Sunday 22 September 2019

Brendan Keenan: Nama tough love is political poison

A less stern view on bank capital, along with the loans transfer, may have helped to quell public fury

Brendan Keenan

Brendan Keenan

THE dissident economists to a large extent got their way in that transfer of bank loans to Nama, and the resulting pledge of fresh capital to the banks. Not that they seem very happy about it.

The arguments put forward in letters and articles in the newspapers still swirl around the popular blog, irisheconomy.ie. The temperature of the debate among the economists has cooled, though. On the other hand, there is no doubt that it has risen dramatically among the public in general.

If so, it illustrates once again that economics and politics are two different disciplines -- "science" may be too strong a word for both. Someone did say that, in the long run, good economics make good politics. But the long run can be too long for politicians.

On that basis, it is no accident that, while the economics of the Nama transfers were better than those originally proposed, the politics were poisonous. One did not have to go to a teachers' union conference to feel the fury at the amounts of public funds allocated to the banks.

Government politicians could be forgiven for wanting to keep that figure as low as possible. We do not know their exact motives, but all the likely ones pointed in the same direction.

They do not want to own the banks, for fear they may never get rid of them. They do not want to add more than is necessary to a national debt already exploding because of the budget deficit. Perhaps they did want to support property prices. For sure, they did not want to be seen as putting the equivalent of the entire national development plan into the banks.

Postponing some of this -- by paying more for the loans and under-capitalising the banks -- would have been less shocking to the public, albeit more galling to the economists.

But there may be some theoretical merit in waiting for something to turn up -- in this case the economy.

A return to growth will not solve the problems, but they are insoluble without it. Doing the minimum on bank rescue while the economy is shrinking could make sense -- although the minimum would have to be enough to get the banks in some condition to contribute to recovery.

But it has not worked out like that. The prices being paid by Nama for the loans are much less than originally estimated, so the banks' losses are greater. The need for taxpayer capital is correspondingly higher and the new Financial Regulator insists that the banks must have it.

Government ministers were rattled both by the amounts involved and the reaction to them. They can hardly be surprised that they got no credit for one achievement -- dispelling the widespread notion that Nama would be a fix.

Nama had to insist on information which, it would appear, the banks themselves had not got round to analysing. Or perhaps they did not want to, because they knew what they might find.

After this diligent examination, the loans were valued at just half their original value. The most controversial aspect of Nama -- paying more than current market value -- remains, but future taxpayers need worry only if the loans are still worth less than two-thirds of original value a decade or more from now.

For now, honesty will have to be its own reward for the politicians. However, they have not entirely abandoned their plans to make posterity pay some of the bill. There are promissory notes and other kinds of IOUs to keep down the costs of bank rescue over the next few years and defer them to later.

This, too, may strike economists as bad practice, but it is more practical. "Ordinary" borrowing is currently adding €1bn a year to the interest bill. Cutting that day-to-day borrowing may have to come first; leaving extraordinary borrowing to later.

Besides, not only has posterity nothing for us (as an 18th century Irish MP pointed out), but we have done our a bit for posterity. The motorway network at which we marvel was built without borrowings during the boom.

The revenues may have turned out to be illusory, but would they have been built without them? We are borrowing now, but at least we have the roads.

There is such a thing as political economy. Anglo would still have been a nightmare, but a somewhat more generous payment from Nama, and a less stern view on bank capital, would have made the numbers a lot less frightening.

That might have made it easier to get the deal with the trade unions approved, and get another unpleasant Budget through in December. Not only better politics, but possibly better economics than worrying about Tier One capital and Long-Term Economic Value.

Sunday Independent

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