Monday, 18 October 2010

Bacon's Mortgage Suggestion Does Not Add Up

Nat O'Connor: Peter Bacon has suggested that semi-state assets be sold, and the money used to pay off the negative equity part of mortgages, where younger households are struggling. (Interview in the Irish Independent, and further article on mortgage debt). On a purely economic level, this is an argument to increase demand and boost the economy. But on a social and political level, it represents an appalling machination that could damage the economy in order to bail out only a small part of the population.

Bacon is correct to identify a need to do something about huge mortgage debt, although the articles do not give a lot of detail about what economic reasons motivated his suggestion. However, one can speculate. On a purely economic basis, bailing out our 'prodigal' sons and daughters would increase their spending, and thus boost aggregate demand in the economy. Releasing younger people from some of their debt would help maximise the productive capacity of the younger generation, and this could benefit the whole economy. But it is not clear that such benefits outweigh the inequality of the suggestion.

Young households who rent, or who bought smaller homes, or who are still living with their parents would receive nothing. Worse, their share of our semi-states would be given over to those younger households who bought more than they could afford.

And selling semi-states at the bottom of the economic cycle is like selling the family silver when everyone else is doing the same, and the price for silver has hit rock bottom in the market. These strategic assets have a role to play in generating annual revenue to bailout the entire country, and should not be sacrificed for the benefit of a minority group.

There are good economic arguments for the state doing something to help those struggling with mortgages, but there are far better methods. For example, the state could subsidise interest rates, so that people continue to pay back their loans, but are not overwhealmed. Keeping the mortgage repayment money flowing to the banks would reduce the cost of bank recapitalisation while helping people pay their debts. Alternatively, the state could set maximum amounts that householders have to pay on their housing costs, like a third of net income, through a deferral scheme. They'd still pay their debts, but more slowly.


Antoin said...

Why is it ok to bail out weak businesses, as TASC advocates, but not ok to bail out homeowner families? Corporate welfare schemes to prop up failed businesses can damage the economy in umpteen ways. Bailing out families might upset the neighbours (who are benefitting from lower rents and house prices) but is relatively harmless.

When will it be the right time to sell the semi-states? How would you calculate a fair value?

Nat O`Connor said...


I did say there are good arguments to help those struggling with mortgages! So, I am not against the idea, but the question is what method would not unfairly punish people who for one reason or another do not have large mortgages and who will not own their homes in twenty or thirty years time.

TASC is not advocating "corporate welfare" in the sense of permanent schemes to support businesses. Rather, recognising that unemployment is already far too high, we propose a series of time-limited measures to support job retention and to foster new business growth. But the "stabiliser wheels" will have to come off the bikes in a couple of years.

As for the commercial semi-states, the Government lists 30 of them. If you have a glance at the list, it should be clear that it is hard to generalise.

Some of them should be retained for the forseeable future, because they are strategic assets. For example, Coillte 'owns' a massive proportion of the land in the State. Such a land bank should remain with the state as no potential buyer could ever pay enough to compensate for the long-term use-value of all this land. Similarly, it seems logical for a country on a small island to maintain ownership of its ports as a strategic asset.

Others could possibly be made more efficient by breaking them into constituent parts or re-merging them into different units. For example, Fine Gael's NewERA proposal to create "Biomass Ireland" out of Coillte and Bord na Móna has some logic to it; but not as something to be asset stripped or to create vast 'green deserts' of monoculture which wipes out entire ecosystems.

For still others, there is an argument for the state to take certain assets into different ownership. For example, ESB owns a lake in Cork that is an important bird reserve. Any privitisation of ESB, or even state-led commercial activity, could eventually eye up that site and shrink it or pollute it. Our electricity company simply does not need to own and maintain this site - a national nature reserve service would be a better owner.

But again, there is a huge variety of them. I don't think TG4 could be commercially viable without state support, but maybe I'm wrong. I don't see any logic in selling The National Lottery or the RPA.

On the other hand, I had never heard of Arramara Teoranta: Ireland's seaweed processors since 1947.

I'm not set against private ownership if the public benefits tangibly, but I am really suspicious that we could get a rotten deal, like with Eircom, by selling commercial semi-states.

Paul Hunt said...

Ah yes. The usual fall-back. When you run out of vaguely plausible reasons, just mention Eircom. The outcome of the privatisation of a poorly-regulated, unrestructured, fixed-line monopoly with low gearing using an IPO during a global stock market bubble in the sector was entirely predictable. (Still the ESOT hasn't done that badly - even it lacks the will or the wherewithall to behave like a proper owner and inject additional equity.)

The ability to learn the worng lesson from a mistake is remarkable, but probably not unique to Ireland. I just wonder how often the NPRF (whose risk should be diversified away from Ireland) will be used to avoid recycling existing assets (ineffciently financed and providing an inadequate return) to invest in new ones.

Nat O`Connor said...


In fairness, my main argument above is that (1) selling the silver at this time will not raise maximum value, (2) some semi-states make money, which is a year-on-year benefit to taxpayers and a greater long-term return, rather than a one-off benefit, and (3) there are good strategic reasons for hanging on to many of the 30 semi-states on the Government's list.

The Eircom example is also still relevant. We have not greatly changed the administrative/business capacity of the state (i.e. civil service, politicians and their advisors) in relation to privatisation. There is a risk that political concerns will dominate. Each of the major parties will be conscious of the effect on voters of their budget proposals. And if a couple of billion from a sale is offered as a 'quick fix' that will avoid cutting pensions before an election, then politicians may be sorely tempted, despite economic arguments to keep assets.

The PAI is holding a conference on the issue: "The Irish semi state sector – will the State be a forced seller of the family silver?" Unfortunately it is €300-€350 to attend, which will limit participation by many interested citizens who own the assets in question. Nevertheless, it will hopefully tease out the economic arguments for and against selling state assets at this time. And the media will no doubt open the debate to wider participation.

antoin O Lachtnain said...

Why do you think these company's competitors who may have planned better and developed businesses that are sustainable in a downturn will not be as upset as the householders' renter neighbours? Would this really result in saving any jobs, or just damage competitors?

There is no capability in the civil service to dispense this kind of venture cash. KPMG and Cox would not want to help.

If we want to deal with mortgage debt, the strong will inevitably have to help the weak. Less indebted people have to shoulder some of the debt. You can dress it up as tax breaks (which I know TASC opposes) or deferrals or whatever you like, but it boils down to the same thing. What is the alternative? Surely it is a mark of a decent society that the fortunate help out the less fortunate, even if it occasionally means that we end up bailing out the reckless? I do not think this is an appalling machination as you describe it.

Re eircom. eircom was not a rotten deal for the government, at least not as rotten as you make out. In fact, it was an example of getting what you call 'maximum value' for the asset.

The reason the premium paid was so big was because of the poor regulation and also the way in which the government endorsed the flotation. We could instantly get a massive premium for the ESB if we shut down the regulator and drove the competitors out of business.

There is this fair weather idea that if eircom hadn't been privatized, the company would have turned into a caring, infrastructure sharing, efficient company, finely tuned to the broadband needs of the Irish people. This is the greatest load of garbage ever. eircom has many faults, but it is a vastly improved organization today compared to what was there in 1995. In the meantime, there has been little or no reform in the other semi-states. The market has actually opened up now, although it has taken far too long, and UPC is making a real impact in the marketplace.

The semi-state eircom was not only unregulated, it was also unregulatable. The state's interest in eircom just had too much political weight. The same is happening today with CIE, which has been left as a wasteful transport company which is struggling with corruption, provides a poor service and has an extremely bad safety record.

If selling a semi-state asset can be used as a means to prop up pension payments, what is wrong with that? Surely this is a good way of avoiding the deflationary effects of pension cuts and the risks of borrowing.

Very few semi-states pay dividends. The dividends are very low. As you keep telling us, our country needs investment, not asset-sweating. It is ridiculous to keep these companies for the sake of an abysmally small dividend.

What does 'strategic' mean apart from 'loss making'?

You mention TG4. TG4 is in many ways a model for state intervention. Rather than employing thousands of people, it acts as a publisher-broadcaster, commissioning work from small, dynamic private companies. There is very little capital (8m) tied up in TG4, compared to, for example, RTE (260m).

I hate to be a pessimist, and perhaps I am beng unfair to the organizers, but my experience is that conferences like the PAI one do not inform public opinion or debate on these types of topics at all. They do not tease out anything, just rehearse the old, tired, staid arguments for continuing to do absolutely nothing. The media never report on them, presumably for this reason.

Nat O`Connor said...


The assumption underlying TASC’s call for a credit guarantee scheme is that the banking crisis – and starvation of credit to SMEs – has gone beyond what most companies could realistically have planned for. Getting credit flowing in the economy should benefit all companies, and those with more sustainable models should continue to do better than their less well-run rivals.

In relation to seed capital, if the civil service doesn’t have the capacity, they can buy it in as part of the temporary package.

As I’ve stated above, I do not oppose helping people with mortgage debt. But selling state assets at this time, when they are unlikely to yield a good return, is the wrong way to finance such assistance. That’s the “appalling machination” – making the sale of state assets more palatable to a segment of society who would benefit from reduced debt, which could blinker them to the longer-term loss to the state from selling these assets cheaply.

In seeking alternative sources to fund a mortgage debt relief scheme, I would first of all look to the banks, and the amount of money being poured already into that sector. Can we extract concessions, debt write-offs, etc. in exchange for recapitalisation? Is there a cost-benefit trade-off between helping indebted householders today and therefore lessening the future recapitalisation of the banks? The logic of this is that banks need people to keep paying their mortgages right now; repossessing a bunch of houses is not going get them cash any time soon. And by helping people pay their debts today, the state may not have to recapitalise the banks as much tomorrow.

Do you really think the Eircom sale achieved ‘maximum value’? What about Eircom’s massive property portfolio that was part of the deal? What about the asset stripping by some of Eircom’s previous owners?

It is doubtless the case that some semi-states could be better run. But why can’t this happen under state ownership, where there can be more democratic control and public benefit from increased dividends?

By “strategic”, I mean a few things. For example, avoiding putting the state (and private enterprises) in a position where a private company gains a disproportionate share of a valuable – and potentially irreplaceable – resource and uses their dominant position to take large profits. For example, if we sold all of our ports, as a country on an island, is there not a risk that this could add significantly to the cost of imports and damage our economy?

Environmental protection is another aspect of what is 'strategic'. Coillte ‘owns’ a massive proportion of the state’s land. As a state-owned entity, it should be easier to constrain their activity; for example, requiring them to protect local habitats more than they would if they were profit-maximising. Some positive externalities – like the health of our native flora and fauna – are simply not protected by a profit-maximising calculus in a free market. I grant that a state-owned forestry company can do better or worse in this regard, but the argument is still about running the company better, not about selling it.

Antoin O Lachtnain said...

So you think we should bail out mortgage owners? If that is agreed, the only question is how to fund it.

Everybody talks about reforming semi-states, but it never happens. It just doesn't work. We don't have the expertise in the public service to do it.

TASC are proposing using less outside expertise in the public sector, not more.

That is why I am saying we should seriously consider selling these assets.

We got a massive price for eircom. Could we have gotten more if we'd waited for the property boom? Sure, but so what? One of the present owners of eircom also participated fully in stripping it. eircom sold to the asset strippers for a lower price than what the government actually got for it.

Re the ports - you can manage assets like these on the basis of an allowed return on capital and a regulatory system. If you wanted, you could prevent all these ports being owned by one person.

The problems about property - then just move the property into a property portfolio company which remains state-owned. We also have the EPA and the planning system to manage such considerations.