OK it’s way past my bedtime but I couldn’t resist showing you this. I was researching something when I was struck by the similarity between these two diagrams. On the left we have income inequality – roughly speaking, the difference between the richest and the poorest fifth of each society. On the right we have the amount of debt that countries across the EU have gotten into in the last few years.
Broadly speaking, it’s the most unequal countries that are also the most indebted. How does that happen? The ‘liberalisation’ of many economies in the past decades was ostensibly meant to make them richer. The effect though has been very different. Low-tax countries are having to borrow in order to meet expenditure, particularly when times get tough. Meanwhile their lack of redistribution means that citizens are encouraged to borrow in order to compete socially – sometimes even to meet basic expenses. This private indebtedness tends quickly to become public when lenders collapse.
In short, trickle-down economics is really trickle-away. Though a minority of individuals within them are of course better off, countries that cut back on tax and expenditure end up impoverished over all. People seem to vote for such policies in the optimistic hope that they will somehow get into that ever smaller, ever richer minority. The odds suggest that they should buy lottery tickets instead.
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.
The Greeks played a game of brinkmanship and got a huge debt write-down from it. What did they learn from that? To do more brinkmanship.
So they’re getting a referendum on whether they’ll accept better terms, while we give it away without even a vote in parliament. €700 million to people who should, if they were treated like anyone else in a free market, have simply lost their money.
From this the banks learn that they can lend to people who can’t afford it and still make a profit, because those who did not the make the mistake of borrowing will be forced, by their government, to pay them back.
So what do we learn? That major international banks are our enemy, that the only way to fight them is to threaten the whole European economy, and our government is too supine to do that for us so the people will have to do it themselves.
I hate the silly term double-dip recession. It makes it sound like there is some sort of mathematical explanation for this graph, a predictability about it. What we have is false recovery, the kind that only happens because markets work on the assumption that recessions will come to an end out of some sort of natural pattern. Would-be investors wait for the whole boom-bust cycle to start all over again so they can get in at the bottom. The brief spurts of growth we see are like sprinters waiting too long for a race to start. They dash off alone, only slowing to a halt when they realise no one’s joining in.
We are not recovering yet because, simplistically put, we have not yet reached the bottom. More accurately though, we can’t rebuild an economy when there is so much non-existent money in the way.
We need to face up to the fact that the western economy is still stuffed to the ears with bad debt. We are treating bad investments that will never yield a damn thing as real money that somehow must be paid back to the investor – even if the taxpayer has to be made to do it. But it’s not real money. These are failed investments. The money has been lost. It no longer exists.
This blog post is highly speculative, but it argues that the sudden willingness of European banks to take a loss on Greece is because they foresee things getting much worse, soon. One of Italy’s largest banks is stuffed with bad debt, and it seems more than likely that if it goes, the Italian economy will go with it. The Eurozone cannot afford to bail out a country that large.
But this is actually a good thing. We will finally have to stop pretending this can be fixed with bandages, and do the major surgery necessary. It will hurt, but not as much as treating innocent taxpayers like reckless debtors hurts.
So the Nyberg report into our banking industry says that borrowers as well as lenders were to blame for the crisis. Fair enough I suppose. After all, it’s not like the banks lent money to people who didn’t ask for it.
Oh wait. They did.
A tramp living in a sherry bottle could borrow money in that market. Hell, they offered a ‘pre-approved’ loan to me. While many borrowed foolishly or even greedily, the greater part of the blame must surely fall on the professionals. Your bank was traditionally expected to advise you on your financial interests. It was not supposed to push debt on you, take your indebtedness and repackage it as an asset, use that to raise money, declare this a profit and pay themselves enormous bonuses. A basic trust was broken there. Not to mention a law of thermodynamics.
A proportion too has to belong to the institutions overseeing the industry – the regulators of course, but ultimately the Department of Finance. They were astonishingly lax while all this was going on, and we still aren’t being told why. (The role of government was beyond Nyberg’s remit, strangely.)
Do we really need to ask though, when politicians party with and parties are funded by people who were making enormous profits from all this? The nod and the wink is the Morse code of Irish governance, messages flew back and forth across the wealth-to-power hotline. You’ll go a bit easy there on the regulation. Wouldn’t want to kill the golden goose, or look a gift horse in the mouth, or whatever stupid aphorism they used.
When you get a gift horse as mysteriously generous as this you shouldn’t look it in the mouth, no. You should shove a telescope right up its bum. Nobody rocked the boat because the boat was full of money.
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.
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.
Don't worry, it only looks like a racist caricature
Brendan Howlin has soberly explained that they looked at all the options and reached the conclusion that burning the senior bondholders would not be worth the consequent costs. This is sensible.
It is not however what they promised, and it’s not why we voted for them.
If not this way, then how are we going to punish the speculators, the people who drove house prices into the idiosphere and turned a healthy growing economy into molten radioactive waste? It seems we are not going to punish these people. We are in fact going to reward them.
The blog software automatically suggests illustrations, and sometimes I just go with the most inexplicable thing it comes up with. I mean, a boat on a fish. What the hell does that have to do with bank stress testing?
So the reason they won’t burn the foreign banks that over-served the Irish industry is the hope that they’ll lend us more in the future. Isn’t that a lot like alcoholics always making sure to pay the bar tab, even as the children go hungry? Credit is what we got too much of.
But to cheer us up, we are to get two ‘universal pillar’ banks. I do like that; we should have more financial institutions that sound like they’re out of pre-Christian mythology. A Department of the Great Sky Serpent, maybe a Unicorn Interest Rate. In fact it sounds a lot better than the names we have for them now, BoI and ABBoI. The new banks should actually be called Universal Pillar 1 and Universal Pillar 2. No wait, Alpha and Omega. “I save with Universal Pillar Omega.” Surely that will restore confidence in the Irish banking sector.
But I don’t really get the idea behind stress-testing the banks. They are already dysfunctional, loss-making, unable to keep their doors open without State and ECB constantly pumping in raw cash. In what way exactly could that get worse?
Investors to sue Financial Regulator for recklessly letting them do whatever they wanted to do.
“An organisation representing property investors and developers is to take a class action in the High Court against the Government, the Financial Regulator and the banks over their roles in the collapse of the property market.” ~ The Times again.
I’d be all for suing the banks. If we weren’t all liable for their debts now, making it just a little self-defeating. But how do property investors get to sue them? These were the ones trying to make money out of house prices magically going up forever. The only people they should have a right to sue are their parents, for breeding them too stupid to breathe and tie their shoes at the same time.
Ah, because the banks lent recklessly. True – though this does overlook the fact that the people they were lending recklessly too were the property investors who were borrowing recklessly. It’s the alcoholic’s justification: they didn’t drink too much. They were over-served.
Having destroyed our economy with their bare-bollocked, dribble-soaked avarice, property speculators have decided that they were the real victims here. So once we’ve finished selling our hospitals to pay off foreign banks, they want whatever’s left.
At what point does it become legal to hunt these people down with dogs?
So the Nyberg report into our banking industry says that borrowers as well as lenders were to blame for the crisis. Fair enough I suppose. After all, it’s not like the banks lent money to people who didn’t ask for it.
