Draw Breath

Was it just me who was turned off by the following sentence about developer Donal Caulfield in Frank McDonald and Kathy Sheridan’s obituary for the Irish housing market:

He has tried to spread his risk, with developments in Poland, the Canaries, London, Madrid and Ibiza.

Spreading risk by buying up property in a series of bubble housing markets? You spread risk by diversifying a portfolio, not by tyring to cash in on every property bubble going. Language appropriate to describe investment ought not to be used to dignify speculation.

Anyway, I know I’ve said that a dig out for banks is inevitable – or at least I think it is – because Irish banks, and everyone on this island as a consequence, will be in a whole load of bother as banking losses mount, but lets hope that the dig out doesn’t either shore up developers or speculative property owners. There is more than one group interested in the politics of housing and, as this guy points out also in yesterday’s Irish Times, there’s no reason for privileging the interests of owners over aspiring owners (or indeed over taxpayers).

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Cross-posted from the Irish Left Review, perhaps to be read in the light of this not entirely surprising news from P. O’Neill on Irish Election.

"If you owe us £1,000, it’s your problem; if you owe us £1 million, it’s our problem" was how Justice Moriarty described the AIB’s attitude towards lending when he was chairing the tribunal investigating Charlie Haughey’s adventures with AIB.

How right he was. While we read the good news about the American government’s using vast amounts of Chinese money to rescue the global capitalist system from total collapse, we shouldn’t think that takes us all out of the path of disaster.

The Irish are bound to go the same way in 2009 that Spain is going at the moment. Like us, the Spanish have been enjoying an enormous property boom for the last few years. And, as in Ireland, it has just come stuttering to a halt, prompting a massive rescue from the Spanish government as the sector struggles "with high debt, plunging prices and an overhang of unsold houses and flats."

This is where Ireland is headed, but we’re probably going to experience something much worse.

As I pointed out in a comment thread in April 2007 on Slugger (itself following a post from here), construction constituted 23% of the Irish economy at the height of the boom. That was twice the EU average (which was 12%). So property going belly-up is very bad news indeed for us. While we talked up the role of investment and industry in the Celtic Tiger, we forgot that a whole lot of what looked like wealth was actually us sticking increasing amounts of our money into private debt. And if we have £1000 problems, it’s also given the banks £1m-style concerns (for a serious of discussions, see UCD’s Morgan Kelly). 30% of their loans are to property developers who now find that they can’t sell houses.

Ireland’s property development business model has proven very dangerous for the banks. They’ve been caught short in two directions. First, they lent to the developer who was essentially selling off the plans (or as good as), in the certainty of a quick return. Second, they’ve been busily lending increasing amounts to mortgage payers in the knowledge that they could repackage the risks from those high-stakes several-multiples-of-income 100% mortgages and sell it on the credit default swaps (CDS) markets. But these have all gone down the hole. Banks can’t lend on wholesale markets so they can’t borrow to feed the mortgage frenzy. And they can’t offset their risky bets. AND the property developers have no customers so can’t repay their loans. AND the risky mortgage-payers are going to default.

On property developers, with the country strewn with half-finished developments, the banks have a series of unpalatable choices. They can shut indebted developers down and repossess more or less worthless (for now) unfinished properties. Or they can continue to send good money after bad to developers who have no revenue. Neither option is good for the banks but they seem to be letting the small boys go to the wall and are propping the big boys up. The question is: how long can that keep going?

On mortgage debt, the real hike in Irish unemployment is yet to hit. And also, we haven’t yet seen the shakedown from all those people who borrowed to the max when interest rates are low – unless their mortgages are fixed they’re at risk of losing their homes (even if they don’t lose their jobs). In other words, the banks are looking at inheriting a whole load of property that they can’t sell as their debtors go bust.

This was all predicated on a global trend towards treating debt as if it was money. The Irish problem is that we’ve just done it more than most both domestically through the property market and globally through hosting businesses in the IFSC. So our trouble is a hybrid of what we’re seeing from London and what’s going on in Spain. We’re in the worst of both worlds.

No wonder everyone is on the blower to Leinster House. The governmental failures have all happened already and the only option left is a huge dig out. That will be no easy thing, especially as Irish company and income tax revenues plummet in 2009. But it will be the best possible solution in the current circumstances.

Then read this.

…would have been far preferable to taking the risk that the financial system would unravel entirely.

The Bush administration, sticking to its ideologue’s guns, gets it dangerously wrong again.

Update: Ah: they were just saving up. Don’t underestimate how catastrophic AIG’s collapse would have been: not only do they insure most of the US’s loans but they also have own most of America’s commercial aircraft and have their fingers in many many pies. I think the state had to essentially nationalise the company not just in order to shore up the whole American (and global) economy but to shore up the financialised market system itself. Though it is worth pointing out that, approve of it or not, this sort of action puts to bed any talk of an adjustment: state intervention happens, as any student of regulation will say, when markets fail.

Thanks to Pete Baker for synopsising the results of the research (pdf) on the motivations of no voters in the Lisbon referendum. If the research is sound, it seems that 42% of no voters and 48% of abstentions were motivated by a feeling of ignorance about the treaty. Now, this has motivated some bizarre commentary on Slugger, with some twat arguing that the complexity of the treaty was itself a plot by ‘the EU’ to baboozle voters into a yes vote (a wonderful mix of paranoia and Irish narcisism there).

Now, I’m exposing myself to accusations sour grapes, since I advocated a yes vote, butI would have thought that voting no or abstaining because the treaty is too complex is not somehow a vote against complex law or something (consolidated laws, which is what Lisbon largely is, tend to be very very complex). Are the electorate really sending a message that law should be simpler?

Voting no or abstaining because of ignorance is voting against being asked (at least in the one-off referendum). So we should either stop asking and leave it to the professionals or should ask in a very different way. 

First off, I actually agree with John Maguire in today’s Irish Times, at least to the extent that running a referendum and then discovering (correctly in my view) that Crotty v. An Taoiseach (wikipedia) wasn’t so sweeping after all. If you run a referendum and don’t like the result, higher principles are at stake if you seek to undermine it.

At the same time, I don’t see how it’s ‘perverse’ to say that some decisions are better left to the people we hire to make them. Sneering at that idea undermines the whole notion of representative democracy. We hire politicians to represent and it’s a worrying sign that we then resent them doing that when they have the time (and at least some have the experience) to figure out what’s in the national interest and what’s not.

If we don’t like that, we at least have to recognise that, while questions that can be synopsised as ‘do you want divorce?’ are worth asking, the message of the poll seems to be that several hundred pages revising and updating half a century’s treaties is not amenable to asking a yes-no opinion of people who are not trained treaty-readers. It’s not elitism to say that people didn’t understand what they were being asked: it’s what over 40% of them told the pollsters (and that’s not counting the 4% who thought we were voting on losing a commissioner etc).

The only way I can see us doing this by referendum properly is to take each stage of a treaty like Lisbon and ask an individual question for each one, or at least for each one that contravenes Crotty (as in, involves a transfer of sovereignty). Imagine: a couple of hundred referendums in one day. Or we could isolate the sovereignty transfer stuff, argue about that and vote on it clause by clause. The polity as committee system. Trés democratic!

Certainly the current arrangement is just senseless. It undermines representative democracy and replaces it with something worse.

Update: I see Mick has posted on this over at Brassneck. I think I agree with him that we could do with shooting the messenger. That is, that the government was ‘indolent.’ At the same time, I’m slightly sympathetic to government parties. They raise money to fight elections (er, mostly) and are now expected to fight for government policy too (against well (if mysteriously) funded rivals. Perhaps we should think of state funding of both sides in referendums?  Even with that, however, we all work on the assumption that complex documents like Lisbon can and ought to be synopsised onto a leaflet. I’m not sure that’s either possible or desirable.

Where I disagree with Mick is over his suggestion that "the success of the NO campaign was in prompting Irish citizens to look more closely at the document in order to ask themselves what it all meant." The no campaign was obviously successful but in Sinn Féin’s case some of their and-a-pony wishlist reveals that they either don’t understand the treaty themselves or don’t care what’s in it. Libertas barely stayed this side of disingenous (not that the government was much better). Their success was not in ‘prompting people to look more closely at the document’ but in encouraging people to despair of the whole thing.

I suppose there’s going to be a lot of crowing about how Gordon Brown’s failure to get energy companies to pony up £1bn worth of fuel vouchers for the least well-off. Certainly Brown has some serious problems with his, um, capacity to persuade (things are bad when I agree with classics-my-arse Clarke).

But on this occasion I’m not so sure that his failings are all that bad a thing. The government has an opportunity now to really think about a long-term energy policy. And I think that taxes can do some of the heavy lifting for consumers here. Instead of taxing on profit, we should tax energy companies based on how energy efficient or inefficient their customers are so that companies would have a huge incentive to focus on their customers’ energy efficiency.

It’s worth saying for a start that the vouchers were motivated by good reasons. While, for the average person in the UK, energy consumption makes up 10% of the household budget, poorer households spend 17% of their budget on energy.¹ Unfortunately those households are also the least likely to invest in efficiency measures like insulation. They are either too poor to invest or live in private rented housing and so have no incentive to invest (or both). 

Brown’s failure to get the energy companies to cooperate strangely gives him an advantage. After all, he’s just forgiven them an enormous windfall tax. So he should certainly be getting them to fulfil any vague commitments they’ve made about contributing to household efficiency. But I think Brown should take the next step and lock a commitment to energy efficiency into taxation.

It’s not enough to focus on the efficiency of production because that might just lead to increases in consumption (as lower prices are passed on). Nor would it be enough to tax on price (because that produces no incentives but lots of costs all round). Properly designed,² taxing on efficiency would produce massive companies to invest in their consumers’ energy efficiency. If they don’t invest, the state could do so out of tax revenues. Whatever the shake-down, the consumer (and the environment) wins.

1. See Vanessa Brechling and Stephen Smith, “Household Energy Efficiency in the UK,” Fiscal Studies 15, no. 2 (1994): 44-5 (pdf). Return.

2. We would need a robust regulatory infrastructure so as to avoid companies gaming the system. For instance a company could set up a wholly-owned but separate (as in, off the balance sheet) company, sell off all their inefficient customers and then charge rent on infrastructure to ensure that the second company’s profits got soaked up by the less taxed first. Return.

Well it’s been a long time since posting, partly because I took a long time to upgrade the site to the new version of Drupal. That’s more or less done now. I’ve also installed Mollom, a system that only presents a captcha for comments if it suspects spam. And finally I’ve entirely rewritten the photoblog module. It’s perfect except for one small thing: no photos. Ah well: I’ll figure it out…

In the meanwhile, a Summer of writing and conferences is coming to an end and an Autumn of teaching beckons. So today’s task is to write up a few module outlines.

And in the world at large?

People who spend their lives impugning the character of teenage mothers hector us about privacy as they set about demanding that Sarah Palin’s daughter be turned into a future divorcee. At least, I suppose, she’s not gay (or even worse, gay, Irish and ineligible for equal treatment). More here.