Professor Joseph Stiglitz Pre Privatisation and The Levy

October 8, 2009

A levy on the banks, ‘a tale told by an idiot full of sound and fury, signifying nothing!’

Consider the scenario, NAMA has failed doing catastrophic financial damage to the country. Say its 10 years from now and the Government of the time have calculated the toxic loans were overpaid by 50%. No doubt because of the failure of NAMA to revitalise the economy, the economy is in deep trouble, bigger than the trouble we are in now.

What our present Government propose is that we say to the banks, ‘you need to reimburse the tax payer to the tune of approx 30€ billion’. Of course, bankers of the day will complain that because NAMA did not work very well.. all that expensive litigation over toxic loans, the artificial support by NAMA of commercial, development and local property, which also has not worked… and the damage this has done to the economy. The value of the toxic portfolio is once again in freefall!

We really can’t pay that levy!

What we, the banks propose, is that you bail us out with NAMA Mark 11, if you plead the dire straits the economy is in to our friends in the ECB, sure begorrah, they’ll bail us all out again. But if you proceed against us we’ll hand this over to our legal teams to fight for an offer of compromise or an insolvency agreement.  There again if we are insolvent, you are insolvent.

The Levy is a half baked promise that if the gambler loses all the taxpayers’ money in the casino, that the gambler will repay them!

Another foolish aspect of the Levy is the incredulous contradiction of, on the one hand, NAMA proposing itself as a method to free the banks of toxic debt, on the other hand, burdening the banks going forward with a future Levy, an iceberg awaiting the Titanic. What this will do to banking shares will be ridiculous. Who would invest in a bank with a cliff of future toxic debt ready to tumble over shareholders in 10 years if the economy gets fried!

Primetime last Tuesday evening saw Mark Litttle of RTE’s Primetime interview Professor Joseph Stiglitz, Nobel Prize Economist, Columbia University, USA.

What Stiglitz had to say was in line with academics and most other commentators in Ireland including the vast majority of the people of Ireland, with the exception of our present Government. He too would be totally against NAMA.

Here’s some of what he had to say:

“What I think is to overpay these loans is really criminal.

There is a pattern I saw when I was at the World Bank. You have these crises, the bankers come in, say you have to do something very quickly, and basically to rob the tax payers…”

When asked if there was no alternative?

“That’s nonsense, there are other ways of doing it playing by capitalism. The shareholders lose everything, the bond holders become the new shareholders. If that doesn’t fill in the hole in the losses at the banks, then because the government is going to provide deposit insurance, it becomes the owner. Then it quickly or as soon as possible sells it. The joke is we call this ‘pre privatisation’, we don’t call this nationalisation.”

In a fascinating interview, Stiglitz also made the point that it isn’t following the normal rules of capitalism to “socialise the losses while privatising the gains. If you do that, you really destroy, distort the economy”.

Stiglitz also swung attention around to the home owners in negative equity unable to pay off their loans. He advocated a Chapter 11 variant for these home owners with the banks required to write down losses for these home owners in a debt for equity swap.

Avoidance of the advice of Professor Stiglitz and others mentioned in these posts by a Government with its head in the sand will doom this country to further financial meltdown in the short to medium term, with all of the dire consequences for the social fabric of this country.

Perhaps the Greens this weekend will recognise this. If not, any concessions they extract from Government on any new revised agenda will merely be the satisfaction of the orchestra on the Titanic to play a couple more songs as the ship goes down!

more to follow, next post



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