Monday 20 November 2017

A promissory note option for mortgagors could lift the country out of mire

Edmund Honohan

WE now read that there is a new EU consensus in favour of 'supporting demand'. But how can we stimulate consumer demand in Ireland's economy? Where is the money to come from?

Even after the troika's departure, our newly re-acquired economic sovereignty will be constrained by the fiscal disciplines to which we are committed by the Lisbon Treaty and by our domestic balanced budget legislation which gives the right of veto to the Fiscal Advisory Council.

If there's scope for any easing of the budgetary medicine, should we go for less severe cuts in public services and/or social welfare payments, or should we instead modestly reduce income tax or VAT?

If the aim is to stimulate growth, what are the best options? We must use cost-benefit analysis. One must ask, in macro-economic terms: what is the expected benefit, and what will it cost?

Is it good value for money? Which option is best? It may not be a straight cash-for-cash calculation.

The benefit may be a public good not quantifiable in the short-term, but productive of long-term economic growth.

Recently in a radio interview Michael Somers, former head of the NTMA, reminded us that economic output equals consumption plus investment, plus net exports. If we are to grow output (GDP), it must be via growth in one or more of these ingredients. At the moment we're relying on investment (largely FDI), while the other two are shrinking.

It's probably time we accepted that we are unlikely ever to return to annual growth rates of even 3-4pc over the long term, and certainly not in the short term, without some domestic form of 'quantitative easing' (an increase in the money supply, generally provided by central banks).

The sooner we can reflate consumer demand without impacting on competitiveness, the better. We need to reach the sunny uplands quickly and stay there.

Given the state of the public finances, we must think outside the box. Are there stimulus measures we could adopt which would cost the Government nothing?

A proposal to encash the national pension reserve and spend the proceeds is on the table, but already voices have been raised querying whether there is any greater long-term benefit in public infrastructure investments as compared with returning the cash to the original investors (the taxpayers) in the form of a modest across-the-board reduction in the tax burden.

Indeed, apart from these choices, the opportunity cost to the Exchequer of liquidating the fund prematurely, instead of holding on to it, has not yet been quantified.

In view of the mortgage crisis, a consumers' 'promissory note' – stimulus based on flexible mortgages – is another possibility which should be thoroughly examined.

Its special attraction is its sheer simplicity. Government would legislate to allow all residential mortgagors, whether up-to-date or in arrears, to unilaterally restructure their monthly repayments by requiring the lenders to accept the borrower's promissory note instead.

The consumer's promissory note is a simple IOU to pay the mortgagee the unpaid sum at the end of the term of the mortgage.

Over, say, the next three years, instead of making the monthly payment in cash, the borrower will have the option of handing over his IOU each month and would then be free to use the cash as he thinks fit.

For a few years, we would be diverting some of the mortgage repayments away from the de-leveraging banks' black hole and releasing perhaps €3bn to €4bn per annum into general consumption.

And the cost to the Government? Not a red cent.

This borrower-friendly form of case-by-case restructuring of the loan repayment profile would fit in well alongside the measures now in train to return impaired mortgages to sustainability.

The borrower would not need the lender's permission. Since the lender gets paid in full at the end of the term, legislation to provide for this would not expose the State to claims for damages for breach of the lender's constitutional rights.

Indeed, the borrowers' option to so vary the terms of the loan secured by the mortgage is arguably already built into the small print as a matter of law, but legislating would remove any doubt on that point.

Might there be a risk that growth produced by a large personal credit stimulus of this sort would have unacceptably large leakage or even cause unintended supply-shortage bubbles? Hardly.

We have a two-tier economy. Perhaps 75pc of consumers have coped with the downturn, and some of these now feel the worst is over.

They may be easing up on banking those extra rainy-day savings and consuming a bit more than they did last year. The other 25pc are mired in debt; some irretrievably so. Consumers who forgot how to budget during the boom years now have a better grasp of good housekeeping rules. A new personal credit promissory note option for all mortgagors will, I think, be spent sensibly by both groups, lifting many of the most indebted out of the mire and into sustainability.

Mortgages, and many other currently impaired or non-performing personal loans, will be brought up to date. Transition from tracker to variable would be eased.

Extra credit in the hands of the better-off consumers will, when spent and multiplied thereafter, reduce SME debt and improve the take from VAT. The gross overall level of private debt may not change much at all.

But even if there were a net rise in private debt as a result of the stimulus, so what? Now that we know that the Harvard economists Rogoff and Reinhart's 90pc public-debt-to-GDP ratio faultline is not writ in stone, there is probably no fixed private debt ratio beyond which implosion will certainly occur.

Looking at Japan's experience, economics writer Will Hutton (in 'Them and Us') suggested that 300pc of GDP "probably represents a ceiling". That book was published in 2010. Three years later, the goalposts are still moving. Total Irish private debt is currently more than 400pc of GDP. Hutton commented that "moralism about debt is no guide to good economics" adding that "the debt moralists are in control, denying the government essential flexibility and agility over borrowing".

To be frank, the problem with the Celtic Tiger credit boom was that the new credit was not spread democratically. We are all now paying for loans made to bankrupt ex-millionaires.

The promissory note stimulus would be a measure of community solidarity, and with eventual full repayment of mortgages built in, no one can point to moral hazard of debt forgiveness as a counter argument having any validity.

Edmund Honohan is the Master of the High Court

Irish Independent

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