Nama: A fairy story without a happy ending

Although the Second World War did not conclude until September 15th 1945, most military historians are agreed that the Axis powers had effectively lost the war by the winter of 1942.  The Japanese navy was annihilated by US forces in June 1942, while the German advance into Russia floundered at the gates of Moscow, and more decisively, on the streets of Stalingrad. The second battle of El Alamein (23rd October - 5th November 1942), which resulted in a decisive victory for the Allied forces, effectively ended the German campaign in Africa.

Unfortunately for the millions of people who died needlessly, or were crippled from injuries received during the subsequent two and a half to three years, the German and Japanese forces fought on to the bitter end, long after their own military strategists realised that defeat was inevitable. Equally unfortunately, both countries had deranged or deluded people in positions of power.

And so it is with the global economy.  The  irrational and superstitious belief that economic growth can be maintained indefinitely on a planet of finite size and resources, has been exposed for the myth it is, yet its cheerleaders will fight on the end, irrespective of the collateral damage or the long term consequences for the planet and its inhabitants.

Nowhere is this irrationality more clearly exhibited than in the case of Ireland, with its government of trolls, goblins, and wannabe superheroes. In truth, this latest series of battles and skirmishes, which began with the formation of the 30th Dáil on 14th June 2007, was lost even before it began. Of all the Western economies, with the possible exceptions of Iceland and Latvia, Ireland's was the one that most closely fitted the definition 'unsustainable'. Almost one quarter of the economy was underpinned by a speculative bubble of unneeded and over-priced construction ventures, ranging from cloned housing developments to glass mausoleums masquerading as office blocks. Another key economic sector was comprised of companies that had set up shop in Ireland simple to evade tax obligations elsewhere, and that were already plotting their next move to a more facilitating tax haven as soon as they set foot on Ireland's shores.

Yet another pillar of this wonderful growth economy had been built on the backs of a bland, tacky and often crass tourist industry which attempted to market its own version of brand Ireland, complete with plastic paddy theme bars, lego-like holiday villages, and souvenir shops to match. 

The whole edifice was propped up on completely unsustainable levels of debt at all levels of society.  The country produced almost nothing of any real worth, had no primary manufacturing capability, imported 90 percent of its energy requirements, most of its raw materials, and three-quarters of its food. The only exports of any note, namely animal and dairy products, relied on unsustainable, fossil-fuel-dependent methods of agriculture, and high levels of subsidies from the EU.

In short a total basket case.

Like many other historical basket cases, there was exceedingly little awareness among those in positions of power who had been complicit in creating the problem, of the complete failure of their own particular economic strategies, and of possible remedial action that could and should be taken. Instead, all the talk was of throwing more money (that the State didn't have) into the black hole of debt thus created: bailing out the financial institutions that had fanned the flames of speculation, and lending more money to the bankrupt developers who collectively owed tens of billions to the same financial institutions.

The trolls and goblins, when faced with the first real financial crisis and test of their loyalty to the financial institutions, quickly hurried through middle-of-the-night legislation that gave an almost unlimited guarantee (totalling some €400 Billion - several multiples of country's GDP) to private savers and corporate investors alike. When that failed to achieve the desired effect of propping up the financial institution's share price, the worst, most unsustainable bank - a model of unethical practices and failed pyramid schemes (Anglo Irish bank) - was taken into state care and nationalised. When that failed to convince investors that Ireland plc was a safe place to do business, a few extra billions were obligingly donated to the other failed corporate banks.

When that (and yet more billions lobbed into the black hole) failed to achieve the desired result, and the share price of the various Irish corporate banks looked at risk of falling to zero, the trolls announced the government would buy up the outstanding loan books of all the insolvent financial institutions, at close to their market value at the height of the bubble. The sum of money involved was estimated to be (at the time), anything up to €70 Billion, almost one and a half times what the Irish government spends each year on education, health, the environment, housing, transport and social welfare combined. The one big problem was that the Irish government didn't actually have any money, and was already something like €20 billion in arrears for 2009 alone. Therefore the money to bail out the banks and developers would be borrowed at interest: from the EU, the IMF, or from any corporate moneylender happy to take the risk. From an EU perspective, the bailout (known colloquially as NAMA) was a great idea as it guaranteed Irish compliance and minimised the likelihood of embarrassing behaviour such as Ireland leaving the Eurozone and dropping out of the EU. Defections like that are bad for EU community morale.

In the storm of public criticism that followed the troll's announcement of the imminent implementation of NAMA, and their stated intention to pay significantly over the current market value for the failed speculative assets the State was to take on from the banks, the trolls fell back on the familiar free market mantras and invoked phrases such as 'return to economic growth', and 'investment for the future'. All in the public interest of course and for the greater good of all. The trolls hired an economic expert, a man with history working for the Fed (US Federal Reserve Bank), to expound a theory of economic cycles that implied everything would eventually rise in value (as before), the Government would sell on its failed asserts (that no-one would need for decades) at huge profit, the frog would turn into a prince and everyone would live happily ever after.

The various other apologists for the fairy story of endless economic growth quickly appeared out of the woodwork where they had been hiding in the hope public outrage would subside. The cast was predictable enough:  the bankrupt developer who couldn't wait for his debts to be put into permanent cold storage by the State; another corporate developer that owed a billion or more to a  motley assortment of banks, and which was  fighting a Stalingrad-like rearguard action through the Courts in a bid to delay liquidation long enough for the NAMA fix to take effect; the economists working for the  insolvent banks, who had cheered on the speculative bubble in the same enthusiastic tone as the exponents of the Thousand Year Reich some 75 years previously,  and who now saw an opportunity for reinstatement and new fat bonuses;  all the various underlings and minor political functionaries who were anxious to cash in on Celtic Bubble 2; and finally the wannabe superheroes of the current administration, with their underpants on  over their day-glo cyclist's lycra, who so desperately wanted to be seen as the good guys by an unforgiving public.

Like all fairy stories, it has to end sometime. So here are the salient facts:

If  the trolls get their way, the failed speculative assets (the bad developer's loan book if you like)  will be taken on by the Irish government at a cost of €54 Billion, plus  interest repayments of  approximately 5 percent per annum. These assets were valued by self same trolls at €47 Billion. This valuation however is meaningless, as it is not based on recent sales receipts but more a case of wishful thinking or outright deception. Almost no failed speculative assets are going on the market, because everyone is sitting tight in the hope they will be bailed out by NAMA. The frantic efforts by the directors of Zoe Developments to delay liquidation proceedings demonstrates only too clearly the fear of forced sales that will expose the true market value of half-finished commercial developments or unsold, unwanted housing schemes.

The Government rationale is thus: historically economies have followed cycles of growth and decline, so eventually the abandoned development sites and other failed speculative assets will return to the prices of the height of the bubble. This ignores two rather large elephants in the room. The first elephant we will call reality. This elephant tells us that the most unsustainable bubbles, of which the Celtic bubble is one, never, ever reflate to former levels once they have burst. In Japan, 15 years after the collapse of the property bubble, residential land was back at its pre-bubble price while commercial land was worth only about 10 percent of its bubble value.

If the €54 billion the Government proposed to  borrow to finance NAMA takes 20 years to repay,  with repayments beginning in 5 years time,  then the total repayment will be of the order of €100 billion. For the money borrowed to be recovered, the value of the failed assets taken into care by the State will have to approximately double from their perceived Alice in Wonderland valuation of €47 Billion. Given the true market value of the development land or unfinished developments concerned may be as little as five percent of their peak bubble price, and perhaps ten percent of the State's current evaluation, and that most of these commercial or residential developments will be surplus to requirements for the foreseeable future, the happily-ever-after ending of this particular fairly story seems more likely to be of the ring-a-ring-a-roses nursery rhyme variety.

In order to final put this fairy story of endless economic growth to bed for the final time, we must now introduce elephant number two. This is a rather bigger elephant than elephant number one, and it has no clothes. We will call this elephant terminal resource decline.

History has shown that economic growth is predicated upon increase of energy availability. The era of increasing energy availability has ended, or will shortly end, as fossil fuel production peaks and goes into terminal decline. Unlike previous eras in which energy availability diminished, albeit temporarily, this new era will last indefinitely. There is no readily available energy resource with which to replace fossil fuels, and even if there were such a source, other resource limits such as food production and/or availability of other key raw materials necessary for the harnessing and utilisation of energy would make it irrelevant.

Nowhere will this be felt more keenly than Ireland, with its 90 percent dependency on imported fossil fuels, lack of political or economic might, and end-of-the-pipeline location on the periphery of Europe.

Even if the fairy story of growth cycles has held true in the past, Ireland has now entered a new era of decline and contraction. The bubble will never return.

NAMA is a disaster of unprecedented magnitude in the history of the modern Irish state. The inevitable failure of the State to repay the billions borrowed can have only one outcome:  a fire sale of all remaining strategic State assets to corporate asset strippers, and the impoverishment of the majority of the population for a generation.

Unfortunately, in this-post bubble, post-fairy tale narrative, the sleeping damsel (Ireland) does not get rescued by the dashing prince or even by a modern day superhero on a bicycle. The trolls and goblins eat her for supper instead.

More on NAMA

The principal argument presented by the Irish government in favour of NAMA is that it will enable the Irish banks to lend money. Just to clarify, these are the same banks that became insolvent as a consequence of previous excessive and reckless lending, that previously resisted attempts at greater regulation and transparency.   The main reason they are not in a position to lend money at the present time is that all deposits and savings are needed to plug the deep hole of debt that occurred directly as a result of this same reckless lending. This hole is so deep that it is likely that the first €10-15 billion of NAMA money will disappear largely without trace.

Of course, the banks that are due to be bailed out by NAMA do not have a monopoly on lending. For example, Ireland has a well established network of Credit Unions that also carry out this function, albeit on a relatively small scale. Although some are now in difficulties - partly as a consequence of lending money to householders who were foolishly attempting to maintain lifestyles they couldn't afford - mostly the Credit Unions are run tightly and sensibly, and present a good model of how financial institutions should operate. Over time, there is no reason why the Credit Unions cannot lend significantly larger sums of money, both to householders and to local businesses, cooperatives and not-for-profit organisations. In order for this to happen, the State simply needs to offer favourable credit terms to the individual branches, with clear terms and conditions in relation to lending.

Another option that is open to the State - one that was first mentioned twelve months ago when the Irish government was rushing through its middle-of-the-night €400 billion guarantee to the Irish corporate banking sector - is that the State simply opens its own bank, and invites depositors with the insolvent banks to jump ship. The State, if it so wished, could also pass legislation enabling it to transfer the good assets, plus some of the liabilities, from the insolvent banks to the new one. The remaining failed speculative assets and liabilities would be left behind for the respective banks to sort out. This type of solution has been proposed by many people, including sustainability-focussed economist Richard Douthwaite.

Richard argues that this course of action would leave all the losses with the insolvent banks' shareholders and bondholders. Any government capital would go into the new banks if they needed it.

This also raises the question of what level of lending is actually necessary in a sustainable, steady-state economy.  Probably ninety percent of all existing businesses will be non-viable in post-peak-oil Ireland. Therefore, sustainability-focused lending institutions should be extremely careful to whom they lend money at the present time. However, a new Ireland living within its means and within the resources available will also require many new businesses and cooperative ventures, and these may need start-up finance. Up-front money will also be required for large infrastructural projects, some of which may be undertaken by the State but will mostly be carried out by the private sector. These projects may include railway and canal building. The total amount of lending  (as opposed to direct State investment) needed  to service these various requirements is likely to be of the order of €10 billion per annum.

The huge sums of money borrowed by householders - essentially for lifestyle purchases - during the latter part of the Celtic bubble era give little indication of the level of domestic borrowing necessary in a steady-state economy. Leaving aside short term bridging loans which are something of a special category, the amount is likely to be on the lower side of €5 billion per annum: considerably less than the money already thrown into Anglo Irish, Allied Irish and Bank of Ireland.

Adding these two categories of lending together we arrive at a figure of about €15 billion per annum. Lending significantly larger sums of money will only lead to the development of another economic bubble, by encouraging speculative activity and other unsustainable behaviours.  A modest fund of perhaps €500 million per annum could be maintained separately by the State to provide emergency financial assistance and logistical support to members of the public who have become casualties of the bubble era, and to fund community employment initiatives.

Market forces and NAMA (Roger Adair)

"And I would rather be anywhere else than here today" Elvis Costello, Oliver's Army

Is it not totally perverse that just when “market forces” are being ruthlessly applied generally their braying, bullying proponents, reminiscent of the English public school classes they so resemble, suddenly change their tune.  The well manicured and figure flattering expensive suits suddenly become gushing enthusiasts for massive and heroically command economy style levels of tax payer intervention in their case?

The principle of natural justice is quite clear in that that the whole broad spectrum range of speculators and their lickspittle political lackies, the perps who looked the other and who committed, encouraged and facilitated the massive catalogue of fraudulent crime, must carry blame and bear pain.

NAMA is clearly and cynically intended to achieve precisely the opposite effect and all in the spurious and sickenly dishonest name of flag wrapping common good and the national interest. If I hear these words uttered by a politician one more time I shall promptly throw up in disgust and sorrow.

Unless the stables are truly cleared out and to encourager les autres, a large number of high level prosecutions and high profile tarring and featherings carried out, it is clear that we are just gearing up for an even greater disaster in the not too distant future.

One could fantasise on a mass culling of all economists, financial advisers, accountants, corporate lawyers, planning consultants, account managers, bent politicians, crooked senior bank officials, nelsonian financial regulators et al but sadly the chances of anybody, anywhere at any senior level being held to account for anything are currently next to zero.

This despite all the valiant arm waving and busy looking pretend investigative activities we are told are going on. These will presumably carry on for ever and a day, at extraordinarily high cost and at a pondeously slow pace of course, and never, ever, ever come to any conclusion.

The central premise  of NAMA is in fact a fantastical lacuna of such unimaginably vast proportions that, like the vacuum nature abhors, it is of fatal necessity drawing in all sorts of absurd and fanciful notions, dubious assertions, pure crocks of the purest black stout based shite, cans of the finest gourmet corporate worms and of course massive opportunities for mind boggling levels of opportunity for even more of the widespread fear and loathing, greed, fraud, criminal corruption, favoritism and demented cronyism that has brought us to where we precariously are.

The emperor has no clothes, there are now a dozen herds of rampaging injured elephants stampeeding unseen in the room, the parrot is dead, deceased, it is no longer.

Which part of denial do we not understand?

Many thanks to R.A. We would welcome further contributions.

Implications of NAMA (AW)

The implementation of NAMA will commit Ireland to servicing a huge long term debt that once taken on board will be exceedingly difficult to renege on. The Government has told us that up to €54 billion will be borrowed in order to buy up failed speculative property 'assets' currently on the loan books of insolvent Irish banks. According to the government, these assets are still worth €47 billion. The government also told us, not so long ago, that all the Irish banks were financially sound. It even told us our economy was strong, when in fact it was a total basket case propped up on speculative pyramid schemes and unsustainable levels of borrowing.

The truth is the NAMA portfolio includes worthless development land, abandoned or uncompleted property developments, and various finished developments that will be surplus to national requirements for the foreseeable future. The real-world price for these damaged goods is likely to be under half the government's valuation, as would soon be evident if the music stopped in the pass-the-debt-parcel game and the NAMA portfolio was put up for sale on the open market.

For the Irish State for sell off the NAMA portfolio at a profit would require the assets to rise in value at a higher rate than the annual rate of inflation and the interest rate on repayments combined - a rate that will presumably also be significantly higher than the rate at which wages increase. Although the rate of inflation is negative at present, and may continue in negative territory for another year, this situation will reverse as soon as global energy prices begin to rise again. Also, wages are falling at present and may continue falling for some time.

In short, the only circumstances in which the NAMA assets could show a profit would be in another speculative property bubble fuelled by a new round of unsustainable borrowing.

When the interest on the NAMA loan is factored in, the total amount to be repaid by the Irish State will be around €100 billion - in other words twenty times greater than the money that might be clawed back in the proposed McCarthy cuts, were all of these  somehow implemented.  The repayment of this loan will be enormously difficult. It would be difficult enough even in good times. But now, Ireland is running up massive budgetary deficits even without the additional burden of NAMA. Indeed the latest government tax receipts show a deteriorating situation, with tax revenues for the first nine months of 2009 down a further €2 billion on government estimates in April.

If NAMA goes ahead it will put Ireland in a very similar position to the householder who took out an excessively large mortgage - representing many multiples of their disposable income - at the height of the bubble, except that the householder did have a choice. The same choice was not offered to the people who will be obliged to bear the costs of NAMA - the public - through the sell off of state assets, further budegetary cuts in public services and the imposition of additional, burdensome taxes.

Colin Campbell on Peak Oil and NAMA

Peak oil strategist Colin Campbell on why NAMA just can't work in world of declining energy resources:

The National Asset Management Agency's flawed plan

A debate rages regarding the Government's plans to stimulate the economy by taking on a massive amount of debt, premised on the assumption that the economy, and especially property prices, will recover over the next few years to provide the essential collateral.

Ireland is not alone in facing the recent economic collapse as banks failed around the world, especially in the United States. This is widely attributed to no more than corporate misjudgement and inadequate Government regulation as banks lent more than they had on deposit, confident that Tomorrow's Economic Expansion was collateral for To-day's Debt. It is widely seen to be a temporary setback that conventional economic processes can remedy, but such a view fails to grasp an important underlying factor, namely so-called Peak Oil. 

Stated briefly, oil and gas are finite natural resources formed but rarely under now well-understood processes in the geological past. It follows that they are subject to natural depletion beyond market forces. They also have to be found before they can be produced, such that the peak of oil discovery, some forty years ago, which is a matter of historical fact, must inevitably deliver a corresponding peak of production. It is obvious that production in any endowed country starts and ends, passing a peak in between when about half the resource has been extracted, as is amply demonstrated in more than fifty countries that are already in long-term decline. Britain's production, for example, peaked in 1999, twenty-five years after the peak of discovery, and is declining at 7.5% a year despite an open market and the most advanced technology.

The growth of the economy over the past Century was essentially fuelled by an abundant supply of cheap oil-based energy that stimulated the growth of industry, transport, trade and agriculture, allowing the world's population to grow six-fold in parallel.  

The position would be self-evident were valid information available to the public, which is far from the case. The skills of the detective are called for to unravel misleading industry data and present sound evidence for the patterns of depletion. But there is at last an awakening : even the International Energy Agency, the OECD watchdog, now admits to the situation with the slogan : Let's leave oil before it leaves us.

Morgan Kelly on NAMA

Economist Morgan Kelly's latest take on Brian Lenihan, property crashes and NAMA:

Kelly on NAMA

Economic Collapse