As noted in an excellent column in this paper on Monday by Stephen Kinsella, it is five years since the Irish economy began to concertina under the twin pressures of too much debts and collapsing growth. As we head towards six years, the question most reasonable people want to know is, “when is it all going to end”. Maybe the question should be not when, but “how is this all going to end”.
Using history as our guide and the recent episodes of debt-related boom followed by bust, we can safely say that as night follows day, massive borrowing splurges, huge mortgages and house-price booms lead to a protracted period of massive retrenchment, house price falls and a certain amount of defaults. It is not a matter of if, but when.
If a housing bubble can bust with collapsing prices, so too can a debt bubble with mass default.
For those looking for an end to all this, the default period signals the beginning of the end of the slump because this is the moment of realisation for both debtors and creditors that the world has changed irrevocably and in order to go forward, we can’t go back to the past. Contracts signed then, in good faith, simply can’t be delivered on because the new environment of falling prices and diminished income and wealth simply make this impossible.
The more new capital is used now to pay these old debts, the more fresh capital is wasted trying to make legitimate poor investment decisions, which were based on nothing more than “hot air” in the first place. It is throwing good money after bad, the ultimate expression of “dead money”.
A recent report by the stockbrokers Davy indicated that one-in-seven residential mortgages is in arrears.
The number is twice that in buy-to-let mortgages and overall, 50pc of all mortgages are in negative equity. We are now entering that zone where the reality of there being too much debt and not enough incomes, is beginning to dawn on most people.
The endgame is that someone has to lose — either the debtor or the creditor. The best solution is co-responsibility, where both debtor and creditor take a hit.
In Ireland, up to now the debtors — ordinary people with huge mortgages — are being asked to shoulder everything, while the creditors — the banks — are still behaving as if they expect to be paid in full. They won’t be, nor should they be.
The endgame starts with isolated defaults and then this process accelerates.
Bear in mind that 400,000 tracker mortgages are at historically low subsidised interest rates, which can only go up over the lifetime of the loan. The tracker phenomenon is a ticking time bomb because it gives an unrealistic picture as to the real cost of borrowing in this country.
But before we look at interest rates, let’s just briefly see what happens to the other key component that drives mortgage defaults — income — in the downturn,
The collapse in house prices leads to falls in consumer wealth and demand, which in turn, causes incomes to fall. As unemployment rises, the fall in income for those who lose their jobs is direct and immediate. But the collapse in demand also leads to lower general tax revenue and increases in welfare spending. The government budget deficit increases. Eurozone nations lack a sovereign currency and have great difficulty following the counter-cyclical fiscal policies that would allow a faster recovery from the recession. The decision to extend what was originally a temporary guarantee that was designed only to prevent an evident bank run, into an open-ended bondholder bailout of what turned out to be massively insolvent Irish banks, blew up the budget deficit to levels that a nation lacking a sovereign currency could not repay.
Bond vigilantes target nations that are in economic trouble and lack a freely floating sovereign currency because these countries have to pay back debt which is effectively in a foreign currency. Irish sovereign debt became far more expensive to refinance and would have become impossible to refinance without EU support. The great increase in sovereign debt costs makes the budget deficit surge. Credit rating agencies then downgrade Irish sovereign bonds, exacerbating the death spiral.
The EU’s Stability and Growth Pact then compounds the problem — demanding that Ireland embrace austerity at the worst possible time. The EU and ECB demand that Ireland increase taxes, reduce spending, and cut ordinary people’s incomes (to spur exports) in order to close the budget gap.
Tax increases and wage reductions reduce private sector monthly income, leaving less cash to pay the huge mortgage. This reduces private sector demand, which is already inadequate in a recession. The reduction in public spending reduces public sector demand. The recession deepens, unemployment increases, and incomes fall. Housing values fall even further. Tax revenues fall and unemployment expenses rise.
Austerity can increase not only unemployment, but the very deficit it is promised to end. The terrible truth is that a nation mired in a deep recession cannot ensure that austerity will reduce a budget deficit. Remember, while consumer income goes down, housing debt is fixed.
Over the course of the next year, as the economy continues to deteriorate or at best bump along the bottom, many thousands of people trapped in too much debt on houses that are worth half of what they paid for, will ask themselves:”what’s this all for?”
Will they chose to default, not because they are financial delinquents who always intended to abscond from their economic responsibilities, but because the sums don’t add up? And if they do, will this process become viral where each default gives the permission for the next guy to do something similar?
Remember, house prices rose and fell in a similarly viral manner, going up together and crashing back in tandem.
This is possibly the major economic dilemma facing Ireland’s political class in the years ahead.
The values of loans must be writtne down in line with the value of assets.
Should have happened three years ago and existing Banks ringfenced to deal with this process and new Banks set up.
Made this proposal to the previous and current government.
They preferred the Pillar Bank Strategy and a lot of slow pain and legal fees. But as I always ask who is adviing them ?
Actually, the end phase is the cessation of global economic growth. Economic growth, although deemed essential (according to the dictates of a debt/interest based economic system) is but a temporary phase permitted only while materials throughput can increase in tandem. Possibly economists, bubble wrapped in their own little world, are unable to appreciate this,but economic growth can only go so far in a finite world. As recently as 2005, Ireland was still talking of an annual growth rate of 4-5 percent. At the lower end of that range, that gives a doubling period (the period taken to double economic activity)… Read more »
At this stage, I wish mass default was here, as it’s grinding slow progress is tiresome! I want to see a mass collapse of Capitalism and then hopefully we can start afresh in a kinder more humane way of living. Not the New World Order way, that the Elites think will happen!
Great article David :)
‘For those looking for an end to all this, the default period signals the beginning of the end of the slump because this is the moment of realisation for both debtors and creditors that the world has changed irrevocably and in order to go forward, we can’t go back to the past’ Really David? I couldn’t disagree with you more! You have arrived at this conclusion because you view the problem like an economist. Remember doing the job properly in Ireland is the worst thing possible. What this signals is the end of the brginnining. After the nass default the… Read more »
30 years ago a banker was a well respected person in our society now in ireland I see them as gangsters hiding behind a terrified government whom ought to stand up to the mark and put them in their sorry place unfortunately Mr Alan Shatter squander that chance by giving the dysfunctional banks a veto in the new insolvency bill a mistake that will come back to haunt him in my opion people will put the keys in the letter box and leave ireland for a new life and a fresh start if the government had given people in real… Read more »
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Hi irishminx,
If you have been reading this blog for a couple of years you will realise that the way the world has been run by bankers is NOT capitalism. Capitalism is trying to reassert itself because in a capitalist system when you fuck up as badly as the bankers have (depending on your perspective) their respective organisations should have been liquidated by now. This hasn’t happened! So bring back capitalism is what is in fact required.
+ 1
As some commentators have stated capitalism for the citizen socialism for the wealthy and the Banks.
I just don’t remember the referendum where the Irish people voted to sign the international agreement which indebted the country for the foreseeable future…
I do not mean to detract from DMW’s article and the situation in Irleand, but really, we as a country arereally subject to the whims of what is happening globally irrespective of what we do 1) QE 3 starting in US and/or the mother of all tax hikes or spending cuts 2) QE for real (not the coverup trash for cash nonsense) in the EU in an attempt to absorb the mess in the EU. 3) Euro ramp in oil costs as we head to winter (even though it is headed lower for now) becasue of 2) 4)Food costs heading… Read more »
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Couldn’t agree more. Just exactly how big does this herd of stampeding, dung-dropping elephants-in-the-room need to get before the penny (woops, ‘cent’ – no wait, ‘penny’…) drops and the banks start writing off large chunks of this mammoth debt.
There is only three classes of people this state cares about Speculators,builders and financiers the rest us will just have to put up with it or leave.The state has done everything it can to protect and bail out these people to the detriment of Ireland.Now we the people are paying of these debts through taxation.The sooner the whole lot collapses the better.
In my opinion the real situations facing all western economies are inflation vs deflation scenario. Due to massive monetary easing, we now have not only ZIRP(zero interest rates) but NIRP Negative interest rates). Infaltion is not showing up in CPI due to the nature of how it is calculated. Savings are destroyed by NIRP,ZIRP. Commodities are soaring (Oil,PM’s, Foodstuffs)which are in effect adding to inflation and hurting those who can least afford it. However on the other side of the coin we are suffering in a deflationary economy, lower wages, lower asset prices, lower lending etc. If inflation does break… Read more »
A lot of new posters all of a sudden today on the site. Maybe we are finally reaching ‘critical mass’.
Clears throat… http://www.amazon.com/exec/obidos/ASIN/B008YF7DRG/downandoutint-20 ‘A worse unemployment rate than Greece. A Spanish economic miracle turned catastrophe. A lost generation of indignados with no homes, no work, and no faith in the system. An austerity government who in nine months have already pushed miners to armed conflict, firing home-made rocket launchers at riot police. An Economics Minister whose last job was director of the Spanish branch of Lehman Brothers. And right in the middle of the Andalucian countryside is Marinaleda, a little-known communist utopia led by the charismatic poet-rebel, Juan Manuel Sánchez Gordillo: a town of landless labourers who for over 30… Read more »
Good Afternoon We,as a Country and as a people need to implement a mass default with immediate effect. This is not a “Fiscal Crisis” it is a Banking crisis and a financial War. The Current Banks supported or owned by the Government and the people… are incompetent and insolvent and 5 years down the line we are no closer to improving our Country’s balance sheet. Their is no leadership in Banking,their regulators or our Government. The U.S federal reserve is once again on the verge of creating more debt to solve a debt problem,this has proved time and time again… Read more »
If a time comes that people who have mortgages and can afford to pay them but default because the house has lost value. I will leave this country and never return. 30 year mortgage, did people honestly believe in that time period they would not struggle financially for a few of the 30 years. If its too expensive you shouldn’t of bought it. Every penny I’ve spent in rent is a Penny saved. I was told this in 2005 by a guy who worked for a German bank. Good advice obvious then and obvious now.
The ‘sub-contractor who does the titles’ got it bang on with this one!
On the same theme NAMA wine lake writes today about 22% of mortgages in arrears/restructured:
http://namawinelake.wordpress.com/2012/08/23/more-than-22-of-irish-mortgages-are-in-arrears-or-have-been-restructured/
As long as we think we are a great little nation, as long as we act like one, and as long as we are told we are a great people (various endorsements HM Queen Elizabeth & Barrack Obama Etc.) then we’ll feel alright! We’ll be broke…but the generation that made such a balls of the economy…will have consoled their children with the gift of a re-imagined Ireland – far from the irresponsible ‘piss-head paddy’ international perception we once had!
It’s not all about money!!
Great article as usual, and my personal empirical observations suggest, unfortunately, that you will be proved correct. But isn’t this exactly what Morgan Kelly said circa 15 months ago.
David,
House prices are overly priced, STILL.
This economy is rigged.
House prices are rigged.
NAMA took over the rigging of the property market from the collapsed banking pOnzi bubble.
The economy is crying out for the return of sanity to property prices and the reutrn to the Shiller mean index price estimated over a 100 years which would return the price of a average house back on course at 100,000 euros.
Until this happens we are all playing fantasy economics.
David, you reference history to show the inevitability of busts and so on. Now to anyone, has there ever been in history a story of mass default that led to stability very shortly afterwards.
Default means you cannot pay for whatever reason and it always means a loss of your assets. You do not get to stay the way you were before the default.
So, let’s have it. What are the nuts and bolts of recovery of post bust Ireland from the viewpoint of a typical family of 2 adults, 2 kids, a 300K mortage and 1 part time job?
Well David thanks for pointing out the obvious. While there are suggestions of the problems what of the solutions. Why are you not more direct. State the obvious solution right after the factual problem. you are too cute. Meanwhile there is no suggestion for the individual survival while all this unravels in Ireland and around the world. Fact Fiat currencies are in collapse mode and will fall in value more quickly as TPTB ramp up QE to Infinity. Solution Own money not based on Fiat. gold and silver coin in hand , in your physical possession. nothing paper. Not stocks,… Read more »
An experiment in Bloody Nose economics, I wonder what the reaction would be if everyone went and took out as much as they could from the ATM tomorrow. Not to spend it. Just tuck it into the sox n jox drawer. You still have it but since all the big bank cover up scams are done over the weekend, you could always put it back in on Monday because most folk would have to. Be interesting to see the banks reaction. After all, it is your money and there is nothing odd about wanting your money on demand. At least… Read more »
“wiping up fear”
The Irish Independent sales tactic and some here too…
http://www.youtube.com/watch?v=B5OWRRJh-PI&feature=player_embedded
Michael D spells out clear to the tea party but it apply all to often to Ireland media too….
Austerity never worked, from Brüning, to Schacht the BIS (Bank of International Settlements, Basel) banker himself and finance minister to Hitler. Now today, we have this : Inventor of ‘Quantitative Easing’ Urges Adoption of Schacht’s Recipe To Save the Euro Aug. 22, 2012 (EIRNS) – Richard Werner, a German-born economist at the University of Southampton, called for a genuine Schachtian plan to save the euro, in an interview with the Aug. 16 {Daily Telegraph}. Werner is credited for having invented the term “quantitative easing” in 1994, in proposing a money-expansion policy to Japan. Reporting on Werner’s proposal, James Hurley wrote… Read more »
I agree with David. By summer next year, I will be one of the first nfe group of defaultors, knowing that in ten years time, I’ll be looking back at the mass defaultors that will follow me. I will leave my home, I will head to the UK, go bankrupt, and head for Oz or US. I am a senior engineer with 15 years experience and my wife is a teacher, and a fw young kids. It will be hard but I am not willimg to subject my family to 20 years of third world living, which is coming here… Read more »
I recall a while back hearing stories from the USA about banks/lenders having failed to properly complete the paper work on a huge amount of mortgages.
This was in turn creating problems were action was being taken loans in default.
I have no doubt that this is the eye of the storm from in regards to the Irish property market. I understand some Irish lenders are still wearing the kid gloves in public but behind closed doors they are acting very agressively.
The personal insolvency legislation is, from what I read, a damp squib.
The truth is very mundane. The wimmen and gay communities are taking over the world -slowly but surely. Why? Cos they’re the only ones who know how to work and get on with it and they are up front and they are networkers. Whether u like it or not, you will on average all be living useful lives for a lot longer than yer parents. This has 3 effects, you will be able to pay off yer debts, have fewer children per average yr of your life cos you enjoy life too much and you’ll have a few more partners… Read more »
Republicans Eye Return to Gold Standard By Robin Harding and Anna Fifield Financial Times, London Thursday, August 23, 2012 http://www.ft.com/intl/cms/s/0/06ebfdaa-ed3f-11e1-83d1-00144feab49a.html The gold standard has returned to mainstream US politics for the first time in 30 years, with a “gold commission” set to become part of official Republican Party policy. Drafts of the party platform, which it will adopt next week at a convention in Tampa, Florida, call for an audit of Federal Reserve monetary policy and a commission to look at restoring the link between the dollar and gold. The move shows how five years of easy monetary policy —… Read more »
@Tony.
http://market-ticker.org/akcs-www?post=210599
Hello David, Dan O’Brien asks the following question in todays Irish times ‘what innovations has the financial services industry introduced in recent decades that boosted economic growth’ (other than the ATM) Ans; NADA, not a sausage, nothing what so ever according to non other than Paul Volker the former central bank chief of the U S of A. According to the same article two Irish central bankers Sarah Holden and Fergal McCann have released the results of their recent study which conclude; Banks are not meeting the demands for loans from viable businesses. The conclusion to O’Briens article; ‘Banks do… Read more »
Theres a new invasion of the body snatchers comming to a theatre the Irish government has been taken over by lifeless puppets ,who can see Ireland going down the tubes.
The government decides to stand back and see what other country’s are doing in the hope that our problems will disappear in a poof of smoke .
Or maybe the government will disappear in a poof of smoke.
Gold takes another step as money
http://www.foxbusiness.com/news/2012/08/21/lchclearnet-to-accept-gold-as-collateral-for-margin-cover/
Germany: Eleven Foundations Start Massive Pro-Euro Campaign Aug. 24, 2012 (EIRNS)–Eleven foundations have launched a pro-Euro campaign, investing enormous amounts of money and recruiting prominent dupes from political, economics, and showbiz circles, to bombard German citizens with Goebbels-style propaganda in the next months, to push through the EMS. The campaign was announced yesterday in Berlin by the heads of the Mercator and Robert Bosch foundations. Angela Merkel sent a videotaped message of support. (The Robert Bosch Foundation financed the infamous “Amato Group” that rewrote the so-called European Constitution, into what became the Lisbon Treaty). The 11 foundations include, in addition… Read more »
New Schachtian Measures Announced in Spain August 25, 2012 (EIRNS)–At least two additional austerity measures gouging the Spanish people were announced at the end of Prime Minister Mariano Rajoy’s meeting with his cabinet on Friday: a bill to make it {easier} to evict tenants in arrears on their rent payments, and sharp restrictions on who among the long term unemployed will be eligible to receive federal assistance. After the cabinet meeting, Employment Minister Fatima Banez had the gall to say that the “Prepara Plan,” which provides a stipend of 400 Euros a month (equal to 75% of the minimum wage)… Read more »
Spanish Doctors Refuse To Obey Orders To Cut Off Immigrants August 24, 2012 (LPAC)–The “conscientious objectors” movement of physicians in Spain, against the government’s health care reform that cuts off free treatment for undocumented immigrants, is exploding. Initiated by the “Doctors of the World” organization in Spain, individual doctors are taking an oath that they will refuse to turn any patient away who comes to a public facility, come September 1st, when the law goes into effect, and some entire regional medical federations have come out in their support. The head of the Official College of Physicians of Murcia, for… Read more »
A dramatic warning from the Financial Times on the danger of war now. This follows the repeated calls for Glass-Steagall since July 04. “Thucydides’s trap has been sprung in the Pacific” http://www.ft.com/intl/cms/s/0/5d695b5a-ead3-11e1-984b-00144feab49a.html#axzz24Y6YCpv3 Author Allison’s outspoken warning that Obama is bringing us straight into a thermonuclear war, is by no means limited to the Pacific — nor is it limited to him. Over the past ten days, a broad array of America’s foremost civilian experts have joined Lyndon LaRouche and the JCS led by General Dempsey, in ringing this alarm bell — and not one moment too soon. Graham Allison also… Read more »
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http://www.thedailybell.com/4213/Is-a-State-Run-Gold-Standard-Really-the-Answer
If you want a sound money system do notlet the govenment operate it.
For anyone who mistakenly thinks that their bank deposits are actually their money. They are NOT they are the property of the bank to do whatever they deem fit with the money and it’s usually something very stupid. Get a large proportion of your savings out of this financial casino before they blow your cash
http://www.activistpost.com/2012/08/customer-deposits-are-property-of-bank.html
Blue Moon Revelations On August 7th this month I posted a submission relating to the above and ‘Confusion’ was the key word.This Confusion is close to an end now . The apex of the moon wobble was 23rd Aug and currently we are heading to the Blue Full Moon on Aug 30th . Today is the 7th day before this event .So why do I say this ? In todays Sundays Independent the Minister has acknowledged he will reveal the ‘secret letter ‘ sent to the late Brian Lenihan by the not so late Jean Claude Trichet : http://www.independent.ie/national-news/michael-noonan-ecb-threat-letter-will-be-released-3210209.html What… Read more »
Lenihan, Noonan, the ECB, the blackmail letter, and Pippi Longstocking Assertiveness is required to train dogs and achieve a high level cooperation between the handler and the dog. It is a state of mind and most inner conviction that allows you to be assertive and calm. The mambo jambo that is being played now on the public stage concerning the infamous Trichet letter is remarkable in many ways. Personally, I find it utterly risible to remotely consider that a threat coming from Trichet to cut of ELA funding would be taken serious for longer than 2.5 seconds at the most.… Read more »
A question to any cynics or otherwise out there.
Did anybody else beside myself think that it was more than just a coincidence that S. Fitzpatrick was arrested, the very same weekend S. Quinn’s son was sent to jail?
Bernanke Sends Yet Another Signal That QE3 is Coming Aug. 25 (LPAC)–Federal Reserve chairman Ben Bernanke hinted, in a letter to House Oversight Committee chairman Darell Issa (R-Calif.), that more “quantitative easing,” that is, money printing, is on the way. The expectation in the media and among the tea leaf readers is that Bernanke will make it official when he addresses the Fed’s annual gathering at Jackson Hole, Wyoming at the end of August. In his Aug. 24 letter to Issa, first reported by the {Wall Street Journal}, and then {The Hill,} Bernanke said the Fed’s efforts have “substantially helped”… Read more »
Debate on Banking Separation Spreads in Germany, France Aug. 25 (EIRNS) – Linde industrial corporation CEO Wolfgang Reitzle and SPD Hessen leader Thorsten Schäfer-Gümbel are the latest in a growing number of prominent business and political leaders who have come out in favor of banking separation in Germany. Reitzle stated in an interview with {Manager} magazine that “With the Libor affair, the last piece of confidence has been lost. What should we think when the possibly most important rate in the world was manipulated?” Reitzle did not call directly for banking separation, but his statements are seen as on the… Read more »
Does that mean Bernanke wants to create ‘bonds’ as opposed to the FDR printing money?
Everyone needs to read this. Get out of fiat currency NOW! The paper you hold in your hands everyday that you called “Money” is worthless and becomes even more worthless as the Central Banks of the World print more currency to prevent deflation. The fiat currency paradigm CANNOT last forever – nothing lasts forever. No monetary system has lasted more than 50 years in recent years, and the system where the dollar is the reserve currency is nearing 50 years old. When the dollar collapses, the world collapses. Don’t believe me? How is oil imported into our country? We use… Read more »