Bubbleomics And A Pin!

September 1, 2009

NAMA monster could devour Irish economy!

NAMA monster could devour Irish economy!

A surefire way of discovering whether someone is for or against NAMA, which in the main works very well, is to listen out for the words, ‘complex’ or ‘complicated’.

People who use those terms are usually in favour of NAMA for reasons they can’t explain to themselves or to you, or, even more worryingly, do not wish you to delve deeply into what NAMA is about.

Let me simplify what NAMA is about for those who find the subject tedious or complicated.

Unregulated lending and borrowing by the banks created a property feeding frenzy of property developers, consumer competition/demand for property and Government stimulus as it saw tax income sky rocket.

Like a tornado sucking into its vortex all those cash borrowings, a tipping point was reached, and the increasing price of property became unreachable, then fell creating a domino effect for all those borrowers whose borrowings depended on ever increasing property/development prices.

Construction itself suddenly found itself out of favour creating further devastating unemployment in services downstream. Property kings, bankers, shareholders, developers, builders, speculators in a ballooning economy felt the pin:

“…for which the hollow crown
That rounds the mortal temple of a king
Keeps Death his court, and there the antic sits,
Scoffing his state and grinning at his pomp,
Allowing him a breath, a little scene,
To monarchize, be fear’d, and kill with looks;
Infusing him with self and vain conceit,
As if this flesh which walls about our life,
Were brass impregnable; and, humour’s thus,
Comes at the last, and with a little pin,
Bores through his castle wall, and farewell king!
(Richard 11 3.2.160-70)”

NAMA is designed to bring back the bubble. We should be regulating to prevent property bubbles, but our Government is instead on the verge of recreating a bubble that will win a fortune for tax payers! Or maybe it will bring economic catastrophe instead!!

Commentators such as John Mulcahy, Chief Valuer of NAMA, spin rubbish with nonsense such as having looked at the index of market since 1971, generally, property in a cycle of 7 years between peak and trough recovers to 80% of any value lost during any given cycle.

I do have Maths I added to a degree, but I don’t need it here. The truth is mathematical formulas applied to economic theory are all flawed. But this one is particularly flawed because it does not factor in the extreme, unusual and special circumstances in a bubble. Bubbles step outside the rules of formulae such as the above because they are unique. To compare a bubble seven year cycle to the basic ebb and flow of property prices in a real economy is not comparing like with like. Property prices outside bubbles do not go into free fall.

But feeding on the Mulcahy nonsense and fed with such propoganda from Dr Garret Fitzgerald or Lenihan and others, that the turn will come in a couple of years, we are being brainwashed to believe that property will return in a few years to something like 80% of prices during our boom. This is ludicrous to the extreme. Property in Japan after 10 years has only reached 50% of values during the boom years there.

Our country during our boom has built enough to last the next 10-15 years. We have an oversupply of commercial and residential property.

Because of increasing unemployment levels, lack of a construction and service industry, increasing taxes, property tax, student fees, increasing social welfare demands, emigration, our economy is in a nose dive.

Add the fact that NAMA will borrow €90 billion from the ECB….Are you getting the picture? As a tax payer, you will be saddled with having to pay back these borrowings.

NAMA as provided for in the current draft legislation intends to pay the banks, mainly the AIB(Allied Irish Bank) and the BOI(Bank Of Ireland), a sum of money calculated against the value of all the toxic loans on their books. NAMA will become a developer and speculator in regard to that toxic collateral, those unfinished housing estates, the biggest property developer of them all.

NAMA will take over where the developers, speculators left off. Like the failed developers/speculators NAMA has an eye to making a profit. It intends to put the banks back on their feet. Without those toxic loans, the banks can serve Ireland INC once again. But if it underpays the banks, the banks will be burdened still with huge losses.

So NAMA has introduced this notion of ‘long term value’ of toxic loans. If it paid the ‘current market value’, the Government, to save the banks, would have to step in and give the banks more capital to clean them again. To avoid this dilemma the Government wants to give the banks a value for bank toxic debt way in excess of the value it ought to be giving.

It is absolutely guaranteed given the spurious fantasy of Mulcahy above that the Government will overpay for those loans using tax payers money.

Furthermore, the banks and their shareholders will be the benficiaries of this Government windfall. The banks through unregulated lending carry most of the guilt as creators of the mess and end up being the biggest benificiaries in the Government cleanup.

NAMA in its incarnation as super developer, super speculator, super gambler, witholding property from the market place, stimulating false demand, will attempt to create a new property bubble to extract the value of its portfolio from us all.

We’ll pay taxes and through NAMA bubbleomics ( my term,  defined here as the art of stimulating a property bubble through poor economic policies )  pay inflated prices for property that will go into the pockets of banks and shareholders.

The ECB have warned the Government against paying in excess of market value for property. More about this next post!

Nationalisation of the two banks AIB and BOI remains the safest and best option for cleaning up the mess.

The Government are on the verge of creating an even bigger mess than it made during the bubble, an even bigger mess than that made by the banks, speculators, developers taken as a whole.

Government bubbleomics is currently bringing our country to the verge of economic catastrophe.

Next post, claw backs, two tier payment systems, more detail on the draft legislation. No timescale for NAMA! NAMA as worse than nationalisation or a bigger interference in the market place than even the Kremlin could come up with!

Keep on reading!

Thanks!

Colm

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