Bailout Rip-off - Exposed by the Market!

Unlike the capitalist media, financial markets do not lie. They can’t afford to. Share prices reflect the prognostications of traders after having considered all the available information. So while our politicians may lie, the market tells the truth.
It is no different with the terms of the NAMA bailout which Socialism or Barbarism has covered in some detail over the past months. While the politicians tell the people that this is a good deal for them, the share prices of Bank of Ireland and Allied Irish Banks jumped at the news of the paltry discount employed to calculate the price taxpayers were going to pay for bad loans.

The financial cataclysm that has hit the Republic of Ireland has impacted all property prices adversely. Future returns look increasingly unlikely to cover the highly inflated asset prices on which many loans were calculated. The first thing to notice is that the ‘distressed loans’ bought off the banks by the Irish state represented the worst element of the loan books of the main banks. The fact that Anglo-Irish Bank (which is already nationalised) was hugely over-represented in this bailout reflects the rapacious nature of its growth strategy.

So when they tell us that a discount of 60% on peak bubble prices is a fair proportion for the taxpayer and reflects the likely contraction value across the market, they neglect to point out that this price is being paid for assets in the worst classes of ‘distress’.

The second thing to note is, that as we identified ahead of many other commentators, that the reality is that the Government may yet have to step in to cover the costs of the shortfall or the ‘haircut’ as it has become known. In the case of Anglo-Irish Bank there is no doubt about this as it is effectively nationalised already but there remains a significant risk that Bank of Ireland and AIB could have been forced into Nationalisation if the prices paid for loans reflected their true market prices.

Market Prices

It is in relation to these that the biggest misrepresentation has been conducted. The total value of loans bought by the Government was initially priced at €90 billion before the crash. Now, they tell us, the market price of these is €54 billion (although the valuation of these would appear somewhat opaque to the external observer). The problem is that this market price, if it is a market price, will price in the likelihood of a future recovery. The reality is that vacant commercial property sold today would only attract very little interest – it has potentially no current worth as there is no conceivable return in the short-term. The prices that investors may be willing to pay is not based on its current worth but on the likelihood of an improvement in the economy providing a income stream justifying that valuation.

In other words, the current market price – as is the case with all market prices – is not simply based on current earnings but a calculation of future earnings. It prices in a future upturn.

Basing the cost to the taxpayer of buying these distressed assets as being above the current ‘market price’ therefore is a nonsense. Current market prices – if neo-liberal economics is to mean anything – are the correct price to pay. There is no justification for providing a €7 billion top-up to the value of property on the grounds that the current market price may rise in the future.

If prices rise in the future it will reflect their price rising above their economic value. In other words, the Government is pricing in the likelihood of a future bubble in the property market.

Now few fools among us might conceive that this would be appropriate. Ireland is a long-term crisis and it is unlikely in the extreme that in the next ten years we are likely to reverse out of this depression and experience a property boom.
Evidence, if evidence were needed that the valuation of the assets prices in future worth is the fact that if the property underpinning these loans was put on the market today it would pick up only a fraction of the €54 billion the state has valued it at.

What should have happened?

The Government has decided to cover the gambling debts of the property developers and the shareholders and its seemingly limitless largesse is funded through the contributions of working-class people. Not only that the cutbacks to wider state expenditure that will be forced in order to pay for this bailout will force a deeper contraction across the Irish economy than would have otherwise happened.
While all the opposition parties have played highly opportunist politics in making great shows of their opposition to the NAMA bailout, the fact remains that this opposition is not grounded on the principle of a socialist alternative but on the grounds that the price paid was too great.

All the parties, therefore, recognise the necessity of the bailout – a necessity grounded in an ideological prostration to neo-liberalism. They believe that the cost of letting the banks collapse to the Irish economy would have been catastrophic and this threat was overwhelming enough to compel any reasonable opposition to accept the bailout but to perhaps demur at the harshness of the terms.

The problem with this is that this approach to the economic crisis is based in Thatcherite economics: the economics that there is no alternative.

Firstly, the bailout didn’t achieve what its proponents claim for it. The main argument of its supporters was that if the banks collapsed the Irish economy would shut down as lending stopped and people couldn’t get money to pay for goods and services. However, the bailout has been marked by its failure to stimulate credit flows across the wider economy – banks have simply sucked up the money given to date to improve their leverage ratios and to expand profit-making activities.

The reality is that it would have been very easy for the state to set up alternative financial management structures. The banks once collapsed could be taken into public ownership and rationalised to form a new publicly-owned bank oriented to consumer banking and perhaps with an investment wing to stimulate investment in cooperatives and small businesses.

Through taking on the banks once they had collapsed the government would have avoided the costs associated with their bailout and with their ongoing recapitalisation. Deposits of €100,000 or less could have been guaranteed while those with more would have obtained only a fraction of that above that figure. The small man could have been protected.

At the same time, the state would have obtained a colossal portfolio of property with which it could stimulate the growth and development of a more sustainable, productive and balanced economy. The problem of housing shortage could have been addressed with little additional investment.

There would have been a shock through the Irish economy – not so much from the impact of the bank failures but from the shock that the Irish Government were serious about a socialist economy. But it would have been little worse than that we’re already facing. Money wasted in bailing the banks out could have been invested in a large-scale development of renewable energy along the west coast, in supporting the development of Ireland’s agricultural potential in an era of food-scarcity or in developing gas fields along the Corrib.

That this alternative appeared impossible to any of the parties in Leinster House reflects on their ideological pre-disposition to the market and the fact that none of them are committed to anything close to an economics that can meet the needs of Irish people.

Irrespective of their ideological leanings, revolutionaries should work alongside other parties to protest this bailout. It is important to publicly gather to keep the pressure on this Government and build an awareness that it is a rip-off.