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The State is morally obliged to help out those in debt

ONE of the sad things about Ireland is how, instead of resulting in a blend of the best aspects of both religions, centuries of strife between Catholicism and Protestantism seem to have given us the worst of both worlds. Instead of mixing Catholic forgiveness with Protestant rigour, we have mixed Catholicism's moral ambiguity with the retribution of Protestantism.

And we have no moral compass guiding how we use the latter: Tuesday's pension levy was yet another example of how in Ireland retribution is visited not on the guilty but on the innocent. Debt forgiveness is another example.

If you're a regulator, a councillor or politician whose stupidity caused the crisis, then Catholic absolution is at hand. If you're a residential buyer who trusted your leaders and bought property at outrageously overvalued prices, then it's Calvinist damnation. Banks that blew billions receive the Catholic generosity of €18.7bn in further recapitalisation. Residential mortgage holders who invested out of need rather than greed can hope at best for law reform. Here, bankruptcy is as often as not the fault not of those affected, but the gross policy mismanagement of our economy.

Last week, Ed Honohan focused on the human consequences of banks aggressively calling in loans: stress, and sometimes suicide. But as well as the objectionable human aspect, the fire and brimstone approach to personal debt is economically damaging. Debt worries are a key reason for the fall in April's KBC consumer sentiment index, and mortgage arrears -- five per cent of the mortgage book -- are only a small part of that.

The fact is that we have a debt forgiveness strategy: it is called the bank bailout. And we need to apply it to a broader swathe of the population for whom indebtedness may not be causing arrears but is still causing financial distress.

Many households will seriously feel the squeeze in the coming months. Thursday's Consumer Price Index shows that prices rose by 3.2 per cent in the 12 months to April. Our State and semi-State sectors -- health insurers, education, transport, energy -- can continue to clobber defenceless consumers whose incomes are static or falling. Or disappearing altogether due to unemployment. Then there are ECB interest rate hikes. And then there are continued stealth taxes such as the pension levy.

The liability of the State due to the sheer incompetence of economic policy creates a moral obligation to act. But stark economic considerations also create a policy obligation to do so. The lack of credit is a crucial factor in the lack of confidence among consumers and savers. And that is one of the reasons why the fall in consumer spending has far exceeded the fall in economic output. And that in turn makes a return to profitability more difficult for our banks. Instead of only recapitalising the banks, Government policy should devote modest resources to recapitalising those demographic sectors on which a recovery in banking depends.

Some will say that extreme personal indebtedness is the fault of the person affected. In many cases that's true. But in more cases it isn't: the failure by our banks, our Financial Regulator and our politicians in creating the property bubble -- and the fact that in our country of insecure rented accommodation residential buyers had no choice but to buy -- forced debt on those whose life circumstances required them to buy property at overvalued prices.

The generation whose mortgages are paid off, or who sold their properties during the boom, might ask why this is their problem. The answer is that -- as shown in research published last week by Amarach -- they have benefitted most from the boom. The over-50s are more likely to splash out on holidays, new cars, restaurants and home improvements than any other section of the population. Their comfort is the flip side of the misery of those younger people who bought their homes at overvalued prices and whose stamp duty payments lessened the income tax burden of older generations. The same younger generations will also soon be in the position of paying for the pensions and health care of an ageing population. If ever we needed intergenerational solidarity, we need it now.

A holistic policy on personal debt should include encouragement in prudent cases of interest-only mortgage repayments, fixed interest rate mortgage payments, further adjustment in mortgage interest relief, and measures to allow notional values of negative equity to be carried forward to facilitate trading up.

The success of such an approach will depend on continued improvement in our cost competitiveness, and fiscal sustainability will be crucial. But neither can improved competitiveness and fiscal sustainability succeed if our debt problem isn't tackled. The schizoid pulling back of credit is a manifestation of the dysfunctional boom-bust pro-cyclical stupidity that got us into the mess. Counter-cyclical policies -- lending in bad times and prudence in good times -- are what we need. In that respect, Ed Honohan might have a word with his brother about the excessively high capitalisation requirements imposed on our banks.

That aside, a mix of Catholic forgiveness and Protestant determination to stick to the rules in future will go a long way.

Marc Coleman presents 'Coleman at Large' each Tuesday and Wednesday on Newstalk 106-108fm

Sunday Independent