You Owe The Bank Nothing

House prices in Ireland as a multiple of average income. (Source: Morgan Kelly, Finfacts)
House prices in Ireland as a multiple of average income. (Source: Morgan Kelly, Finfacts.ie)

Somebody on the radio saying they’re going abroad to declare bankruptcy. A different holiday idea I suppose. Naturally others soon phoned in to object to this “moral hazard“, as the banks would like us to call it. It was wrong they said to walk away from your mortgaged home just because you owed more on it than it was worth.

That got me thinking about what debt actually means. Is there a moral obligation to repay?

Well of course there is. It’s a matter of trust, which is what morality is basically all about. If you’re in a business, you were given materials and help by your workers and suppliers. You are obliged to pay them so they in turn can pay their helpers and suppliers and so on. The wheels of the economy keep turning and everyone gets fed. A financial debt is a promise like any other.

However there is one important qualification. You are only indebted when and if you actually receive something.

The banks will argue of course that they gave you money when you signed that mortgage so you are obviously obliged to repay it, along with the agreed interest. But the thing is, did they actually give you money?

No. They never gave it to you, because they never had it to give to you.

I don’t mean they didn’t have it in their vaults; we all know that’s not how finance works. All loans are borrowed, when it comes down to it, from the future. They’re based on the reasonable prediction that most of the time they will be paid back in full and with interest. But when the banks decided instead to start making ludicrous loans for several times the value of the houses they were raised against, thereby further escalating the price of housing and so allowing them to offer even bigger loans, they knew that ultimately the whole thing had to blow up. The loans were fake. There was no money in the future to borrow from.

When the inevitable crash came the banks of course had a parachute: They were too big to fail – or so at least they managed to convince themselves. And with themselves convinced they had little trouble convincing the political parties they were going out with – who effectively promised that they would make this impossible future money somehow magically become real money.

Or to be precise, they promised that we would.

The money you seemed to get from the bank ultimately came therefore out of your own pocket. You were tricked into lending it to yourself so that they could take a cut. It’s immoral to stop repaying that? It’s probably immoral to keep going.

ESRI public debt
The surprising result of neo-liberal economic policy – massive public debt.

Besides, you will only be a little ahead of the crowd. It should come as no surprise that even with all of us working together we can’t actually afford to turn the banks’ lies into reality. The State itself is going to default at some point. That is as inevitable now as the property crash was. Our public debt is soon going to be 200% of GDP, and the harder we try to pay it the less we will be able to; we are being crushed in fact by the burden of trying. Actual people being crushed, by imagined money.

The sooner we all default the better.

The Value Of Nothing

Property prices in Ireland
Property prices in Ireland converted to 2011 currency. The red line shows the pre-boom average. ©RonanLyons.com

So house prices in Dublin have reached half what they were at the height of the boom. That’s a good sign. If they halve once more they’ll be back to what they were pre-bubble. Look at the graph (ganked from the very interesting ronanlyons.com) if you don’t believe me. Converted to 2011 money, an average house cost about €100,000 for decades. At the height of the boom it peaked at nearly four times that. Well over a third of a million, for an ordinary home.

Just one question springs to mind. What the hell were we thinking? Houses costing the price of a house, plus three other houses? Cars didn’t quadruple in price in just a few years. Food didn’t, even drink and cigarettes didn’t. During boom times, market prices are supposed to fall behind rising incomes. Otherwise they wouldn’t be called boom times, they’d be called mysterious outbreaks of rampant inflation. But during ours the cost of housing left incomes for dead. Clearly, the housing market is a deeply flawed one – almost an object model in fact of how capitalism goes wrong.

In theory the price of something is set by supply and demand, which is both efficient and ethical. Well let’s pretend it is for now, it works well enough for most things. Why does it go wrong here? Because the supply and demand of housing is almost irrelevant to the housing market.

What does a house cost? It’s an interesting question. A house in an appropriate location can be a very important asset, so in general people will spend the absolute maximum on a house they think they can afford. That’s clearly unlike wine or cars or dinners or phones. So in short, the answer to the question “How much does a house cost?” is “Whadya got?”

Or more precisely, what can you raise? If easier money is available therefore, people will borrow more. They’ll pretty much have to, as prices will rise to meet the available credit. Of course they have the option of only borrowing as much as they would have before prices went strange, but if they do they’ll get a much worse house than they could previously have afforded, while those willing to avail of the softer terms will get the shorter commutes, the better school catchment areas, the safer neighbourhoods. Competing for their and their children’s futures, it is hard to blame them for taking all that the banks and other financial institutions offered.

Speculation happens in such runaway markets of course. People will buy houses in the hope of selling them at a profit, just as if they were buying shares or gold or currency. Capitalism teaches that there is absolutely nothing wrong with that. The vast, vast majority however are buying houses because they need a house. And while some postponed purchasing in the hope that prices would come down, far more rushed into buying out of fear that they would not.

There are other factors, but we shouldn’t overemphasise them. People had become better off, yes. But did your income double? Mine sure as **** didn’t. The euro facilitated the boom because such an influx of credit would otherwise have exploded the currency, but it didn’t cause it. Houses were said to be “historically underpriced”, but even if you can bring yourself to believe a thing could be consistently underpriced for decades without anyone noticing, could it seriously be by a factor of two, even four?

And there was net immigration, that could have been expected to fuel the market. After all prices go up when demand outstrips supply. Only… Supply vastly outstripped demand. People were building houses up the sides of cliffs.

There are no two ways about it. We had a housing price bubble because we had an oversupply of credit. The blame rests squarely with the financial institutions that offered these loans. That is, all of them. Major banks should have known better and could have resisted. Had just a couple of lesser institutions been left to their excessive lending the larger banks would have lost custom, yes. But they would have survived. And minor institutions could not by themselves have super-inflated house prices.

But these lending practices were adopted by the whole industry, and quite literally they forced people to pay too much – far, far too much – for houses. There is a clear case for debt forgiveness therefore. There is also a case for punishment – though of the lenders who made the irresponsible loans rather than the borrowers who had little choice except to take them. And by punishment, I seriously mean prison sentences. There must surely be some law against business practices so reckless that they ruin individuals, families, even a whole country.

Isn’t there?

No Banks, Thanks

What are banks for now, anyway? A while ago you would have said they were in the business of lending money, but now they’re so in debt themselves they can’t afford to.¹ When we were innocent we were told that they were for keeping our money safe, but there was a woman on the radio this morning whose bank – ‘Permanent’ TSB – allowed someone to set up a direct debit that withdrew the maximum amount from her account each day until it was emptied. Yet they had the audacity to tell her that policing the account was not their responsibility. In other words it is up to us to protect our savings. Apparently, now from the banks themselves.

I don’t want to have an account with any of these bastards, but I am forced to – and they are forced to make money from me. Money they can then blow on unfinished luxury gated communities in Romania. They are clearly useless overfed pigs of organisations, and rationalizing them into a duopoly is hardly going to improve the situation.

You know what is going to replace banks in this country? Not NAMA, not state-run ones, not foreign banks either. Phone companies. O2 now offer a service which is essentially a debit card you can use internationally; something the banks, with their rather half-arsed Laser system, failed to provide. I can go into one of O2’s shops – probably more numerous than banks these days – and put cash onto that card instantly. (You can transfer from a bank account too, but you don’t have to.)

Meanwhile, there are other systems that allow purchases made over your phone to be added to your phone bill, and are therefore new alternatives to credit cards. As phones are becoming all-purpose electronic devices, it is pretty obvious that they are going to be our wallets. And the lovely thing about this is that our fat, useless, greedy banks will be entirely bypassed.

 

  1. The government is actually talking about turning NAMA into a lender, on the (perhaps flawed…) logic that if it does one thing our commercial banks have disastrously failed to do – manage assets – it can do the others as well.

No Banks, Thanks

What are banks for now, anyway? A while ago you would have said they were in the business of lending money, but now they’re so in debt themselves they can’t afford to.¹ When we were innocent we were told that they were for keeping our money safe, but there was a woman on the radio this morning whose bank – ‘Permanent’ TSB – allowed someone to set up a direct debit that withdrew the maximum amount from her account each day until it was emptied. Yet they had the audacity to tell her that policing the account was not their responsibility. In other words it is up to us to protect our savings. Apparently, now from the banks themselves.

I don’t want to have an account with any of these bastards, but I am forced to – and they are forced to make money from me. Money they can then blow on unfinished luxury gated communities in Romania. They are clearly useless overfed pigs of organisations, and rationalizing them into a duopoly is hardly going to improve the situation.

You know what is going to replace banks in this country? Not NAMA, not state-run ones, not foreign banks either. Phone companies. O2 now offer a service which is essentially a debit card you can use internationally; something the banks, with their rather half-arsed Laser system, failed to provide. I can go into one of O2’s shops – probably more numerous than banks these days – and put cash onto that card instantly. (You can transfer from a bank account too, but you don’t have to.)

Meanwhile, there are other systems that allow purchases made over your phone to be added to your phone bill, and are therefore new alternatives to credit cards. As phones are becoming all-purpose electronic devices, it is pretty obvious that they are going to be our wallets. And the lovely thing about this is that our fat, useless, greedy banks will be entirely bypassed.

 

  1. The government is actually talking about turning NAMA into a lender, on the (perhaps flawed…) logic that if it does one thing our commercial banks have disastrously failed to do – manage assets – it can do the others as well.