Have we learnt nothing? The most depressing – and I mean depressing – news last week was that useless, unproductive houses in upmarket Dublin are now making well over the guide prices at auctions, at a time when useful, productive SMEs are going to the wall for want of credit and working capital. After everything we have been through, this is pathetic. It means that the same banking and property cabal that got us into this mess is flexing its dangerous muscles again.
Houses in this upper-end bracket are nothing but unproductive, useless status trophies. But worse still, if banks start funnelling what limited cash they have into the smarter end of the property market, we are goosed. At the core of lending to swanky property at a time when small businesses are starved of cash is a form of kamikaze capitalism, a get-rich-quick scheme which may favour the individual who gets in on the scam, but is detrimental for the community.
It is a kamikaze form of capitalism because it is ultimately self-destructive and unproductive. This type of asset only has value because other people put a value on it. You want it because other people want it and that’s what drives up the price. It creates no economic value, no jobs, no enterprise, no patents, no creative industry.
In fact, by stoking up the property game again in Dublin, the banks and the property sharks will again preside over a feudal system where the scarce capital of the country is sucked into the social pit of trophy houses, while working capital to small business is strangled.
Right now, the Central Bank should move to stop this so that we never, ever have a property pyramid again. It could do this by limiting the value of the collateral against which the banks can lend. When you look at all property markets, they are driven, not by supply and demand, but by excessive lending against collateral. As soon as prices rise, the ‘equity’ in the houses rises and banks feel that they have permission to lend more and more cash because they have the buffer of equity. But this only insures that yesterday’s rising prices leads to tomorrow’s increased lending.
A suggestion to stop this price/lending spiral was tabled by Israeli economist Amos Rubin. Imagine that regulators instructed lenders that the combined maximum loan amount should not exceed 70 per cent of the moving-average value of a property, offered as collateral, over the preceding 20 years.
This would wipe out any future house price nonsense at a stroke, and the socially insecure would need to find another asset through which to display their endemic inadequacies.
By preventing money going into property, we liberate that money to go into other investments, which have the potential to create jobs and opportunities for Irish talent, particularly young talent.
For years now (actually, since the publication of The Generation Game in 2007), this column has been highlighting the generational divide in Ireland – whereby young people have been disproportionately penalised and the middle-aged and the old have been favoured.
Last week, the ESRI – a bastion, ironically, of the middle aged, feather-bedded economist – finally agreed with a note that said the under-45s were being hammered, while the over-45s were doing OK. Better late than never, I suppose.
Ireland needs jobs for young people because we know that unemployment at a young age has a permanent impact on people’s prospects throughout their life. The warning sign for a recession that penalises the young over the old comes from Japan.
There, we see the phenomenon of the ‘freeter’. Freeters are young people who are either freelancing or working way below their education level, living a hand-to-mouth existence. Real jobs have been replaced by temporary, badly-paid jobs. Since the 1990s recession, millions of young Japanese workers have been finding themselves in this position.
In 1992, 80 per cent of young Japanese workers were in regular jobs. By 2006, over half were temp workers in one form or another. This remains the case today and scarily, the Japanese economy of 2013 is actually smaller than the same economy in 1992.
In Japan’s depressed system, there is no clear path to prosperity for young people. They have only two choices: stay and take whatever subsistence-level job they can find or leave and take their chances elsewhere.
Now, look at Ireland today. As of 2010, Ireland’s temp work rate was 22.4 per cent of the total, and this is rising and concentrated in the younger age group. Probably the most damaging statistic is that our young population is actually dropping.
In the 2008 census, the Irish population between the ages of 15-24 was 669,200. In 2012, it had fallen to 553,500. In 2008, the population between 25-29 was 408,300. In 2012, it had fallen to 341,200.
In 2011, the total population between the ages of 25-44 was 1.405 million. It was 1.4335 million in 2012 – a small drop. We know that migration is on the rise. Emigration rose from 80,600 in April 2011 to 87,100 by April 2012 – of which 46,500 were Irish nationals: your brother, sisters, sons and daughters. The highest proportion was aged between 25-44.
Japan shows us that these trends don’t reverse themselves on their own. In Japan, we can see the future for young Ireland. Many of these young people are also trapped in mortgages and/or in arrears – meaning they can’t up and leave, but are finding themselves in ever more frightening domestic circumstances, which have obvious social and economic knock-on consequences for the country as a whole.
The eclipse of the young by the middle-aged means we have not only a lost generation, but such a dangerous process could set off a cycle of national decline.
How do you reverse it? Well, the first thing we know from the US is that most jobs are now being created by young, small companies. In fact, old big companies are net job destroyers. So, at the very least, giving small businesses credit should be the number one priority for government and the state’s industrial banking complex.
The last thing we should be doing is championing trophy house sales to the middle-aged when the future of a generation is at stake.