September 2008 Archives

Guarantees for Banks

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The value of the proposed bale out in the US is equivalent to US$2,000 per US citizen. The Irish bale out could be worth up to €125,000 per man, woman and child. If US citizens won't accept their bale out, why should we accept something a hundred times larger?

The Government's action is nothing more or less than a huge reward, underwritten by taxpayers, to banks for foolish lending, to the Regulator for failing to regulate, and to its beloved construction industry.

It does absolutely nothing to address the underling problems which the banks, government and construction industry jointly created over the last five years by building, selling and financing grossly over-priced houses and commercial property.

This is the AIB and ICI rescue repeating itself. Where are the restrictions on bankers remuneration? Where are the equity stakes? Why should Irish taxpayers guarantee to bale out a bank that stupidly financed an overpriced property development in Dublin, London or Germany or made billions by conspiring with house builders to lock hundreds of thousands of young purchasers in huge mortgages for the rest of their working lives?

Irish households are amongst the most heavily borrowed in the world and, instead of helping them, the Government gives guarantees worth a multiple of the Irish economy's annual output to the Irish banks.  This, on top of the hammering that households can expect in the forthcoming budget.

Lead letter published in the Irish Times on 1st October 2008.

National Wages Analysis

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The proposed new national wage agreement continues the practice of awarding percentage increases "across the board" with only a token nod to the lowest paid. This has helped make our ministers, TDs, and highest earning public sector managers and professionals amongst the best paid in the world and has progressively widened the income gap between low and high paid.

Using data from the CSO's National Employment Survey for 2006, the proposed agreement's impact on employees who account for 82% of the work force can be assessed as follows:

  • Gross earnings of 1.7 million employees amounted to €63 billion and the proposed agreement would increase this by €3.8 billion (6.1%) if applied to all employees. 
  • Because the proposed increases are percentages, lower paid employees would receive much smaller monetary gains. This means that about 233,000 workers earning less than €13,000 a year would share an increase of €173 million whereas the 75,000 employees earning over €75,000 a year would share about €466 million. Put another way, the lowest paid workers (14% of all employees) would get 5% of the cake while the much less numerous highest paid (4% of total) would get a 12% slice.
  • The 0.5% "bonus" for the low-paid employees would be worth less €2 a week per worker. It would apply to about 500,000 workers but account for a mere 1% of the total proposed increase.

Aside from being inequitable, the proposed agreement ignores the fact that world economies are facing a possible serious recession and that, thanks to the excesses of the Celtic Tiger, our open economy has become completely uncompetitive. Given that the global credit crisis has yet to reach our real economy, a much more radical agreement is needed. For example, to restore competitiveness and social equity, the proposed percentages could be reassigned so that the lowest paid get the 6% and the highest get the 0.5% over the agreement's life. If applied on a sliding scale to all workers, the cost would be about €2 billion, just over half that of the proposed agreement.

House Prices

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Five years ago you published a letter from me about house prices (28th October 2003) which stated that "rising interest rates could move many recent and future buyers with large mortgages into negative equity and expose their lenders to defaulting loans. It could also mean that many houses acquired as investments might be offered for sale to lock in gains or to cut losses. This would further depress prices. Can nothing be done to prevent this calamitous event from happening?".

Clearly, very little was done. If a mere letter writer could foresee this crisis, why didn't the Government?

The best thing the Government can do now to assist the beleaguered building industry is absolutely nothing! House prices should be allowed continue their rapid descent to a point where people and lenders become confident that they have finally reached a reasonable and sustainable level.

There should be no dig outs or artificial schemes as these will merely defer decisions by those who would wish to purchase a quarter of a million houses over the next five years. The return of affordable housing for all would be real shot in the arm for society and the economy.

To consolidate this, the Government must introduce much-discussed controls on the price of building land and, in conjunction with the Central Bank, implement measures which curtail inflationary lending for house purchases.

Letter published in the Irish Times on 10th September 2008.

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