Many years ago, just before the fall of communism in Russia, I lived for a while with a Russian family in a small village about 100 miles west of Moscow called Novi Ruza. The experience was a bit like going to a Russian version of the Gaeltacht. I lived with a family who didn’t speak English, except for the daughter whose only access to English was a scratched recording of Hey Hey My My by Neil Young.
In this atmosphere – listening to Neil Young and going to Russian classes every day – I tried, with limited success, to learn Russian.
Most mornings, the official radio carried riveting stories about bumper grain harvests in Ukraine and how the collective farms had beaten all expectations. Yet the shops in the village had no bread.
We heard stories about how much industrial machinery the Soviet Union was producing, yet there were no spare parts for the Lada, which kept breaking down.
Every week, there was a story about how the great triumph of socialism was just around the corner.
I suppose we would now call this sort of stuff ‘talking up’ the economy.
Communists were great at it. They would spot a recovery, a new dawn, at the drop of a fedora. They believed in the ‘incantation’ approach to economics, which held that, if you incant or even chant long enough about something, that something will eventually come true. Daft, I know, but the communists were great believers in positive thinking, even if there was no evidence to back it up.
Now is it just me or do you get the sense that you are listening to Pravda on the radio these days? There seems to be a concerted spin, delivered by politicians and so-called economists, who never saw this bust coming and were preaching ‘soft landings’ two years ago, that Ireland is now on the cusp of recovery. We are going to experience some mythical ‘export-led growth’, which will drive down unemployment and, by next year, we will splurge again, spending all the savings we are sitting on.
Quite how we could possibly have labour-intensive, export-led growth when we have one of the highest wages in the world is beyond me. For that matter, I can’t see how we will splurge our savings when the government deficits are so huge that they will absorb our nest egg. I can almost hear the sheaves of wheat bursting out of their ties on the steppe.
The truth – a strange concept which ultimately broke the communists – is that Ireland is not going to experience a recovery any time soon, and this year will feel worse than last year. Behind all the spin and incantation, there is a barely audible sound which will get louder and louder. It is a large sucking sound: the sound of money leaving the economy.
What is now faint will become a cacophony.
We don’t seem to realise that we are now in a phony war situation where our sense of stability is based on the European Central Bank (ECB) injecting soft loans into the banking system. This massive monetary injection was carried out all over Europe to make sure the European banking system survived last year.
The ECB is now unwinding this credit. Let’s just recap on the way the banking system works. If the banks stop lending to each other (as happened in September 2008), the Central Bank, acting as the ‘lender of last resort’, steps in. It says to the banks: ‘‘Give us what you call ‘assets’ on your balance sheets and in return we will give you money so that you don’t run out of money and go bust.”
In Ireland, the assets on the banks’ balance sheets are our mortgages and all sorts of loans to property. So the banks package all these mortgages into what is called an asset-backed security (ABS).
This product, which could be thousands of performing mortgages, is rated by the rating agencies and then given to the Central Bank in return for cash.
This cash goes into our ATMs and we spend it. The ECB did this all over Europe from September 2008, because every banking system was experiencing problems.
The pathetic spin put out by the government and believed by many is that Ireland has some sort of sweetheart deal with the ECB, whereby the Europeans looked favourably on Ireland.
This is not true. The ECB treated the Irish banks the same as any other banks in Europe. In fact, it could not have legally treated us any differently to any other country. It loosened its rules on what did and did not constitute ‘security’. So banks in Europe that couldn’t get money anywhere else went to the ECB and exchanged ‘assets’ for cash.
In normal times, the ECB will only accept assets with an AAA rating as collateral. In the past two years, it has loosened this and accepted any old trash in return for cash to protect the system. Look at the chart for Europe as a whole, and we see that the ECB provided over €500 billion in this type of financing across the eurozone.
In July, it intends to pull €442 billion out of the system, as it reverts to taking only AAA assets and signals to the rest of Europe that the banking crisis is over. But it’s not over in Ireland.
In the crisis, different countries needed differing amounts of cash, depending on how delinquent the country’s bankers and regulators were during the boom. It will come as no surprise that Ireland is the most badly affected. Today, Irish banks are getting €98 billion from the ECB in this type of ‘cash for trash’ funding. That is 17 per cent of our banking system’s assets, which are about €520 billion.
Nearly as fragile are the Greeks, who are getting €42 billion or 8.8 per cent of total assets. For Italian and French banks, only 0.8 per cent and 1.8 per cent respectively of their total requirement comes from the ECB. In other words, when the ECB changes its rules, it will have no effect in Italy and France, a nasty impact in Greece and a catastrophic impact on the amount of money in ATMs here.
The major problem for Ireland is that the ECB will accept only AAA assets from March, but we don’t have any AAA assets.
Our government debt, the least risky (apparently) asset in Ireland is not even AAA any more. The ABS packages of our mortgages are clearly nowhere near AAA and will be further downgraded as mortgage defaults rise.
So where are we going to get €92 billion and how much will our banks have to pay over and above ECB interest rates? Someone will lend to us – but at a huge premium and probably a rationed amount of cash.
This means the most heavily indebted country in Europe is facing interest rate hikes and a massive contraction of credit from bust banks, which are looking for more cash from us. This can only be generated by more government borrowing, which drives down the rating on the debt further, drives up the cost of money to businesses and increases the likely tax hikes. Recovery, how are you?
I lived in Russia too long and listened to drivel about the whopping grain harvest in Ukraine as we queued for bread. We are hearing the same nonsense from our government and their lackeys on the radio and in print these days. As that great economic thinker, Chuck D of rap group Public Enemy, once said: ‘‘Don’t believe the hype.”
Excellent article,David, makes you think what will it take to get the Irish people to wake up!!!!
Just a quick follow up; if the papers are to be believed, Dan Boyle threatend to resign which would have provoked an election. Can somebody here please tell me how to convince this man to do the honourable thing and give the people back their right to choose a legitimate government ? I for one have had enough….
The dream is over…..lucky I have 60 grand in the bank to get out of this joke of a country!, never believed the hype thanks David and a few others like him!
I totally agree David, things will definitely get worse before they get better in Ireland.
Hang on a second … isn’t this what NAMA is all about? The banks get all their shitty assets converted into government bonds, so that when they go cap in hand to the ECB their assets are only as toxic as Irish government debt, which is supposed to be somewhat less toxic than a loan to a bankrupt Irish property developer, and therefore cheaper (N.B. cheapER, not cheap) to borrow against. I’m not a fan of the government or NAMA, jes’ sayin’ … that’s how it was supposed to work. What am I missing? paul77 — 60k in the bank?… Read more »
Speaking of Russia … Back in the seventies when I was a kid, we had one of those big old valve long-wave radio sets which was a throwback to an even earlier pre-transistor era. I remember listening to Radio Moscow’s international service, to a female announcer with an almost flawless BBC-English accent except for the slightest (and to me at them time, very exotic) Russian twang. That station was basically a propaganda vehicle for the communist regime, and it showed, so the announcer would be saying something like: “Mr. Macintosh from Glasgow writes to ask about the unemployment levels in… Read more »
I’m based in Asia, and I’m just back from a week in Ireland. I come from a middle-ish class family, and hang out in middle-class circles – the people who I thought would be most interested in the state of the State. But when back in Ireland, no one, not one of my friends or family, had any idea about what was going on. Some thought NAMA was the only choice, and most were apathetic. It was deeply depressing. We really need a few good men in Ireland – most of our career / dynasty politicians cannot be relied upon… Read more »
Good write up. I was looking forward to the next alert and reading some more sensible words which should waken up anyone who is not still living in 2004. Thankfully this blog is a rarity in Ireland in that it provides a voice that can be believed in and which does not leave you with that sinking outsider feeling you get after listening to our own versions of Pravda in RTE and and the press. Being an outsider in Ireland can be tough but it beats being an inside slave whose integrity has beed busted and whose silence is assured… Read more »
Morning All, It is a little bit disheartening when you feel the apathy. But things will become more focussed. 2009 was a year of shock – and it looked like a traditional shock led recession, with most of the impact on public finances and jobs. 2010 will be totally different and the true nature of our debts comes into focus. The fact that the mainstream media still spouts drivel should not come as a surprise to anyone who remembers how these people behaved in the boom! There is only one way out which is a negotiation with the creditors and… Read more »
ABS – I am not a mechanic but I always thought it means ‘good breaking’. Why do the banks have to mash up our english and make it an accelarator? I was reminded of the the times under communism I had a project in Novi Pazar in Bulgaria .I hired a car ( lada) to drive from Sophia and during my trip my breaks became my accelarator and I was only left with my hand break to stop the bloody thing.To make matter worse the engine over heated ….and thats another story . My project was a venetian gold coating… Read more »
Solpadeine – I am told this is one of the best new remedies in chemist shops for headachs.What we have ahead will warrant us all to use them more often.I did not sleep last night because of this article .It’s absolutely terrorising. I saw something else in this story too .I noticed David gave us two ‘systematic dates’ namely March and July .When I read that it shocked me big time. Later in March to early April and again in July we have the next two big ‘MOON WOBBLES’ . We have seen what happened in the recent one over… Read more »
Thanks David for this article.
I’m currently reading “Newspeak in the 21st Century” which while being a bit long winded, I’m not going to put it down. It’s an eye opener. I used to think for example that the BBC was an organisation which could be trusted, but this book sorts out my illusion. I have since stopped watching and listening to all BBC news type programmes. I filter everything I read and see now.
Well done on another attempt to get people see the light David. The ” Drivel” is spawning faster than a bullfrog on speed. It must be disheartening some mornings to wake up knowing what you know yet witness the destruction of our country. We tried last year to visualise what one billion amounted to and it came to a monumental tower of 500 euro notes. Since that didn’t grab the public imagination, I’ve got the calculator out over the cornflakes (The Quails Eggs are gone – too expensive). It turns out that a 50 Euro note measures 140 mm x… Read more »
@ Bamboo Testimony #3 Mary Duffy, clerical officer, Department of Education, Tullamore “In September 2008, my husband found himself standing in the swollen queue at the local social welfare office. He was granted unemployment benefit of €204 per week in January 2009. In August 2009, we discussed our mortgage with the bank. Our only option was to hand it back. So the day we had dreaded so much had arrived. On my son’s first day at school we moved into rented accommodation in Tullamore. Now my husband’s benefit of €196 per week has ceased. We are currently lving on my… Read more »
And even when the country implodes with public service strikes etc and even when the Jeremiah prophet´s (David) plan is finally followed and the bondholders are forced to negotiate there will be thousands of hard luck stories from lower paid civil servants (as above) and nothing will change for them. Nothing will change for the thousands of young people living in negative equity shoeboxes-they will never begin the process of trading up to proper family homes. Nothing will change for the unfortunate young people (My own daughter) sucked into Fianna Fail´s Ponzi property racket through the latter day quango: http://www.affordablehomespartnership.ie… Read more »
Yes, the ‘Affordable’ homes ‘Partnership’ was neither affordable nor a partnership in the real sense.
Truly Orwellian, another landmine unfortunately.
On Tubridy (Family Firm RTE employee) this morning.
[ Good morning, it’s the first day of Spring, Spring has spring. Roll on the good times. The Good times are here ].
Tubridy then went on to cover how we need to sell Ireland more. And later started a whinge about there being too much of a “whinge factor” in this country.
David is 100% correct. A landmark article. Everybody in Ireland should read this – and wake up and see what is really going on in this country.
@ G,
Thanks for this G. Much appreciated.
If John & Mary bought an “affordable” home from the quango for 196,000 Euros when the mugs in the street were paying 280,000 Euros, then the “clawback” on selling within 20 years is 30%. example Scenario : – If the Market Value of the Affordable Home Decreases: If John and Mary sell their home and the market value has decreased from €280,000 to €260,000 then the clawback would be based on the lower market value of €260,000 less what they paid €196,000, which is €64,000. So they have to pay back €64,000 to the local authority when they sell in… Read more »
Hi Folks, I lived in Russia during that era also and one of the points of interest for me between here and there is if there was a major F**k up in an industrial plant its the top brass that takes the fall here its always the little people. On another note you can look at all the stats. and forecasts you like but its a very simple equation no employment no recovery as a small business owner myself nothing is being done to give me any reason to want to employ any more people everything is stacked against me… Read more »
As for Tubridy,The good times will last forever for the most boring fart on the airways (I lost the pleasure of watching the late late show and now turn off my radio between 9 and 10 in the morning) as long as citizens keep getting screwed for a rip off TV licence .!
He gets paid a sinful salary for talking tripe.
The monies collected in TV licences should be distributed to struggling-but quality radio and TV stations-that dont repeat government propaganda ad nauseam`!
I find it difficult to believe that a clerical officer-even in the first year of the scale is earning only 451 Euros weekly?
Is this true?
Can the poster of these hard luck stories give me evidence or a government web site where Clerical Officers wages are posted?
I know that overtime has always been a normal element in their total income but I find the figure above difficult to comprehend?
What about additional allowances etc etc.
Thanks D great article again I like the “‘incantation’ approach to economics” metaphor a lot. Propaganda, secrecy, self delusion can’t completely cover up the wreaking of our economy by our present Government and its project through NAMA to wreak our future. Eventually reality comes knocking on the door! Bottomline we don’t have a government strong or bright enough to let the banks fail as this equates to letting FF power slip away. Bondholders must be brought into the equation to avoid bankrupt defaulting of our banks and subsequent loss to them as well. I suspect when NAMA evaluations and transfers… Read more »
This recovery hype is only Sych- Ops to get people spending so that tax revenues will start flowing again.
“Psychological operations (psych-ops or psy-ops) refer to the planned use of psychological knowledge to influence groups, organizations or populations to act in certain ways. Although associated with guerilla warfare, rebellion and subversion; many marketing and political strategies include psych-ops techniques … often called “office politics”, “hostile takeovers”, “social engineering” or “effective marketing”.
An organization can protect itself from psych-ops manipulation by recognizing the warning signs, defusing the tactics and convincing its members to commit to a common mission.”
http://www.soulwork.net/Systemic/psych-ops.htm
http://en.wikipedia.org/wiki/Psychological_warfare
Sorry – should be Psych -Ops
David and The Eye: I had some slight empathy with your earlier curiosity about The USSR way of life. As a student, concerned about the possibility of an imminent nuclear war with them, I hitched to Berlin and visited the Soviet occupied zone. Walking from West Berlin to East Berlin and observing the differences between those shop windows for opposing cultures, it became abundantly clear that the western way would prevail. That border crossing was shut down that weekend, as I left Berlin heading for Munich across East Germany, and I heard later that they had started building the Berlin… Read more »
Read Peter Suderland’s views in Saturday’s Irish Times just to see how big business views the world-wide recession and banking crash – it’s a case of everyone else is to blame except the poor banking elites. Thankfully President Obama has these guys in his sights – at least in the USA
I emigrated in 2004. I didn’t really mean to but I knew a friend in Luxembourg who was enjoying it. All my family lived in Cork and I was had been in Dublin 2 years and a bit disillusioned so I headed over more or less on a whim but with a job secured assuming I would be back soon. From afar I watched the property mania at home and often wondered how people were affording these houses etc but didn’t really dwell on it as it didn’t affect me directly. It was always my intention to move back but… Read more »
Firstly, an overdue left hook to the sunshine economists David. Well done. Not an easy thing to say in one’s own field either.
The major problem for Ireland is that the ECB will accept only AAA assets from March, but we don’t have any AAA assets.
You say: – “Our government debt, the least risky (apparently) asset in Ireland is not even AAA any more. The ABS packages of our mortgages are clearly nowhere near AAA and will be further downgraded as mortgage defaults rise.”
This article spells out the tempestuous road ahead http://www.moneyandmarkets.com/the-next-contagion-2-37578
David, Thanks for your article and your reply. Calling it as it is really boosts my morale, sapped as it is by non-stop lies in the press. The biggest disappointments for me are The Irish Times and RTE, the former drifting ever rightwards and with its own vested property interest following the myhome.ie debacle; the latter because it has become a shameless mouthpiece of the Government. A case in point was last night’s news. The main headline was that the Government was “considering” setting up a “panel of experts” to look into helping out homeowners (that’s those under 40, for… Read more »
Contagion a’ La Carte : In the latter part of March and early April when the sharp horns of the ram lift up it’s head to the sky on the sparse earth around Dun Aengus it’s ancestor will likewise do the same around the Pantheon .In those moments the sparks will rise and the spirit of the intellect will rouse to a new anger while holding firm on the edge of a great height its stern poise to confront with force .Its feet griped to the limestone holding itself from falling down over the hight and might of the glory… Read more »
The derivatives problem that nobody is talking about that the Banks have will make Nama funds look like a 4 year olds piggy bank.
Will the EU move on us after Greece? It now looks like they’re doing an IMF on them.
http://business.timesonline.co.uk/tol/business/economics/article7009661.ece
I suspect if you wandered into yer average ward for the severly depressed, you’ll be looking at a lot of bankers. Only the most sublimely deluded can pretend to believe they will get away with what is coming down the line. You have to hand it ot RTE et al…they sure know how to keep people from the pointy bits of the economic news. I know that all the large unions here have their own economists and who are fully aware of where we stand. And I expect there are similar in the upper echelons in the PS with a… Read more »
Reading these posts regularly there seems to be a great deal of discord in Ireland. I have recently moved back from having lived in the UK for 20 years — I am completely disillusioned with Ireland and the problem seems to be with politics here. Our politics hail from the civil war where we don’t seem to care who rules the country just once it is not the UK! Speaking to canvassers that usually come knocking on doors at election time I always ask “what does your party stand for”, ”what set of political principals do you have as a… Read more »
This is just a joke at this stage . The banks have told the Dail that even with NAMA they will still not lend . Now the valuations are even worse than expected with further discounts and recapitisation and more montains of personal defaults coming on stream .
Can somebody please answer me as to why we just don’t let the banks fail and start again . There must be a bank somewhere in the world that wants the business of 5 million people .
I really think that FF / Greens are just waiting for something magical to happen .
David. Calling it for what it is. A scam market. Russia in the end became a scam market, communism merely a wrd to hide the scam behind. Ireland is a scam market as is USA UK europe minus germany which still heralds savings and real productivity. Scammers and the scammed. Insiders can be scammed too depending on closeness of insider circle to the magic money making machine. Ireland a democracy is a scam. Ireland is a jailor economic system / slave system. The market system in Ireland, USa, Uk, Europe is one mega central banking system scamarama. if you work… Read more »
The Scammers all know who they are from top down and the savers / real workers know who they are and the two do not mix.
Which one are you poster.
A scam merchant or a real worker.
Great article David. However I think its more lies than hype.
And, after watching RTE’s Nationwide this evening, I’ve lost all hope for Ireland. Tonight’s programme featured a muslim headscarfed woman from Sudan, employed by Iarnroid Eireann as a civil engineer, and we have thousands of our own civil engineers on the dole. Political correctness is driving this country over a cliff.
What “cock and bull” story did she tell when entering the country? We’ll never know because to cast some light on an issue like this is akin to being one of Hitler’s henchmen.
David wrote an article recently about the party being over and we are now tidying up….well I think the party is still going and will only end when the ECB and others stop lending to us. Repaying our national debt of 120 billion is going to be impossible but to make matters even worse we have to make budget cuts in 2010,2011,2012,2013 and 2014. This is to get us back to borrowing less than 3% of GDP. By 2014 our national debt could be 175 billion at the very best. All the while our GDP will probably fall for the… Read more »
Folks, our natural resources must be addressed in any recovery-plan. Check out our bi-diversity mapping, here:
http://maps.biodiversityireland.ie/
I also gather, from the newsletters they send, that http://www.spiritofireland.org is gathering momentum (can’t happen soon enough, if you ask me!).
“One of the key reasons that it may make sense for some severely underwater homeowners to default is because they can’t rationally hope to have equity in their home for many years to come. If circumstances dictate that these homeowners need to move, or no longer have the means to pay for their mortgage a few years down the road, they will likely still be in a position where they will have to foreclose or short-sell, rather than sell their house on the open market through the normal process. Even if these homeowners remain in a position to pay their… Read more »
David – I’m curious about the scenario where Ireland does not leave the Euro – when would you predict the govt could balance its books? I think there is about a 22 (?) billion deficit currently: * Stamp duty is out as an option * Exports are out, because companies aren’t competitive. Banks still restrict credit, pay demands are high (due to Celtic Tiger mortgages), energy costs are high, Sterling remains weak, many rents remain on riduculous upward only clauses. * Raising taxes won’t generate more intake, because country hasn’t anything more to give. Tax intake in 09 was down,… Read more »
“The Brother” is back eating again at the table of the digs, a fact I’m sure ye are all glad to hear! We hav’nt heard much from him since his outburst above in the Dail bar, during the, what I’ll call “the early revelations” of the Banking shenanigans. Well for those of ye new to this forum, ”the brother” took it upon himself to sort the whole mess out, just after the guarantee by Linehan and so retired to the bathroom of the digs with four large books on Economics and one smaller book on the life and times of… Read more »
Michael Hudson -Obama’s Junk Economics “Obama claimed that unemployment would be much higher if they hadn’t been bailed out. So the giveaway of public funds was all for the workers. The $13 trillion that has created a new power elite was just an incidental byproduct. Unpleasant, perhaps, as American democracy slips into oligarchy. But the least bad option. People might not like it, but Main Street simply cannot prosper without creating hundreds of Wall Street billionaires…………… So the rest of us must wait for wealth to trickle down. The cover story is that, like it or not, this is how… Read more »
Folks, Peter Connell on how AIB is making the case for increased public spending:
http://short.ie/qzpx3c
…. and Ireland in firing line as Obama targets overseas tax breaks:
http://www.finfacts.ie/irishfinancenews/article_1018948.shtml
Folks, it’s back to basics or back to our communities. I have been waffling a bit about the latter of late and it’s about time I become more specific (yawn!!) We need to rebuild a community based on a working class ethos. These have been the only real communities which spawned any real positive change over the last century. The curse of community evolution is that as it evolves, we get a middle class of cliques and an upper class of clubs. So Ireland is just a collection of cliques and clubs who still find it so hard to find… Read more »
David,
While some of the members’ contributions are excellent and written with intelligence, I am concerned that your blog has now become the residence of anarchists without remedies. To make matters worse I now read of nazi idealism and racist slur.
What is going on?
Yes Ireland Inc is in deep, but rants from what appears to be a handful of “regulars” will not help us out of the mess.
I’m all for free speech but your blog is rapidly becoming a fertile ground for fundamentalist views.
Don’t believe that you intended it to evolve this way?
Riggs
yeah time for a spring clean alright!!!