'We can fix the economy and heal society'
Published 24/03/2011 | 05:00
Strange as it may seem now, the next few years offer the greatest opportunity to change Ireland. It is difficult to see beyond this crisis when many of us are mired in a deep, deep depression, but we can fix this economy and heal this society.
We are in a balance-sheet recession, not a normal recession.
As the price of houses and land has plummeted, the balance sheet of the nation has imploded with huge debt on one side -- the cost of which continues to rise -- and collapsing "assets" on the other side, the value of which continues to fall.
In a balance-sheet recession, the people who have money save and the people in debt try to pay off as much as possible. The saving ratio in Ireland is now 16pc of GDP. The more people save, the less they spend and the more the economy shrinks. Because the banks are broken, the saved money isn't re-lent to the economy because the banks are afraid to lend and want to build up reserves of cash to fix their broken balance sheet, and so credit in the economy dries up.
The next phase of the balance-sheet recession will be mass-mortgage default, unless we change policy quickly.
The solution to our problem -- a problem of too much debt -- is obviously less debt, not more debt. The core element of a recovery in Ireland is cutting the link between the banks and the people. The EU/IMF deal is trying to solder the people to the banks with more debt. This is causing panic.
Before we discuss economics, let's introduce morality because a policy has to be morally right for it to work. Current policy is immoral. The bank debts are not ours; they were incurred when the banks were private. They are not our debts to pay.
From an economic perspective, everyone knows that the solution to too much debt is never more debt, it is always less debt. So the first change must be to reduce the debt levels of the State so that it does not default. How do you do this? You cut the banks loose.
The big lie we have been told is that if we preside over a restructuring of Irish bank debt, the financial markets will punish us by taking money out of the country.
Wrong. The opposite will happen. Money will flow into the country as the markets will conclude that the Irish bank crisis is over and it's time to invest. So, how do we do it?
Step One: We must have a referendum. We start negotiating for the Irish people, not for the banks. We go to the ECB and say we don't have the money and morally we can't ask the people to pay for debts that are not their own. We should follow the democratic example of Iceland and hold a referendum, asking the Irish people whether they want their children to pay for the gambling debts of those who lent money to the Irish banks in the boom.
The answer will be a resounding 'No'. No European democrat -- whether in the EU Commission, the European Parliament or the European Council -- could argue with that.
Step Two: The process of bank debt renegotiation starts. In advance, we make it clear our problem is a European problem. We follow John Hume's example in the North. One of his many brilliant moves was to "internationalise" the Northern question by involving the Americans and the Europeans, as well as the Irish and British governments.
We should argue that we are seeking a solution for the euro area as a whole, by making common cause with Spain, Portugal, Italy, Greece and, of course, Belgium.
Obviously an alliance of debtor nations in Europe would focus the minds of the ECB. We change the conversation. We reintroduce into diplomatic discourse the capitalist premise of "co-responsibility" where both creditors and debtors are responsible in a crisis.
Step Three: Rescind the guarantee. It was due to expire last September and was always supposed to be temporary. It also should have been limited; it should not have covered subordinated debt, which always gets wiped out in a banking crisis. It should have copied the Swedish model, where those countries lent the credibility of the state to the banks.
Unfortunately, our Government didn't so much lend the State's credibility to the banks as give it to them unconditionally.
People argue that without the guarantee, Irish banks will never again be able to borrow on international markets. Well great. We want a return to deposit-based banking, where banks lend out what they have in deposits. They will then behave like utilities. They supply credit to the economy and get paid a for it. Getting rid of the guarantee is a start.
Step Four: Close down NAMA immediately. It serves no purpose other than to give the debts of the developers and the banks to the people.
Step Five: Force all of the remaining bondholders of the banks to become shareholders. This is called a debt-for-equity swap, a totally normal practice in capitalism. This is how the US authorities cleared up the Savings and Loans mess -- their biggest banking disaster since the depression. It was also what this newspaper's owners did last year, when the bondholders of Independent News and Media were forced to become shareholders. This is standard practice.
Step Six: Tell the ECB that we don't have the money to pay back the cash it has stuffed into the Irish banks to keep them alive. The ECB has deposited over €97bn into the Irish banks. In return, the Irish banks have given the ECB all sorts of rubbish collateral, from rolled-up land deals to repackaged bundles of home and car loans. So the ECB gave us real money and we gave them IOUs!
As a central bank, the innovative way to avoid a meltdown in Ireland would be to simply leave the €97bn in the Irish banks and not expect to get it back. This might sound unusual, but this is what the entire banking system is based on -- rolling over financing.
Step Seven: When the time is right the €97bn of deposits, or some of that sum, should be converted into share capital. This has never been done before, but at a stroke the funding and capital position of the Irish banks would be solved, and the ECB would have taken a hit.
For those who worry that the ECB will react by cutting off euro to Ireland, they should be reminded that the ECB is as unlikely to cut off euro to Ireland as the Federal Reserve is to cut off dollars to Texas. We are involved in creating new financial architecture for Europe and this project will test Europe's much-reiterated rhetoric about solidarity. It is a test that Europe will pass.
Step Eight: We need to prevent mass chaotic mortgage default and offer hope to the 400,000 people in negative equity. For these people -- largely aged between 25 and 40 -- Ireland has become a large debtors' prison with no payroll.
In order to liberate those trapped in negative equity, make all their mortgages "non-recourse", as is the case in the US. This means that people can hand the keys to the bank and that will be the end of it.
Step Nine: Extend the vote to everyone who is an Irish citizen no matter where they live. The Irish diaspora is one of our greatest assets and those of the tribe who are now living abroad should never be cut off.
Step Ten: Once we have sorted out the banks and the debts of the country in a way that allows the people to believe in the future, we need to put in place industrial policies that will create a New Ireland.
Back in the 1950s and 1960s, when Ken Whitaker came up with the policy of attracting foreign investment, no one believed that it could be done. But it happened. So let's be inventive.
For example, in the IFSC there is over $800bn of US multinational money on deposit. This cash is there as a result of the amazing success of the multinationals repatriating their profits to Ireland to avail of the 12pc corporate tax rate. But if they want to redistribute these profits to their shareholders they have to pay American corporation tax of 39pc. To avoid this, they just keep all this cash on deposit at the IFSC.
These profits will, of course, be reinvested in the companies -- in various projects, research and ongoing business development around the world. Therefore a certain amount will be risk capital. So why not do a deal with them? Why not offer them a tax incentive to invest even a portion of this money in Irish projects? Just 10pc of this would be $80bn. To bolster our position as an attractive international place to do business, we would cut corporation tax.
There is a way out of this mess. The crisis provides us with the chance to overhaul our economy and reinvent our society. We should seize this opportunity without fear, and look towards a New Ireland.