single hospital bed (and corresponding staff & resources) should be cut until all idle middle management, unnecessary expenditure and pointless bureaucracy have been eliminated. Any wasted expenditure identified by the Comptroller and Auditor General should be ruthlessly eliminated.

The spiralling deficit is also due to the collapsing tax take. Ireland has quite a narrow tax base and this is now proving to be a major disadvantage. The tax base should be broadened. Perhaps a property tax (at least on those with two or more properties) would be a first step in the right direction. No longer should property be an untouchable asset class for speculators. As for corporation tax, it would be rather difficult to increase that. Ireland has nurtured a vast swathe of foreign direct investment from US companies that suckle at the nipple of predatory corporate taxation. They are not easily weaned without the risk of capital flight of a more fundamental nature. Our low tax, low public services society has created an unfortunate dependency on fickle foreign investment.

The good news is that, luckily, Ireland entered the crisis with relatively healthy public finances including low government debt, so there is some scope for borrowing to cover the deficit in the short term. The bad news is that it will be very difficult for Ireland to successfully raise the billions needed to the plug the hole in the public finances by selling government bonds. As so many “developed” countries will also be looking to the markets to finance their budget deficits more or less simultaneously, the markets will demand high interest rates to buy the (now relatively risky) Irish bonds. This is why the spending cuts (including public sector pay) will have to be all the more stringent.

I do regret the unjust nature of the cuts such as the pensions levy that uniformly hits all without considering pay levels. It only reinforces the profound inequality that exists in modern Ireland. We should remember, however, that equality is not what Fianna Fáil and their cronies have come to represent. Let them clean up the mess they created – afterall, they know best where the dirt lies. A time will come when the green shoots of recovery finally beckon us to close the chapter on a reckless gold rush and place our trust in new leaders. Hopefully, a more just society will be waiting for us when we re-emerge on the other side – with a different government. For now, however, we must choose the bitter pill that only Fianna Fáil can deliver.

please choose up to 3 answers:

In a sharp exchange, O’Toole accused the government of not pursuing the 1% top of earners who, more than likely, have their wealth hidden in off-shore tax havens. He also highlighted the injust tax system which effectively subsidises landlords (on top of the feeble tenancy rights in Ireland). While this kind of thing is going on, I can understand why public sector workers are not willing to accept the pension levy that the government is pushing through parliament. At a time when the government should be leading by example, they are protecting hidden billions of the rich, the landlords, and possibly themselves too.

The response by Cullen, consious of his audience of thousands of TV viewers, was typical  of the manner in which aloof politicians use free market economic theory, completely out of context, to scare ordinary people into submission. His argument is one that deserves a prize for practically mocking his audience for not having a degree in economics -

“You can’t at one swoop of a pen, remove all incentives that disaffect mobile investment out of this country. You have to compete in a global market for mobile investment.”

O’Toole, of course, made the point that landlords and rent is not derived from mobile investment. I would imagine that the problems associated with tax havens could be addressed with some sensible legislation requiring financial organisations to disclose more information, allowing government departments to share more data, and by encouraging the tax authorities improve their administrative and investigative processes. A bit of background is useful, however, to understand the impact of this statement on an Irish audience….

In the 1980’s, as today, the country was in a financial crisis. The difference was that, at the time, the crisis was due to economic stagnation and lack of developement – unlike the imploding credit and asset price bubble that is taking down the country today. Reforms were put in place to create an attractive corporate environment, the centrepiece of which was a sharp reduction in corporation tax, and an agressive promotion policy to attract foreign direct investment from the United States. Ireland enjoyed an economic boom (which was sustainable until the early 2000’s) thanks largely to low tax. The Irish people understand the power of using the tax system as an economic tool and have accepted this as unquestionable economic doctrine.

In Ireland, politics tend to be rather right wing with the result that the “centre” of Irish politics is comparable to the Democratic Party in the United States, and far to the right of centrist politics in other Western European states. Incumbent politicians in Ireland, having seen how effective George Bush’s “War on Terror” has been in controlling the people of the US, have invented their very own War on Economic Terror based on the right wing, free-market policies of the dominant Irish political parties. This was made possible by exploiting people’s ignorance of the mechanics of the free market and their firm belief in liberating the free market and preventing state intervention. The abuse of economic theory includes invoking fear of a demand-led collapse if spending were to be cut on a public or private level – thus realising a Keynesian Paradox of Thrift. On the contrary – the collapse is due to de-leveraging of the credit bubble and cannot be stopped. It can only be managed, to moderate its worse effects.

As a rational person, I am not in favour of terrorism in a democratic society. I strongly disagree, however, with the way politicians label any person having a suggestion that involves sustainability, economic prudence, tax reform and sensible regulation, as practically being an economic terrorist. There are people that have rather extreme left wing ideologies that would be rather damaging to implement, however, even middle ground – the centre of the economic spectrum – is choked. Until only a few months ago, it was taboo to utter any remark in public that suggested that the house price boom was a bubble and was unsustainable – they were “talking down the market”. Anyone hinting at sensible regulation or sustainable economic policy was branded a socialist or worse. Victims of this treatment included Morgan Kelly (“Dr Doom”), an economist from University College Dublin, and RTE’s Economics Editor, George Lee.

To refer to the quote of Bertie Ahern, Taoiseach (Prime Minister) of Ireland from 1997 until 2008, when he famously complained about people who warned about the consequences of the government’s consumption-based bubble economics:

“Sitting on the sidelines, cribbing and moaning is a lost opportunity. I don’t know how people who engage in that don’t commit suicide“.

I rest my case.

Ireland is currently suffering from fears that it may default on its national debt thanks to the collapse of a speculative property bubble and its impact on the construction sector and the country’s financial system. Most of the spurious loans that financed the Irish property bubble have been guaranteed by the Irish state and the losses on the inevitable defaults will be bourn by the Irish taxpayer. Irish GDP will contract by at least 6% in 2009.

We’ve come to learn, over the past few months, that banks are not typical businesses. They are basically huge conduits for distributing capital from savers and investors to other business that need to borrow in order to grow, for example, by financing the purchase of new equipment or facilities. As they are the trusted ones who manage the lifeblood of modern economies, they are critical to our economic welfare.

Private regulated entities

Western economic policies assume that private entities are more efficient and effective at distributing capital compared to governments or public agencies. While this is probably true, especially if we consider cases from the past, it does not preclude the importance of strict oversight of these businesses. Free market principles may lead us to believe that, as banks are businesses, they should be left to manage their own activities freely – that government intervention is not desirable.

On the contrary;  due to their critical importance to the economy and the systemic risk to it if they fail, intervention is necessary, at least at a regulatory level. If the state obliged to step in and bail out banks in the event of a crisis, the banks bear special responsibilities and should concede to more transparency and restraint.

Shareholder pain

The owners of the banks, its shareholders, gain handsomely during times of economic growth. In a normal, cyclical economic downturn, their gains are reduced in terms of lower dividend payments and lower share prices, however, this would normally recover once the economy recovers. The financial crisis of 2008/2009 is not, however, a typical cyclical economic downturn – see review here. Instead of a downturn and corresponding fall in bank share prices, some banks have collapsed and others are on the brink.

The lack of effective oversight from financial regulators have given banks the freedom to speculate excessive amounts of capital in risky asset classes including various types of derivatives, subprime mortgage-backed securities and collateral debt obligations. The unexpected fall in stock markets means that banks are now suffering from large losses on their balance sheets. Banks are required to maintain certain capital adequacy ratios, and their shrinking capital bases results in non-compliance with these minimum ratios.

To increase their capital, they issue new share either to private investors or the government. Issuing new capital effectively decimates their profits (or more likely increases losses) in the case of an issue of preference shares with high interest rates, or dilutes existing shareholder value by issueing new ordinary shares.

Bank shareholders, therefore, have suffered like a shareholder of any company would. Many of us would not feel any pity for shareholders, however, we are all affected by drops in both public and private pension funds. We are all shareholders in some sense.

Banking casualties

The list of banking casualties of the crisis reads like the who’s who of global finance:

Bankrupt, nationalised or forced into acquisition

Bailed out or at risk of collapse / nationalisation

Also the Icelandic banks Glitnir, Landsbanki, Kaupthing, although relatively small, have the dubious honour of being the main actors in the ongoing crisis in Iceland – the largest suffered by any country in economic history relative to the size of its economy.

Another banking collapse worth mentioning is Anglo Irish Bank in Ireland – primarily a lender to property developers and construction companies. It was nationalised following a staggering fall in their share price and lack of confidence in them by the financial markets. Read more here.

The Privileged Class

The privileged class is not shareholders, but bank directors, board members and top executives who continue (apart from Lehman Brothers) to receive exorbitant salaries. Even in the few cases where these have been cut and bonuses eliminated, they know that the cutbacks are temporary and will continue in the realistic expectation that their fat pay cheques will be restored in the future. Only in a few cases have bank directors, board members and top executives they been dismissed from their positions. This privileged class wins handsomely in good economic times but is not sufficiently penalised in downturns due to the systemic importance of banks and the government’s (understandable) reluctance to allow a major bank to collapse.

Fallout

The double impact of the need to preserve capital and the reluctance to lend to other banks in fear of possible toxic assets that they may hold on their balance sheets has frozen lending throughout the economy. Business need capital for expansion, as mentioned above, so there is medium term impact on economic growth. In many cases, some solid business need access to short term finance for its working capital to fund normal daily operations andsatisfy maturing short-term debt. Suddenly finding that they have no access to capital, companies have responded by cutting back on investment, laying off staff, and, increasingly, by declaring bankrupcy. The economic impact from the financial crisis is massive.

See also an article about where the responsibilty lies here.

The massive level of house construction in Ireland relative to the size of the population (4.5 million) was even greater, relative ot the size of the population, than other countries that experienced property bubbles. It has left Ireland with a huge unsold stock of housing that now lie empty in “ghost” estates. Many Irish property developers are on the brink of bankrupcy which would result in them defaulting on their loans to the banks.

Ireland does not have large, internationally diversified banks such as Santander in Spain. The balance sheets of Irish banks are concentrated one small market and are filled with toxic loans to property developers. The impact on them was, therefore, much more damaging. The smaller banks such as the EBS, Irish Nationwide Building Society, etc. were hit even harder than their bigger counterparts such as Allied Irish Banks, Bank of Ireland and Irish Life & Permanent (which owns PermanentTSB). A notable exception was the collapse of the scandal-ridden Anglo Irish Bank.

Now that the Irish government has nationalised Anglo Irish Bank and guaranteed all deposits (retail, commercial, institutional and inter-bank), covered bonds, senior debt and dated subordinated debt, it is the taxpayer who will suffer the consequences. The ever-increasing estimates of the Irish government budget deficit will appear trivial once the construction industry collapses, home repossessions rocket and the bad debts of of the banks are assumed by the government.

Large investment funds which had stakes in Anglo Irish Bank are considering legal action to recoup their losses from the bank’s owners i.e. the Irish State. There maybe a valid legal basis to take action as reported by the Sunday Tribune:

Dr Deirdre Ahern, law lecturer at Trinity College Dublin, said that a possible breach had taken place of Section 60 of the Companies Act 1963 which, subject to some exceptions, prohibits the giving of financial assistance by a company for the purchase of its own shares unless this has been approved by all shareholders.

“There may also be an issue under the Market Abuse Regulations 2003 and Part 4 of the Investment Funds, Companies and Miscellaneous Provisions Act 2005 which regulate insider dealing and market manipulation and provide for both civil and criminal liability,” she added.

One memorable phrase that was sums up the situation is “economic treason”, used in comments by Senator Dan Boyle and Irish Congress of Trade Unions general secretary David Begg. The political infighting over the controversy about share price manipulation by Anglo Irish Bank comes amidst a property price collapse, a spiralling government budget deficit and a growing fear of default on Irish government sovereign debt which is now rated as riskier than Italy, Greece.

Financial regulators appear to have been to be impotent onlookers in the monetary boom and bust of many developed countries, and not the strong authoritative pillars they were meant to be. Any financial regulator or central bank chairman who are proven to not have acted upon information received about excessive risk taking by the sector under their oversight,  or even if they did not adequately investigate and monitor the sector, should, in my opinion, be held legally responsible.

United States

The monetary expansion of the past decade in the US was substantially aided and condoned by Alan Greenspan, the former chairman of the Federal Reserve. He held the post during 18 years which proved to be enough time to instutionalise a loose monetary policy of low interest rates and cheap capital despite much evidence of successive bubbles in asset prices such as stocks and property. He justified this by his belief in self-correcting markets and an upwards shift in in the level of sustainable economic growth and higher productivity for a variety of reasons such as increased investment by business in computer systems.

In the US, besides Alan Greenspan, another prime candidate is the Securities and Exchange Commission and its former chairman, William H. Donaldson. He introduced rules to substantially reduce the requirements that large investment banks were subject to. He also decided to rely on the computer models of the very banks the SEC were meant to monitor to determine the riskiness of their investments. While his successor, Christopher Cox, introduced many positive reforms, they were not strong enough to undo the damage done by his predecessors or reduce the risk of the leveraged boom in toxic securities that was underway. His subsequent reaction to the beginning of the crisis in September 2008 was relatively ineffective. They were appointed by the former US president George W Bush.

Here’s a video that describes how toxic assets were created. It’s really incredible that the Federal Reserve and Securities and Exchange Commission allowed this kind of thing to go unchecked!

The Crisis of Credit Visualized from Jonathan Jarvis on YouTube.

United Kingdom

The UK duo of the Bank of England and the Financial Services Authority were notably ill-coordinated in their response to the financial crisis. This became evident with their tentative handling of the collapse of Northern Rock and the ineffectiveness of their bank monitoring procedures despite the prior warning signals. The combination of poor regulation, the large size of its financial services sector, and the existance of a property price bubble (almost as extreme as Ireland’s) has resulted in severe strain in the stability of the UK financial system. There were very few controls on banks speculative investments in toxic assets. The pound sterling has suffered major falls against most major currencies.

Switzerland

The Swiss bank, UBS, and the Swiss reinsurer, Swiss Re, seem to have had free reign to invest any amount of capital in any class of assets. As a major global financial institutions based in a relatively small country, they have the potential to be a destabilising force for Switzerland. The recent downturn of the Swiss Franc may prove to be a sign that Switzerland is losing its status as a safe haven in times of international financial turmoil.

Austria, Italy, Belgium

The financial regulatory authorities of Austria, Italy and Belgium did nothing to react to the issuance of large amounts of , euro-denominated debt to borrowers in countries of Central and Eastern Europe. While this is normally benign, if the currencies of the respective countries is hit on financial markets, the debt becomes ever more expensive for the borrowers to service. The borrowers receive income in their own currencies, however, they must repay the debt in euros which is currently strengthing relative to those currencies. The banks at risk include Erste Bank, Raiffeisen Bank, Societe Generale, Unicredit and KBC Bank .

Ireland

A special mention goes to Patrick Neary, until recently Chief  Executive of the Irish Financial Regulator, and his predecessor, Liam O’Reilly, who held the post from November, 2002 until December 2005, along with all the board members of the Central Bank of Ireland from 2002 until 2007. During their terms, there was huge growth in mortgages that were excessive compared to combined salaries of house buyers, in addition to an explosion of speculative lending of banks to property developers and construction companies. Both were substantial factors in one of the most extreme property bubbles in the world and no effective action was taken to restrict these activities. Patrick Neary was recently forced into early retirement – a convenient move by his political appointees.

Bank directors, board members and top executives

Considering the systemic risk of collapsing banks to the entire country’s (and world’s) economy, the possibility of taking legal action should be investigated. Bank directors, board members and top executives have a duty of care to their stakeholders (including the state) which is not compatible with the unreasonable profligacy and risky speculation with depositors’ and investors’ funds that took place. Those who are proven guilty of mismanagment and breach of duty should bear legal responsibility.

People that should be investigated by law enforcement agencies include top management and board members of the following companies: In the United States – AIG, Merrill Lynch, Lehman Brothers, Bear Stearns, Washington Mutual, Countryside and Wachovia. Elsewhere – Anglo Irish Bank and many more. You many think that it is only natural that a commercial organisation, with its shares quoted on the stock market and subject to the whims of shareholders, should aim to maximise profits – except that banks are not normal companies.

Action?

If we are to discourage the kind of behaviour that led us into this mess, the people responsible should be charged with negligence on a national scale.

Governments

The state’s executive, or the government, is usually responsible for appointing the head of the country’s financial regulatory authority. While much blame lies with the government, it must be remembered that it is the people of the country who choose the politicians from whom the government is formed. It is a major disappointment that the people themselves – the electorate – repeatedly voted for the politicians who led us into this crisis. An elected official who becomes comfortable in their position does not tend to actively defend the interests of the people. It becomes too tempting to aim for short term gain to increase chances of re-election at the expense of long term prosperity and well-being.

United States

George W. Bush was voted in twice in succession by the people of the United States. I would not consider him to be the most exemplary of presidents a country could have. His appointees have overseen the spread of subprime lending and the unregulated derivatives market. The US financial system is now in severe distress and its economy is contracting.

Ireland

Fianna Fáil has been main party of coalition goverments of Ireland since 1997, having been repeatedly re-elected, and have, rather forcefully, consolidated conservative politics in Ireland. A prominent member of Fianna Fáil , Bertie Ahern was Minister for Finance and subsequently Taoiseach (Prime Minister) at the time when damaging stimulatory policies were either put in place or extended without adequate checks and balances. In April 2006, at the peak of the property bubble, he made this comment, as reported by Finfacts Ireland:

“Really we should have an examination into why so many people got it so wrong. My view is there’s not a great problem. Really, the bad advice of last year given by so many has maybe made some people make mistakes, that they should have bought last year.”

He and his party have squandered an impressive economic boom that has now faded. Ireland is currently suffering from fears that it may default on its national debt thanks to the effects of a collapse of a huge speculative property bubble.

Following the collapse of the Dot-com bubble in 2001, Alan Greenspan, chairman of the Federal Reserve at the time, dropped interest rates substantially to cushion the impact rather than let the market imbalances correct themselves. This monetary expansion resulted in excess liquidity in the markets that eventually found its way into oil and commodity speculation and, of course, property.

Many countries experienced similtaneous property bubbles over the last decade. Property prices inflation had deviated substantially from its long term corrolation with average earnings. In many cases, such as the extreme property bubble in Ireland, justifications were invented such as demographic trends (temporary and dependant on economic conditions) and the notion that  prices were catching up with European averages (this had no-longer been the case since about 2002).  The eventual bursting of the US property bubble in 2007 exposed the financial system to the fallout of subprime mortgages which had been packaged up and sold on to buyers on the global markets.

Typical risky mortages on offer were characterised by lending an amount more than 100% of the value of the property and even paying a token amount interest thereby increasing the principal over time.  Often, mortgages were granted to people with high financial risk profiles without the means to repay them. Financial institutions such as the US government sponsored enterprises, Fannie Mae and Freddie Mac, investment banks, and other financial institutions packaged up these mortgages and sold them on to buyers on international markets. These securities, referred to as mortgage-backed securities and collateralized debt obligations, were complex and poorly regulated.

The financial crisis of late 2008 had a domino effect on many other countries and markets. It was not responsible for the collapsing property prices elsewhere, as this was only matter of time,  but it was the catalyst that finally burst other bubbles. Property bubbles in the UK, Ireland, Spain and several other countries began to collapse. The substantial levels of personal debt such as car loans and credit card debt, that was typical of Anglo-Saxon countries such as the US, the UK and Ireland, is now becoming a major issue.  The financial crisis of 2008 has turned into a more general economic crisis in 2009 with no end in sight.

Consumption patterns national current accounts

Wide imbalances have manifested themselves due to relative consumption patterns of various countries. The most notable deficits are those of the US (over US$730bn), Spain (over US$140bn) and the UK (over US$100bn). The most notable surpluses are of China (over US$370bn), Germany (over US$250bn), and Japan (over US$210bn). Relative to their small size, Portugal, Greece and Romania have excessive current account deficits.

US consumers have been living beyond their means for quite some time, depending on funding from China in particular. In turn, China, Germany and Japan have weak domestic consumption and depend on the US consumer to purchase their products. The current crisis will cause a reverse of the consumption patterns of US consumers as they try to repay debt and save for uncertain times. Chinese, German and Japanese exporters will suffer from weak overseas demand.

Eurozone adjustment

Another imbalance was the adjustment (still) taking place by European countries that adoped the new single currency – the Euro. While in the long term, eurozone countries have and will continue to benefit enormously from the advantages of the single currency, the initial adjustment was not seriously planned for, especially by countries on the periphery of Europe. Countries such as Ireland and Spain experienced a substantial drop in interest rates which proved to be an enormous monetary simulus. They did not modify their fiscal policy to counter this by increasing taxes or reducing public spending. The surplus capital in those countries drove up asset prices and manifested itself in huge property bubbles. A huge percentage of their economies became dependent on construction. The inevitable bursting of the property bubbles is now causing severe economic contraction.