Creating "bad banks"

youcrazyjesus!

Can anybody qualified comment on this article in relation to nationalising Anglo:

http://www.irishtimes.com/newspaper/opinion/2009/0120/1232059661333.html

It makes extremely serious allegations against the Government, particularly in the current economic situation.

Also a comment by a Mr B.Lenihan I found interesting: "This is the last step short of nationalisation… Were we to go from the last step before nationalisation to nationalisation itself, the taxpayer will be taking an awful lot of risk with no return"

thebman

b.ie curious wrote: »

By such logic we should nationalise farms.

Not really, you can import food. It isn't essential that we have control of farms. If farmers start demanding 2,000 euro for a potato tomorrow, we'll find another source for potatoes

nesf wrote: »

The Government doesn't get involved in communications because it's not really worth their while, having sway over the financial regulator or those running a nationalised bank on the other hand is a very different proposition. What's to stop them appointing a regulation/chairman who's amenable to doing political favours?

The people, the press, the opposition. Your basically suggesting government doesn't work for anything because they can get involved whenever they want and arse thigns up but that isn't the case in practice.

They don't have free run as shown when they had to turn back on half their decisions in the budget because of how unpopular they were.

D.S.

youcrazyjesus! wrote: »

Can anybody qualified comment on this article in relation to nationalising Anglo:

http://www.irishtimes.com/newspaper/opinion/2009/0120/1232059661333.html

It makes extremely serious allegations against the Government, particularly in the current economic situation.

It's a v poor article I must say. He clearly has little knowledge of the root causes of the crisis and has not mentioned the full knock on affect of an Anglo Irish failure. And of course, typical of the shoddy, illinformed, sensationalist dribble we have to read on this crisis, Kelly makes an untold number of references with few sources/facts/figures to support his views.

At the end of the day, the Government is in a v difficult position. It needs to balance political needs with economic ones. It's all well and good saying that it is ok to let Anglo fail and let the pieces for where they may but that would be political suicide for the Government. All stakeholders involved with Anglo would immediately turn on the Government. It's a incredibly naiive view.

From an economic perspective, the knock-on effect from letting Anglo fail is also quite severe. Continued uncertainty in the financial system, a drop in Ireland's triple A rating would be guaranteed and could be severe. Property developers all over the country could go bust meaning less jobs, less circulation of cash never to mind the loss of jobs from Anglo itself. One could view a fall in property values as a benefit but Kelly's comment that

Developers would have gone bust and commercial property would have become more or less worthless, but that is going to happen anyway, with or without Anglo Irish.

is a bit of a stretch and is terribly annoying as a statement.

At the end of the day, I don't see how Anglo is viable as a business going forward. I don't believe though that allowing the bank to "Fail" is necessarily the best option for this economy. I believe the stakeholders in the bank should be first protected. Debts should be called in from borrowers in a controlled manner and in the medium term (Note: not short term) the bank should be wound down. That's my personal view. I don't think allowing any bank to fail and default on it's obligations is good for the economy.

A poor article all round. Particularly this little gem:

The proposed Anglo nationalisation marks a decisive watershed in Irish democracy. With it, an Irish government has coolly looked its citizens in the eye and said: “Sorry, but your priorities are not ours.”

A beautifully sensationalist comment which means absolutely nothing. A lovely mechanism that allows the writer to transform his personal (and poor) views on the crisis into the "public's priorities".

My advice is to be highly skeptical of the Irish media. Look perhaps to the English/European financial media to supplement what we are hearing here (FT etc). None of it will hit the nose on the head but collectively a more balanced take on the crisis can be achieved (I'm not for an instance saying this article represents your views).

Flamed Diving

At any point are we allowed to look at ourselves (individuals) and take some responsibility for this? What about the countless people who blew all their earnings over the last decade on cars/clothes/holidays they couldn't afford? I know people may rightly point to the banks/government and say that they should take responsibility for this, but some of this must land at the individual level, also. I think it is all too easy to simply blame banks and government officials, but many of those pointing the finger are the very ones who maxed their credit card on essentials at Brown Thomas, each month. Everyone needs to take responsibility for this, at all levels.

D.S.

Flamed Diving wrote: »

At any point are we allowed to look at ourselves (individuals) and take some responsibility for this? What about the countless people who blew all their earnings over the last decade on cars/clothes/holidays they couldn't afford? I know people may rightly point to the banks/government and say that they should take responsibility for this, but some of this must land at the individual level, also. I think it is all too easy to simply blame banks and government officials, but many of those pointing the finger are the very ones who maxed their credit card on essentials at Brown Thomas, each month. Everyone needs to take responsibility for this, at all levels.

Totally agree. It was the public's insatiable appetite for credit (personal loans, hire purchase, mortgages, credit cards etc etc) which drove the the boom over the last few years. Primarily, the need among Irish people to own their own homes. If you look to other European countries, the % of people who rent their primary residence far exceeds the number here. The Government (as public representatives) fuelled/aided this need via the stamp duty scheme for first time buyers, TRS, etc etc.

Additionally, as a nation we accepted ridiculous prices on goods and services. Never voting with our feet when prices were too expensive.

We have a lot to answer for ourselves. Without some degree of social change in this country, the problems we are facing may become a vicous circle.

Flamed Diving

D.S. wrote: »

Totally agree. It was the public's insatiable appetite for credit (personal loans, hire purchase, mortgages, credit cards etc etc) which drove the the boom over the last few years. Primarily, the need among Irish people to own their own homes. If you look to other European countries, the % of people who rent their primary residence far exceeds the number here. The Government (as public representatives) fuelled/aided this need via the stamp duty scheme for first time buyers, TRS, etc etc.

Additionally, as a nation we accepted ridiculous prices on goods and services. Never voting with our feet when prices were too expensive.

We have a lot to answer for ourselves. Without some degree of social change in this country, the problems we are facing may become a vicous circle.

That's one of the most interesting points that I have been mulling over recently. We appear to have developed a culture where owning a home is not just a priority, but almost a rite of passage. My hope for the aftermath of this crisis is that society will realise that not everybody deserves to get a mortgage. Owning your own home is not some god-given right, but must be earned and if you cannot afford to buy a house, then rent one.

D.S.

Flamed Diving wrote: »

That's one of the most interesting points that I have been mulling over recently. We appear to have developed a culture where owning a home is not just a priority, but almost a rite of passage. My hope for the aftermath of this crisis is that society will realise that not everybody deserves to get a mortgage. Owning your own home is not some god-given right, but must be earned and if you cannot afford to buy a house, then rent one.

I would differ slightly on the fact you say that owning a home is not a right. Everyone has the right to own a home. However, owning a home shouldn't be incentivised to be the best method of securing a residence. House prices should not be safeguarded by the system to consistently rise. Renting is a sensible option in many cases and shouldn't be disregarded. If lending standards do significantly tighten, perhaps renting will become the only option for many as a result.

As an aside, I like the French system whereby if you purchase a home and sell with the first number of years you pay an extortionate amount of tax on the profit. The amount of tax you pay on the profit of your Home should you sell declines for every year you are resident. This incentivises people to purchase a home to live rather than to sell. I'd like to see something like this introduced here. Clearly, we can't make it difficult for people to trade up homes but this could be overcome.

Anyway, we're starting to veer a little off topic..

Flamed Diving

D.S. wrote: »

I would differ slightly on the fact you say that owning a home is not a right. Everyone has the right to own a home.

I disagree. This is where the fundamental problem comes in, people thinking that they have a right to such things. Not everybody can own a house, they simply don't earn enough. But the belief that they do have a right drives them to take crazy loans that they cannot afford. Hence, we arrive at the problems we have today.

Permabear

This post has been deleted.

Tricity Bendix

D.S. wrote: »

As an aside, I like the French system whereby if you purchase a home and sell with the first number of years you pay an extortionate amount of tax on the profit. The amount of tax you pay on the profit of your Home should you sell declines for every year you are resident. This incentivises people to purchase a home to live rather than to sell. I'd like to see something like this introduced here. Clearly, we can't make it difficult for people to trade up homes but this could be overcome.

I don't like this tax. It is in no way targeted. It catches too many people who aren't investors. It also hampers labour mobility.

D.S.

Flamed Diving wrote: »

I disagree. This is where the fundamental problem comes in, people thinking that they have a right to such things. Not everybody can own a house, they simply don't earn enough. But the belief that they do have a right drives them to take crazy loans that they cannot afford. Hence, we arrive at the problems we have today.

I hear what you saying. I agree not everyone can own a house. But everyone has the right to, whether you like it or not, simply because of freedom of choice. If you can afford it, and can obtain it, you can do so. The problems here are 1) the attidude everyone should own their own home, rather than rent, 2) Government incentivisation and 3) Weakening lending standards.

The attitude certainly needs to change. It stretches back from the landlord system of the past where owning your own land is a prestigous thing. This attidude has been supported by Government incentives like stamp duty and by weakening lending standards. Rectifying the last two removes the enablers. A change in attidue would take much longer and may be so deep rooted that it may not change for decades. Using the French system I mentioned earlier would help with this social change.

In either case, everyone simple has the right to own a home. Addressing the problem we have where everyone actually feels the need to own their own home is where the focus should be.

D.S.

b.ie curious wrote: »

I don't like this tax. It is in no way targeted. It catches too many people who aren't investors. It also hampers labour mobility.

For me, that's exactly the point. A home is a basic need. You shouldn't profit off the buying and selling of homes frivalously (spelling?). What happened in this country was that every joe soap in the country had a chance to flip on their home and make a profit as you paid less tax once you were resident. This helped fuel the property boom.

I think a variation on the French system would bring stability to the market. Penalise those who sell quickly. Don't incentivise people to flip homes unnecessarily and prevent homes from becoming overpriced to the degree where no-one can afford one.

For instance, a major risk we could have is that property prices only fall back slighly in the long run but lending standards severely tighten creating a haves and have nots situation.

Such a measure though, seems to implicitly assume that people have reached a 'settled' stage in their life.

For example, lets assume that the you need to hold a house for 7 years to get beyond the heavy tax penalties. Then lets say I buy a house when I am 30, but then want to trade up as I have more kids, or am offered a better job etc. I can't then either take the new job or have more kids as the house is unsuitable for this. This tax may cause further rigidities in the labour market, or else will cause a rise in wages for transferring skilled workers (and I think a policy of rising wages is the last thing needed right now).

This may work better in France, where, I think, they have more of a job for life culture, so once you enter the workforce and are able to purchase a house, you probably won't be moving in a geographical sense. In Ireland however, this doesn't exist.

Futhermore, would such a policy not lead to upward price pressure as there would be high demand in urban areas with a supply that is restricted by this tax?

nesf

youcrazyjesus! wrote: »

This all sounds like hogwash to me and quite spurious given any system would obviously be run independent of political influence and concerns. State run does not mean Government run.

Political interference in State bodies is an unfortunate reality I'm afraid. State run doesn't mean Government run but if the Government appoint the people running the State company or control its budget or legislation governing it they have a very large influence over it.

brim4brim wrote: »

They don't have free run as shown when they had to turn back on half their decisions in the budget because of how unpopular they were.

But populism is the exact problem here. Governments are always presented with the option/quandary/whatever of influencing State institutions to fulfil populist needs. The problem is that often populist wants are not the best option nationally.

Flamed Diving

donegalfella wrote: »

This post has been deleted.

My point exactly. Not everyone has the automatic right to own a house. They must earn it.

D.S.

Deleted User wrote: »

Such a measure though, seems to implicitly assume that people have reached a 'settled' stage in their life.

For example, lets assume that the you need to hold a house for 7 years to get beyond the heavy tax penalties. Then lets say I buy a house when I am 30, but then want to trade up as I have more kids, or am offered a better job etc. I can't then either take the new job or have more kids as the house is unsuitable for this. This tax may cause further rigidities in the labour market, or else will cause a rise in wages for transferring skilled workers (and I think a policy of rising wages is the last thing needed right now).

This may work better in France, where, I think, they have more of a job for life culture, so once you enter the workforce and are able to purchase a house, you probably won't be moving in a geographical sense. In Ireland however, this doesn't exist.

Futhermore, would such a policy not lead to upward price pressure as there would be high demand in urban areas with a supply that is restricted by this tax?

Your analysis presumes that everyone would want to own a home, which they possibly shouldn't.

There are ways to offset the tax burden for families trading up that would alleviate the pressure you mentioned.

You're right that demand in rural areas could be subject to upward price pressure, however this would be assuming no revision of urban planning laws and densities.

I don't really wish to argue the merits of this plan over any other. My point is that far more people should be renting rather than home-owning for several reasons. The French system is one avenue that could be explored with the objective of stabilising the housing market, preventing frequent flipping of properties which aid in creating credit fueled booms. There are probably several other avenues that may or not work. But incentivising home ownership is not necessarily what the Government should be doing right now. Incentivising rental accommodation might actually have more of an economic benefit in allowing borrowers a steadier flow of rental income, thus ensuring loans and debts are paid off.

True, I thought that was the premise of your original argument though.

Nice to see some economics being discussed though. Makes a change from the usual ****e.

youcrazyjesus!

Flamed Diving wrote: »

That's one of the most interesting points that I have been mulling over recently. We appear to have developed a culture where owning a home is not just a priority, but almost a rite of passage. My hope for the aftermath of this crisis is that society will realise that not everybody deserves to get a mortgage. Owning your own home is not some god-given right, but must be earned and if you cannot afford to buy a house, then rent one.

This is all well and good but developers and speculators were cleaning up on this front. Yes demand, demand, demand but if you are putting the same or nearly the same amount into rent as you are into a mortgage then obviously it makes sense to buy not rent no?

It's was the banks lending practices, driven by their own greed not the little man's, which caused problems too.

I am sorry. Supply = Demand. We had a lot of supply and demand rose to meet it. So saying that 'the people who bought the houses' are not to blame is wrong. Blame lies on both sides.

And no, it doesn't make sense to rent unless you are sure that you will be able to keep paying back the mortgage of however many years it will take. Just because rent = mortgage payments now is a stupid and myopic approach to evaluating whether to buy a house.

D.S.

Deleted User wrote: »

True, I thought that was the premise of your original argument though.

Nice to see some economics being discussed though. Makes a change from the usual ****e.

No it wasn't actually . My original premise was 1) not everyone should own a home and more people in this country should rent, and 2) therefore the Government should incentivise people to rent more rather than necessarily own.

I'd rather see the Government pull the first time buyer grant and replace that with some tax credits for renting.

However, that wouldn't necessarily bring stability to the Housing market. I'd argue that using a system such as the French one I mentioned would stabilise house prices, and prevent future property bubbles. That being said, strictly copying the French system as already mentioned wouldn't be feasible, and I am only using it as an example to point out a method to potentially counteract the current social preference in Ireland to owning a home.

youcrazyjesus!

Deleted User wrote: »

I am sorry. Supply = Demand. We had a lot of supply and demand rose to meet it. So saying that 'the people who bought the houses' are not to blame is wrong. Blame lies on both sides.

I already mentioned demand and I said "which caused problems too".

And no, it doesn't make sense to rent unless you are sure that you will be able to keep paying back the mortgage of however many years it will take. Just because rent = mortgage payments now is a stupid and myopic approach to evaluating whether to buy a house.

It certainly seems so now. However people were encouraged to do this, they got caught up in the hype which told them the property boom would go on forever. It was one giant pyramid scheme and the banks, developers and the Government encouraged everybody to get involved, in word and in deed. I don't own a house so I'm not talking through my pockets. I have a lot of sympathy for those who were sucked in to the hype and nothing but contempt for those who allowed this situation to arise, contrary to common sense.

On another point, I have say to those who say the property implosion and economic recession was unforseeable are completely wrong. I remember reading articles and talking to people 2 and 3 years ago who said is was unsustainable and would cause major problems in the future and I had very little interest in that sort of thing at the time. I find it incredible that anybody who did have an interest would say that nobody saw what was happening or could happen. Or if you did presumably you dismissed those people as naysayers and begrudgers and laughed when Bertie told them to committ suicide.

Flamed Diving

youcrazyjesus! wrote: »

It's was the banks lending practices, driven by their own greed not the little man's, which caused problems too.

I think everybody is to blame. Government, banks and individuals. Everyone must take responsibility.

Flamed Diving

Deleted User wrote: »

Just because rent = mortgage payments now is a stupid and myopic approach to evaluating whether to buy a house.

Spot on. In addition, renting a house is generally much cheaper than buying it. You also have the benefit of knowing what the cost of rent well be for a year, each time you sign a lease agreement.

Flamed Diving

youcrazyjesus! wrote: »

On another point, I have say to those who say the property implosion and economic recession was unforseeable are completely wrong. I remember reading articles and talking to people 2 and 3 years ago who said is was unsustainable and would cause major problems in the future and I had very little interest in that sort of thing at the time. I find it incredible that anybody who did have an interest would say that nobody saw what was happening or could happen. Or if you did presumably you dismissed those people as naysayers and begrudgers and laughed when Bertie told them to committ suicide.

It was the manner in which it happened, which surprised me. But then again, I knew nothing of the scale of bank's OBS activities. This is something that should be watched like a hawk, in future.

Tricity Bendix

D.S. wrote: »

For me, that's exactly the point. A home is a basic need. You shouldn't profit off the buying and selling of homes frivalously (spelling?). What happened in this country was that every joe soap in the country had a chance to flip on their home and make a profit as you paid less tax once you were resident. This helped fuel the property boom.

Hang on, for you the point of this tax is to hamper labour mobility and tax people indiscriminately? I'm totally confused. Why the hell would you want to do such a thing?

I think a variation on the French system would bring stability to the market. Penalise those who sell quickly. Don't incentivise people to flip homes unnecessarily and prevent homes from becoming overpriced to the degree where no-one can afford one.

What about people who have legitimate reason to want to move house after, say, a year? As zaraba said, what happens if you need to move to a bigger house because you have an expanding family? The property tax effectively becomes a pregnancy tax. Or what if you get offered a promotion that requires you to move to another town or city? The property tax then inhibits labour mobility, which has an effect on economic efficiency.

D.S.

b.ie curious wrote: »

Hang on, for you the point of this tax is to hamper labour mobility and tax people indiscriminately? I'm totally confused. Why the hell would you want to do such a thing?


What about people who have legitimate reason to want to move house after, say, a year? As zaraba said, what happens if you need to move to a bigger house because you have an expanding family? The property tax effectively becomes a pregnancy tax. Or what if you get offered a promotion that requires you to move to another town or city? The property tax then inhibits labour mobility, which has an effect on economic efficiency.

Hang on a minute, as I said twice now previously, I am not citing that we should all jump ahead and adopt the French system. My point simpy is that the Irish predominately tend to own their own homes in comparison to other European countries where renting a home takes up a greater percentage of residence types. Where this digression started off was simply that everybody seems to be blaming the banks/politicians for the current crisis. Simply put, the punter on the street needs to take a cold hard look at himself also as 1) his/her appetite to own a home at all costs drove up prices, and 2) his/her willingness to continue to pay these high prices (not just houses, but generally) aided in wage/price spiral that has led to Ireland now being uncompetitive.

Ireland should have a greater proportion of people renting their homes (which increases labour mobility) than it does presently. The existing tax incentives favour those who own a home (stamp duty, TRS etc). Furthermore, over the last few years, homeowners caught themselves up in the boom with many buying and flipping on quite quickly which distorted the market and part-fueled our property bubble.

I'm simply advocating that we should cease incentivising home ownership and do the converse, incentivise a renting culture. It would aid the economy particularly in the current climate by steading income flows for landlords and in turn help stabilise the banking system.

On the French system itself, I'm simply advocating that it would prevent a house bubble like we experienced. Clearly, in it's current form (as I have posted a few times) it would not be suitable to directly replicate over here. But I do think the Government should be looking at mechanisms to prevent excessive inflation in the housing market. First time buyers grant etc is based on our social need to own a home. It really should be done away with as it significantly added to price inflation. If you can't afford a home, you shouldn't be entitled to a Government grant to help you get one. Particlularly when that grant ends up adding to inflation. The individual should be incentivised to rent, and perhaps also save until he/she can afford that home.

Tricity Bendix

D.S. wrote: »

Hang on a minute, as I said twice now previously, I am not citing that we should all jump ahead and adopt the French system. My point simpy is that the Irish predominately tend to own their own homes in comparison to other European countries where renting a home takes up a greater percentage of residence types. Where this digression started off was simply that everybody seems to be blaming the banks/politicians for the current crisis. Simply put, the punter on the street needs to take a cold hard look at himself also as 1) his/her appetite to own a home at all costs drove up prices, and 2) his/her willingness to continue to pay these high prices (not just houses, but generally) aided in wage/price spiral that has led to Ireland now being uncompetitive.

Ireland should have a greater proportion of people renting their homes (which increases labour mobility) than it does presently. The existing tax incentives favour those who own a home (stamp duty, TRS etc). Furthermore, over the last few years, homeowners caught themselves up in the boom with many buying and flipping on quite quickly which distorted the market and part-fueled our property bubble.

I'm simply advocating that we should cease incentivising home ownership and do the converse, incentivise a renting culture. It would aid the economy particularly in the current climate by steading income flows for landlords and in turn help stabilise the banking system.

On the French system itself, I'm simply advocating that it would prevent a house bubble like we experienced. Clearly, in it's current form (as I have posted a few times) it would not be suitable to directly replicate over here. But I do think the Government should be looking at mechanisms to prevent excessive inflation in the housing market. First time buyers grant etc is based on our social need to own a home. It really should be done away with as it significantly added to price inflation. If you can't afford a home, you shouldn't be entitled to a Government grant to help you get one. Particlularly when that grant ends up adding to inflation. The individual should be incentivised to rent, and perhaps also save until he/she can afford that home.

As you will have noticed, I never took issue with what you were saying about the imbalance between renting and house ownership in Ireland. I also never made a peep about the stability of the housing market. So you will have to forgive me if I don't respond to those parts of your post that pertain to these issues. I only waded in because I think the French system is horribly inefficient and unfair and I would not like to see it emulated here. I hate to sound badgery, but you have changed your tune regarding this specific mechanism. Origionally you said you liked it, and that you'd like to see something similar introduced here. I have said I don't like it and would not like to see it or anything like it introduced here. You went on to say you'd like to penalise people who sell quickly, and I went on to say that penalising people who move quickly penalises a lot of innocent folk, not just investors who see houses as investments not homes. You seem to disown it in this post, and simply advocate some "mechanism" to prevent house price inflation. Well, I think its safe to say that pretty much everbody in the country would welcome such a mechanism, but finding one is hard.

Where we probably would agree is on state intervention on the demand side. I don't know about stability per se, but the bubble would have been pricked a lot sooner had house ownership not been so eagerly encouraged. I'd much rather see government supports removed than to see incentive-distorting taxes brought in to alleviate the downside of incentive-distorting subsidies.

silverharp

D.S. wrote: »

I'd rather see the Government pull the first time buyer grant and replace that with some tax credits for renting.

why should there be any in either direction, the last decade should surely be a lesson that any tax credit rarely helps the people intended, Also given that housing is a consumption item it seems a waste of resources to "help" consumption?

BenjAii

Flamed Diving wrote: »

Spot on. In addition, renting a house is generally much cheaper than buying it. You also have the benefit of knowing what the cost of rent well be for a year, each time you sign a lease agreement.

I agree home ownership is not the be all and end all.

It seems we in Ireland (likewise UK, and US) have become addicted to the mirage of "wealth creation" through property booms. I do wonder next time round, will we be collectively clever enough in Ireland to avoid it again.

Another mechanism for easily preventing booms (apart from property tax) would be to ensure councils were legally obliged to put planning permission for social housing at the top of the queue, and only after demand for that was satisfied give permission for new private development.

In that way, anyone who wanted to would have access housing that was priced at cost + reasonable profit to builders (say 10-15%).

I'm guessing here, but I would imagine in Ireland that would mean 1-2 bed apartments for 150K and houses for 200k.

I fail to see how we can enforce price restrictions that won't lead to excess market distortions.

Better I think, to regulate the agencies who issued credit. Once (and if) the public adjust to a lack of cheap and easy credit, the markets should settle down without the need for extra regulation.