Things are going downhill so rapidly that we need to look at changes day to day, not year to year.
In economic analysis, it is normal to compare year-on-year figures in order to draw some inference about what is happening to the economy. Every day we hear experts saying that new car sales are down 42 per cent since last year, or unemployment is up 47 per cent since last September, or whatever.
The central underpinning for this type of measurement is that we can deduce something from comparing this year and last year, and any such deduction can help us understand what is going on now. The key assumption is that nothing has changed since last year and, therefore, a comparison with 12 months ago is meaningful.
But this premise that nothing has changed since last year is nonsense. The most important thing to appreciate today – in the week the government reacted to the crisis and the markets went into freefall again – is that everything has changed.
As a prominent businessman said to me last week, ‘‘forget year-on-year comparisons – what matters now is week-on-week changes’’. His gist was that things are deteriorating so rapidly that the day-by-day and week-by-week changes are more revealing than the year-on-year malarkey favoured by many ‘experts’. His reasoning is simple: last year was not only 365 days ago, it was an entirely different epoch.
Let’s examine the contention that we are now in a new epoch. Given what we know about lending, debts, house prices, unemployment, migration and tax revenue, it is reasonable to argue that Ireland has now moved into a quite different phase. This is not merely a normal economic cycle amplified by the credit crunch; we are faced with an entirely new paradigm which has enormous ramifications for banks, governments, house prices and all of us.
What is happening in Ireland is a microcosm of what is happening all over the English-speaking world. To appreciate the magnitude of developments, we must understand that this is a global monetary crisis, the likes of which we have not seen in our lifetimes. The epicentre of the tempest is the banking system and the monumental debts that have been incurred.
Make no mistake about it, these debts will not be paid back because we cannot generate the income to do so. As a result, it is highly likely that one big Irish financial institution will fail in the next two years.
This might sound dramatic, but it is fact. Remember, telling people that house prices would fall two years ago was labelled heresy – but it has happened.
In fact, the lesson of the past 12months is that the ‘experts’ haven’t a clue what they are on about. If you look at how the consensus view has changed in the past year, we see that what was originally labelled ‘extreme’ and ‘maverick’, has become normal and mainstream.
For example, we were reassured that the crisis would be limited, ring-fenced and manageable. But the opposite has occurred. If we look at what has happened in the US, we see that the local has become global.
Twelve months ago, the experts told us that the financial crisis in America was limited to the sub-prime market. Then we were told that it was only in Florida. Then the spin was that investment banks were safe and only mortgage banks would be affected.
Then we were reassured that a run on a bank was not likely. Now we know that possibly trillions of dollars of debt will have to be wiped out as mortgage problems feed into credit card default and on to insurance premium defaults and car loans. In short, the entire ‘buy now, pay later’ culture has been exposed as little more than a pyramid scheme.
Exactly the same will happen in Ireland. Up until this year, the Department of Finance was forecasting a budget surplus! This coincided with the ‘soft landing’ scam — which was, of course, bogus, because it has never happened in any market. However, this unfortunate truth didn’t stop the experts from peddling it, or the people from believing it.
Then we were told that only outlying areas would see house-price falls. Yet the biggest damage in percentage terms is being felt in the premium side of the market. Then estate agents indicated that new apartments in good areas would be fine. Yet last week we saw prices of swanky apartments in Dublin 4 slashed by 20 per cent. In addition, some developers are now offering zero-interest-rate loans to potential buyers.
This is indicative of the dire straits we find ourselves in, where the banks are trying to hoodwink ordinary people into debt by doing a backdoor deal with the developer, rather than forcing the developer to reduce prices. Where do you think the developer is getting the money to give you the zero interest-rate loan? From the bank that underwrote the project in the first place, of course.
This amounts to the bank agreeing that it is better that we lumber a small individual with the crud of a falling market, rather than standing up to a developer and telling him the game is over. But the game is over. The Irish business model does not work any more.
The business model was simple. It was the same as the business model of the modern bank and it was based entirely on leverage. But leverage and credit have dried up. Borrowing for houses is half of what it was last year and it is likely to be half again next year. In these circumstances, the probability of a bank failing must be high. Remember, there has never been a credit crunch without at least one bank failure, and this credit crunch is like no other we have seen.
Unfortunately, our banking authorities are doing nothing. Why don’t they just call the banks in and say: ‘‘Listen lads, stop conning us, we know your balance sheets are in trouble, now let’s work together to sort this out.” Instead, the Central Bank is criticising the government for not cutting public spending enough, when the Central Bank is the institution most responsible for the credit crisis in the first place. This is a bizarre and truly shameful piece of theatre.
The Central Bank can see the train wreck of a bank failure coming down the track, but it is hoping something miraculous will happen before it hits the buffers. So, as always in Ireland, we wait for the crisis before doing anything, by which time the remedial action is considerably more dramatic than it needed to be had we acted with courage earlier. What is likely to play out is drearily familiar.
There is likely to be a run on a bank, particularly banks most exposed to property and the ones with the least developed deposit base. As is always the case, the equity in that bank will be wiped out and shareholders will lose everything. The Central Bank will then force a shotgun wedding with one of the larger banks and the delinquent bank will be swallowed up.
All this will occur against a backdrop of rapidly rising unemployment, rapidly falling house prices and persistent budget deficits.
The Irish business model does not work anymore. Sorry for the bad news, but someone has to tell it like it is.