I’ve thought about it … and I’m voting yes

May 19th, 2012

Here are my reasons why…

 

1.    Voting No will not bring less austerity, it will bring more, faster and more ruthless austerity

Contrary to those arguing from the left, this is not an ‘austerity treaty’. A more accurate description would be an ‘anti-austerity’ treaty. If we vote no, it is highly unlikely Europe / ECB will give us a second bailout. This will leave us to balance our books in 2013, or try to get additional funds from the IMF. We have already borrowed more from the IMF than is normally permitted, only because of guarantees from Europe. Without these guarantees the IMF may not lend more to us. In either case, a solo IMF bailout, or no bailout at all will result in instant cuts hitting hardest those the left claim to represent.


2.    It’s a sop to the German electorate

Who are we planning to federalise the debt with??? By federalising the banking debt, French and German banks, and by extension, French and German taxpayers will shoulder their share of the banking crisis with us. Should we be sticking two fingers up at them? If a sop, such as this, is required by the people we are expecting to share the pain, lets do it, and move on to federalising the debt.


3.    It does not stop us from renegotiating our banking debt in the future

We do not want to hold on to the coat tails of Greece as she exits the Eurozone. Instead we should aim to hold on the the coat tails of Italy and Spain as their banking systems are too big to fail. Voting Yes puts us in position to federalise our banking debt in the context of Italian and Spanish banking solutions.


4.    We do not have a veto, we may not get a second chance

This treaty has been specifically constructed so that individual countries do not have a veto. If we vote no, Europe does not have to wait for us. Indeed, a question mark over Irelands participation in Europe incentivises other countries not to stop for Ireland. Our membership of the Euro is one of many reasons for investment in Ireland. If we are not in the Euro, that investment may go to other countries who are in the Euro. If we vote no they will have an incentive not to wait for a second referendum.


5.    Voting no will not bring us closer to a federal Europe

National and European politicians have shown themselves to be weak in providing us with a vision of what Europe is is to become. To date, only Declan Ganley / Libertas have really spelt out their vision for a Europe of the future. How can people have an opinion on a Europe when our leaders do not tell us what we are voting for? That being said, voting no will not bring us one iota closer to a federal Europe, or any other future Europe of which Ireland is a part. Unless your vision of Europe involves Ireland not being part of Europe, voting no does not move us, or Europe in the right direction.


6.    At a time when Greece looks to be on the way out of the Eurozone, we should not put a question mark over our continuation in the Euro

If Greece elects non bailout parties the process of Greece leaving the Eurozone will begin. That process will be traumatic for Greece, but will affect us in Ireland also. A no vote will raise the prospect that Ireland could also leave the Eurozone, possibly at the same time as Greece, possibly later. It is a self fulfilling prophecy, the fact that the question mark exists makes the outcome more likely. A Yes vote puts us firmly in the Euro which will be important as Greece exits.


7.    It enshrines into law many laudable principles, most of which we have already committed to in previous treaties

Although some of the economics may be ‘terrible’ the principle of having a reasonable debt:GDP ratio, of spending no more than we earn, of balancing our books are principles we should welcome. Indeed theses are principles we have already signed up to in previous treaties. Even outside of a European context there are good arguments for putting these types of limits on politicians spending.


8.    Vote on the treaty, not the government

I strongly believe that the saddling of this country with the banking and gambling debts of others is abhorrent. I strongly believe that this debt should be shared by all Europeans, it is a European problem with a European solution. By definition therefore we need to be in Europe rather than out of it. We should be voting in favour of this referendum for that reason. If our government fails to deliver on federalising banking debts we will have ample opportunity to make out voices heard.

 

It would be easy for many reasons to take a position against this treaty, but the responsible, self interested, enlightened thing to do is vote yes.

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We need to create jobs!

September 12th, 2011

The closure of Talk Talk is not just a symptom of what has happened to this country over the past years, but also a warning of what could happen in the future. We don’t have growth, and what we have is provided by the multinational sector. We have heard politicians in recent years talk about the importance of sentiment to our banks and our government, but in reality the sentiment of our multinational sector is what is keeping this country afloat. For that reason, instead of grand standing, point scoring and blaming, we must all engage in the generation of ideas that improve our lot. The solutions to our problems will not be the solutions of the few, but the solutions of the many. Everybody has an idea, some action that can be done, and some fault that can be remedied. This is my contribution to that process.

Mary Roche in her blog ( http://cllrmaryroche.blogspot.com/2011/09/actions-not-words-for-waterford.html ) makes many excellent points, in particular about selling. We need to

1)   Sell the South East to our government agencies by promoting what we are doing locally to attract business

2)   Sell the South East to the world by promoting what we are good at

3)   Sell our local goods and services to our local multinationals

4)   Sell our local goods and services to the world by demonstrating what our local businesses have achieved at home

We need to create jobs.

1)   Identify what we are good at. Work with the local (ahem) university to identify areas of expertise. We can’t be world beaters at everything, but we have a bias. What is going to back the brand of Waterford and the South East when we market ourselves to the world?

2)   Identify one or more locations. Give these locations time limited derogations from rates. Think about how best to do this, perhaps provide rates credits tied to the purchase of local goods and services. Using a method like this makes the provision revenue neutral. Provide modern infrastructure, broadband, electricity – we have all these modern facilities available, lets make a point of making that known. Find out from our existing multi-nationals what more we can do for them, and for others. Define what it is that makes multi-nations pick one location over another. What else can we provide to make ourselves a more attractive location for business?

3)   Use local government agencies then identify what products and services the multi-nationals are purchasing abroad. Setup a panel of local businesses of all types and use the government agencies as a conduit for information feeding the purchasing needs of the multi-nationals to local firms, and highlighting the skills of the local firms to the multi-nationals.

4)   In these new locations, provide buildings for local startups. These will have the same modern facilities as those for the international companies. The idea is to foster the growth of locally owned companies who can sell firstly into the multinationals and then, once established sell these same products and services abroad. This is the stepping stone we are missing, moving from reliance on multi-nationals to locally owned international companies [generating local wealth].

5)   Don’t give grants, tax back, continued dole, free facilities – yes, but grants, no. But also don’t put red tape or requirements for head counts on start-ups.  This is a jobs crisis. If someone has an idea that can provide one job – that is deserving of any support local government can give.

 

I am sure our TD’s, councillors, government agencies, local agencies and more are working to resolve this jobs crisis, but you have a part to play too.

It is not good enough to grumble.

If you can make it easier for a business to start, do it. If you have ideas to make it easier for businesses to start, say it. If you are thinking of starting a business, start it. Words don’t create jobs, people do. Rather than looking for our next Intel or Microsoft or Pfizer…or Dell…or Talk Talk, lets plan on how we can create 100 new small, internationally trading, locally owned companies. To do that we will may need to create 1,000 start-ups, but if we can do that, as well as the 100 small companies we will have the human and financial capital that ensures we never suffer a week like this again. To get 100 successful companies from 1000 starts means that 900 must fail, and that is hard. We do not learn to walk without falling over, but when our children fall we do not punish them. As a society we must learn to hold a helping hand to those whose businesses fail and see failure as an important step to success. Not just for them, but for us all. We need to culturally embrace business, we all have the ability to run a business and we have a cultural character made for business. We now need to unleash that ability.

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I’m backing Britain, independents are backing themselves!

June 8th, 2011

Too often we… enjoy the comfort of opinion without the discomfort of thought.  ~John F. Kennedy

In January of 1968 five typists, in a patriotic effort to rejuvenate Britain started a campaign called ‘I’m backing Britain’. They pledged to work one extra hour, for free, in an effort to increase productivity and halt the decline in British fortunes. Their selfless act soon snowballed into a nationwide campaign. The acts of these women, which of themselves seemed so small compared to the size of the national economy, inspired thousands. It resulted in the giving of ‘conscience money’ to the British exchequer. This money, given freely by citizens was specifically used to pay down the national debt.

Unions, the status quo at the time, predictably did not like people giving their [over]time for free and actively worked to snuff the idea out.

What is so startling, is that five English typists in 1968 showed more leadership than our independent TD’s. These people did not sit in the Dáil, they did not make the rules, they themselves were not in a position to change the fortunes of the country, but they tried anyway. They could have worked the extra hour and kept the money themselves. They could have worked the extra hour and given the money to charity (boasting about it to the papers). They did neither of these things.

Those brave women believed that every single person had a part to play. They spoke through their actions.

The leaders allowance was brought in by Bertie Ahern to buy the votes of the independent TD’s, money which is now being used to buy our votes. When we talked of corruption in the last Dáil, these are the types of payments I at least had in mind. It is beyond  defensible that any independent TD who ran on the basis that the country is going bust, or that corruption must be stamped out could accept this payment. All they had to do was refuse it  specifying the money is to be used to pay down the national debt. Do our independent TD’s feel that their actions are any less powerful than those of five English typists?

Put this in any terms you wish, it is money the TD’s should not be getting. That €41k could pay for an extra Garda, an extra teacher, and extra nurse. It’s many, many low paid workers Universal Social Charge. On one level it’s just morally wrong, but on another level, it makes me very uncomfortable that our new independents feel it is okay to use this money for their own personal means, it’s not their money.

Finally, for any politician using the money for charity purposes, the question must be asked, what do they plan to do with the €20,000 cheque from the revenue. It is entirely possible for such TD’s to give the money to charity in such a way as to claim almost half of it back again in tax (or give that to charity too!).

Five typists from England have greater insight and more leadership than our new independent TD’s. They had opinions, but through the discomfort of thought, and hard work, they made a difference. Our independent TD’s, while full of opinions, appear not to be able to make that jump.

Posted in Budget, Politics, Unions | No Comments »

Expectations of Government

May 12th, 2011

It is very hard, in 500 words or less, to give a reasoned argument about a system that is so completely and utterly broken. The raiding of private pension funds is wrong and unusual, but this has already happened to the public sector pension pot, the NPRF. It was burned in the banks, and there was no outcry. The reason is, and this is not a criticism, in the public sector a pension is seen as an entitlement, not something to be saved for. The NPRF was a nice idea, but the perception is its passing will have no real effect on pensions. The raiding of private pension schemes is much more personal. That is money that could have been spent today, but was saved for tomorrow.

We all want to a society that is fair, equal and prosperous. To do this, the rules must be principled and consistent. The pension levy is wrong on so may levels, it flies against 10 years of government policy, it’s unfair, it’s unprincipled and it’s unusual. But the real problem here is not the pension levy, but rather the pension system. The rational conclusion of a rational agent to the levy is that money in a pension is hostage to the whims of any given government. Once you put money into your pension, you can’t access it, but the government can through taxes. The government has opened a Pandora’s box. Given the choice you would be mad to put money into such a scheme.

Instead of offering tax breaks for private sector pensions, offer everyone public sector pensions. A new grand social contract where the government promises to pay a proportion of the tax take to pensioners. The social contract should take the following form. The government promises to keep the percentage tax take of national income reasonably static (say 30% – 35%). The percentage of this tax take given to pensioners will also be reasonably static (say 10%). The only variable is the nominal amount given to each pensioner and the age at which you retire, but thats the deal. The day you retire you are entitled to a percentage of national income. Such a scheme doesn’t just have benefits in 30 years time, it has benefits today.

An economy is made up of the following components:

Y(GDP) = C + I + G – T + NX

Basically this means National Income (GDP) = Consumption + Investment  + Government Spending (Less Taxes) + Net Exports. The problem in Ireland is that government spending is too high artificially inflating our GDP. Cutting it to meet the tax take will clearly lower GDP making our debt position look less sustainable. Also our net exports make our GDP look good, but a lot if this is non taxable. The part that makes the most difference to the economy is consumption (C), currently in the doldrums due to high unemployment and uncertainty about the future. There has been plenty of focus on these areas.

There has been less focus on the investment (I) part of the equation, which includes pensions. Currently it’s running at 16%+ of GDP, so it’s a big number. The problem is that when Irish people invest, they tend to invest overseas, the money is lost to the Irish economy. If we want to give our economy some pep, we need to induce people to invest less overseas and consume more at home. This increases national income (GDP) in a way which is most beneficial to the Irish economy and those who would like to work in it. No extra money is borrowed, and the effect is immediate.

For such a scheme to work we need a grand new social contract, and we need to be able to trust our government. By introducing unusual wealth taxes, such as the pension levy the government introduces uncertainty and mistrust. Until we can trust our government, our banks, and our futures the country will continue to falter.

 

Posted in Budget, Pensions | No Comments »

China Calling

April 29th, 2011

The Chinese bubble will burst, we should be prepared for the after affects.

If the Irish property bubble has taught us anything, it is that bubbles can last for a long time, that calling an end to them is difficult, and that the resulting crash can be most discommoding. Wishing it to go on for ever is a fools game.

12 months or more ago, there was much talk about currency wars. Each country in turn was attempting to devalue its currency to get the upper hand and spur exports from that economy. The problem is that when every country tries to devalue its currency at the same time, the net effect is zero, none do. Take the Euro for example. Greece is close the default. As soon as Greece defaults, the moral argument for Ireland and Portugal to continue austerity becomes impossible, and they will follow shortly after. A question mark hangs over Spain, how can it have 21% unemployment, a housing crash and yet a completely unfazed banking system. Something doesn’t smell right. All of these factors have the ability to destroy the Euro. A shaky currency you would think, but no, the Euro is trading at 16 month highs of 1.45+ against the dollar. China!

China sells goods to the world in dollars. When we in Europe buy from China we pay in dollars, so the weak dollar makes Chinese goods in Ireland cheap, cheaper than they should be. But Chinese firms pay in Chinese currency, the Yuan. The Yuan has been appreciating recently against the dollar, and will continue to do so. This makes production costs in China higher, meaning their goods should cost more.

The Chinese have been doing their best, for nearly 10 years now, to have their currency appreciate slowly against other currencies, to the advantage of their exports. They have been trying to do this in a managed fashion. This is our fabled soft landing. I cannot think of a single instance of a bubble this large being successfully managed. In Ireland we were told the property market would have a soft landing, it didn’t, it couldn’t have. Even though the Fed pulled out all the stops, the US still had the largest recession since the 1930′s following the financial crisis, and they have some practice at managing financial crises, the Chinese do not.

The Chinese are richer than they appear. Sooner or later the Yuan must reflect this reality. The same reality that drives our house prices down drives the Yuan up. You can play the poor mouth or the big man for so long, but sooner or later the laws of arithmetic will win out.

The increase in the value of the Yuan will be the final chapter in China becoming a member of the world economy. It will not be easy, but we should welcome it. The short term effects of a valuable Yuan will be higher prices, higher inflation and higher interest rates. If it happened tomorrow it would be very bad for Ireland. It will happen anyway so we can be assured at some undetermined time of higher interest rates, prices and inflation. There is never a good time for those. But all it reflects is that China is more wealthy. A wealthy China means more opportunities for local manufactures to supplant Chinese manufacturers. A wealthy China means a new market with 1 billion people with real purchasing power. In the short term it makes our position worse, but in the long term, and if we work smart, it should be good for us.

The Chinese bubble will end with a bang. The bang will be so large and so loud that it will be heard far beyond China, and especially in the US. It will greatly affect us in Ireland too. When it happens there will be equal cries of doom and Schadenfreude. But it will in fact be the starting gun for a new era in world trade where their will be three economic giants, the US, China and Europe.

 

 

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Posted in China, World Trade | No Comments »

Easy Solutions

April 14th, 2011

I have a plan.

First a little recap. The deal with the EU/IMF calls for growth last year of 1%, this year of 1.75% and next year of 3.25%. Last year we had no growth, this year looks at being 1% behind target, and next year looks like being 1% behind target (Irish Central Bank and IMF forecasts). On simple sums we look to be about 3% behind target, it’s more, but lets keep it simple.

You will remember that we ‘front loaded’ the cuts and tax increases in the last budget to get the worst out of the way. But the then government assumed we would be growing more than we are. We look to be missing those assumptions by 3%. That means extra taxes and spending cuts of €1bn in budget 2011, and €2.5bn in budget 2012. Thats on top of the cuts and tax increases already planned making 2012′s budget as severe as the one just gone.

There is a simple way to make up the numbers so we do not have to make those cuts. We could build some roads, increase public service pay, the government could buy more stuff. Sure, we’d have to borrow some more money, but our GDP would go up. Our numbers would look better, we wouldn’t have to make any more cuts than are already planned. Lets just borrow enough money to make our GDP hit the projections and we won’t have to make any more hard choices.

That would be madness of course. Borrowing large amounts of money just to inflate your GDP and make the economy look stronger will not actually make the economy any stronger, it will not make is any richer (it will make us poorer) and it is unsustainable.

That is the status quo. The current plan is actually just borrowing money to make the numbers fit the plan, they are not based on real economic strength. They are based on the government borrowing large amounts of money which in turn inflates the GDP numbers making them look better than they actually are. This is madness.

We are funded by the EU/IMF until 2013. Lets get the budget balanced by then. Our GDP will fall, but it is an illusion, it is not real. Get the budget balanced by 2013 and then we know the true strength of the economy, it will be a real number. A balanced budget gives us options. If we rely on no one but ourselves to fund our services we have prepared the ground to play hardball with our creditors.

People will argue that making cuts or raising taxes will damage the economy. Debt will destroy the country. If our economy is based on government borrowing, then it is a false economy. There is no point in living in a fools paradise. Stage one of recovery is correctly assessing our current situation, that means balancing the books.

 

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European Parochialism

April 4th, 2011

The bank stress tests, and Enda Kennys European adventure have shown that:

a) Not much has changed

b) Despite Enda Kenny’s wishes, what Europe wants, Europe gets

Makes you wonder why we had an election.

The current financial crisis, from the moment it broke, to the moment it broke Ireland, has highlighted just how undemocratic Europe is. The ballot box is impotent. Enda Kenny may be the captain of the ship of state, but this ship is being controlled remotely from Brussels. It has been thus since 2008 when Brian Lenihan was told, no bank shall fail, and he obediently complied.

The fate of Irish banks is being decided by people who are in no way accountable to the Irish public. The people making the decisions are not accountable to the people who pay for the decisions. Is that what passes for representative democracy in Europe today? What century have we regressed to?

Europe is failing from an extreme case of a disease we know well in Ireland – parochialism. No European leader has articulated a vision for Europe because there are no European leaders, just country leaders fighting for their own self interest. It is the same reason that Europe, or the European project, has become removed from the people. Nobody is putting forward a vision for Europe, just a vision of what each country can get out of Europe. Who wants to pay into something that has no vision, has no aim.

Ireland should put itself back at the heart of Europe by setting out such a vision. A vision of Europe where the big decisions are made by a European president, elected directly by European people. A vision where some of our taxes go to Europe, but Europe pays for some of our services in return. A Europe that values tax competition between nations as highly as cost and innovation competition between companies.

We will end up with a federal Europe, or no Europe at all. We, as the beasts of burden of the European banking system, need to know what this outcome will be. If we are on the path to a federal Europe, lets talk about it, engage with it and define what we want it to be.

If Europe is on a course that will lead to the breakup of the Euro, why carry the can for a failed project a single day longer? If we believe the Euro is going to breakup, lets talk about it.

To have either of these discussions, we need to know what we want and what the implications are for Ireland. There is no European vision because there is no European leader, just rival leaders fighting for advantage followed by design by committee, parochialism on a grand scale.

Collectively Europe has its head in the sand if it believes it can continue in the same format as it exists now. It cannot, it will federalise or fold. Which outcome do we want?

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Events dear boy, events…

March 25th, 2011

Next week sees the release of the results of our bank stress tests. We will all be shocked at the numbers involved, and then our government will proceed to bailout foreign banks again, putting in €15,000 for every person lucky enough to have a job.

Rumors abound also that Michael Noonans jobs budget will in fact be a mini-budget. FG had promised a jobs budget within 100 days of taking office i.e. before 17th June.

The most likely reason for this coalition to fall apart will be the constraints imposed by the EU/IMF deal, and the most likely catalyst will be a budget. For that reason attempting to introduce a mini-budget so soon would seem brave. FG are keen to keep taxes as low as possible and work on reducing costs, while Labour fear cutting costs will damage the overall economy. The IMF have no such dichotomy of thinking and have an agreement with Ireland which gives dates, deficit limits and borrowing limits. If we don’t meet the targets, the money tap gets turned off.

A week before the banking stress tests are released would seem a good time to look ahead and see what stress tests our government is likely to face in the next 18 to 24 months.

31st March 2011 – €25bn more required for our banks. This is unlikely to cause the coalition any headaches, the European focus will be on Portugal, and the government have no alternative to putting in the money (they should, they just don’t).

This is also the date for the first review of the EU/IMF deal with the new government where government income from taxes will be compared against EU/IMF benchmarks. If our budget deficit (excluding interest) is greater than €7.1bn on the 31st March the government will be forced to act. We do not have enough information yet to judge, but tax returns for the first 2 months of the year were slightly behind target.

30th June 2011 – On the last day of June, this government will have its second EU/IMF review. If on this date we have a government deficit of more than €11bn the government will again be compelled to take action. This will be the first real stress test for the government.

31st July 2011 - Multi year departmental spending limits to be agreed with the IMF. Of itself not the easiest task in the world, but more importantly this is the date on which future bench marks are set. You live by the sword, you die by the sword. This is the sword.

31st September 2011 – As per the IMF deal the government will “consider an appropriate adjustment, including to the overall public service wage bill, to compensate for potential shortfalls in the projected savings arising from administrative efficiencies and public service numbers reductions”. This is the day the proverbial hits the fan. This meeting will set the tone for the budget.

2012 – The Mayans may have been on to something. The same schedule of meetings happens in 2012 as the previous year, but the targets are tougher, and the plan calls for growth of 3.25%. It’s possible, but it’s equally possible the train wreck of residential mortgages will be careering through the economy forcing the government to take ever more unpopular decisions.

On one level, having waited so long to get into power, and seeing how FF held on when it seemed impossible, it is hard to see the coalition giving up easily. On the other hand, the challenges, the IMF and the ideological differences make it difficult to see the coalition survive two budgets. One possibly, but two? In fact, if it does survive two budgets, one or other of the partners will likely be wiped out at the next election. The actions required need to be dramatic, and consistent. At least one set of supporters will be very unhappy with the governments actions.

Bringing in a mini-budget so soon gives ownership of the crisis to the new government. Their actions now dictate its course. If the coalition makes the wrong choices, does not make the hard choices, or makes no choices at all and falls apart, FG and Labour will join FF in having demonstrated their inability to govern. That would be a bad outcome. It has the potential to leave a dangerous vacuum at the center of Irish politics.

Posted in Banks, Budget, Deficit, IMF, Politics | No Comments »

Waterford Crystal Pensions

March 18th, 2011

…and what it means for state pensions.

In 1970′s Ireland a job in Waterford Crystal was a guarantee of steady work and a good income. At its peak well over 3,000 people worked at the factory. The pay was good, the bonuses were better and a fantastic pension awaited you on retirement. The debacle that has left pensioners without a pension is grossly unfair. Unless we learn from what has happened it will happen again. And it is, right under our noses, and on a much larger scale.

The Waterford Crystal pension scheme was not a pyramid. The workers paid into the scheme, the money was invested, the pension scheme had assets. Unfortunately those assets were not enough to pay the pensions and the company failed to make up the difference. In hindsight over the years perhaps more money should have been invested, both by the company and the employees. But an employee had no way of knowing this. They paid into a pension scheme that had assets and was backed by a world leading company. Based on the strength and history of the company they had a reasonable expectation of a comfortable retirement.

The state pension scheme is a pyramid. State pensions are paid out of current income, there are no assets to back the pension, except for the state. The state is rapidly becoming bankrupt and it is this bankruptcy which aligns the interests of civil servants and Waterford Crystal retirees. It is entirely likely that if the state goes bankrupt it will not pay pension entitlements. The decision not to bail out the Waterford Crystal pension scheme was made by an Irish person, on behalf of the Irish people for Irish people. When the state goes bankrupt the decision to pay pensions will be made by a non-Irish person for the benefit of non-Irish people. That is unlikely to lead to a more forgiving outcome.

If you don’t believe a state could renege on pensions put yourself into the mindset of a Waterford Crystal worker in the 1970′s – pay was good, bonuses were good, the company was strong, it was completely unthinkable. In America the states of California and Illinois are being pushed to file for bankruptcy in order to renege on the pension entitlements of their civil servants (link here).

The saying goes that in life you can be sure of only two things – death and taxes. Lets add two more, an older population and higher oil prices. 30 years from now we will definitely have an older population and oil will very likely be more expensive than it is today. An older population means less people paying into the pyramid that is the state pension scheme, higher oil prices mean lower growth. Both of these factors cast a shadow over the ability of the state to pay on its promises. That was before the banking and financial crisis hit.

As willing accomplices to the IMF and EU all political parties have made plans to spend the NPRF (National Pension Reserve Fund). The NPRF was the government equivalent to the assets in the Waterford Crystal pension fund. It was money set aside to pay for the pensions of the future. The government was sensibly doing what every company is forced by law to do, make provisions for future pensions. That fund has now been spent, it was used to cover the losses in our banks. What would the people of Waterford have said if Waterford Crystal decided to use their pensions to pay for the gambling debts of French and German banks? That is what the government have done, and no one has stopped to ask why, and what the implications are.

What no government or union will tell our civil servants is that they would be better off with defined contribution pension schemes in their personal names. The money is then theirs, and its value is transparent. The lesson from Waterford Crystal is it is better to know the true value of your pension and to make decisions based on that rather than live in rational ignorance only to discover on retirement that you do not have the pension you aspired to. Try to implement such a scheme and I imagine there would be mass strikes. But actually such a scheme would be to civil servants benefit as the alternative is to work until 75+ and live from here to there in the fear that you will not have the comfortable retirement you aspire to. What the workers of Waterford Crystal found to their cost is that what appears to be a gold plated pension in the good times doesn’t amount to much when the money runs out. State pensions may well become an oxymoron like “safe as houses” or “money in the bank”.

When dealing with the state, Waterford Crystal workers could well make the point that any decision made now will equally be applied to state employees in the future. Deny the workers of Waterford Crystal a pension now and they may well be denying themselves a pension in the future. When making the decision set the precedent you would like to be judged by. Death and taxes we can be sure of, pensions we cannot, even state ones.

 

Posted in Pensions, Unions, Waterford Crystal | No Comments »

de Leveraging, de Problem and de Solution

March 10th, 2011

The program for government has a lot of good stuff in it. But making dinner service on the Titanic more efficient doesn’t amount to good governance when there is a massive hole under the waterline.  Tinkering with interest rates, and pushing budget targets out a year is akin to asking people to stand at the back of the Titanic in the vein hope this will help steady the ship of state. It won’t, it’s still sinking.

We are all going to hear a lot over the coming months about deleveraging and reducing bank balance sheets. What does that mean and how does it affect non bankers like you and me? To answer this, think a little first about how a bank operates. Normally, each month you, I, and everybody else pay back a little bit of our mortgage, car loan, credit card etc. This money is then lent out again to others in the form of new loans. This is really important, the money going back into the bank and then being lent out again is what keeps money flowing in the economy.

What is happening in Ireland today is not that. The money is being paid back to the banks, but the banks are not lending this money again, they are holding on to it. This is not banking, it’s a tax. I’ll say that again, it’s a tax, and a big one too.

The Irish banking system has deposits of approximately €180bn. It should have loans of about the same figure, and that money should be recycled through the Irish economy. Assuming that the average duration of all loans in the Irish banking system is 15 years (balance our 30 day credit card debt with 30 year mortgage debt) the drain to the Irish economy is €12bn each and every year. The banks are receiving €12bn in loan repayments, but this money is not being lent out again. The money is being sucked out of the economy. It has the same effect as as extra €12bn in taxes. To put this in context, the tax increases in the last budget were just €2bn including the universally hated Universal Social Charge. Put another way, it’s a tax of €6,500 for every worker in the country.

Fixing the banks will have the effect of releasing this money into the economy. It will be the same as a €12bn stimulus package. There are a number of possible solutions to the banking crisis, here is one:

1) Create BoI MkII and AIB MkII.

2) Move all deposits from the current AIB and BoI to the new ones.

3) Asses all loans and move only the highest quality loans from the old AIB and BoI to the new AIB and BoI. Keep moving the good loans to the new banks until there is approximately the same value of loans as there are deposits.

4) Sell the new BoI and AIB (or float them) and return the proceeds of the sale to the old banks.

5) Remove the bank guarantee.

Following from this we now have two banks which can lend again. As these banks will be perceived as secure deposits will flow back increasing their lending capacity. Depositors have been protected and the government gets to end the guarantee thus ending the dance of death between the banks and the government. The toxic remnants of the old banks are left behind but decoupled from the economy, depositors and as much as is possible from the government.

We will still have to deal with the fallout from the disastrous decisions of the previous government, but by taking the action described above two important things will have happened. Firstly any further discussion about how to deal with the banking crisis will be conducted in an environment where depositors have been protected and the banks are lending again, prerequisites to any future homegrown economic growth. Secondly, a clear message will have been sent that the government has changed, and so has the way we are dealing with the crisis.

If we do not do this, or something equally drastic, the opposite message will have been sent. The new government is dealing with the crisis in the same fashion as the old. In that instance why should we, or anybody else expect that the outcome will be any different? A comprehensive bank resolution must be defined and enacted within the first 100 days of the new government, if it is not then nothing will have changed.

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