When are the powers in this country and internationally going to understand that this economic crisis is a debt crisis and will only be solved when the debtors and the creditors sit down and hammer out a deal with each other? This goes for debt between countries as well as internal debts.
The way to solve a local or global banking crisis is through the medium of “co-responsibility”, where the debtor and the creditor equally share the blame and the cost. One party borrowed too much in the good times and the other lent too much. That’s about the height of it.
The mature and responsible way to solve this problem is to do a deal which involves each party paying.
Contrary to popular belief, this crisis didn’t start in 2008 with the collapse of Lehmans or the collapse of the Irish property market. The debt crisis started in Ireland in the late 1990s and early 2000s when the banks started lending wildly.
The failure of the vast majority of Irish economists and policy makers was not that they didn’t predict the bust, but that they failed to understand what all this credit was doing to the underlying economy.
And unfortunately this thinking remains the establishment view — so rather than looking at the causes of the crisis they are looking at the consequences.
So, for example, the Irish establishment still seems to think that the collapse is the problem rather than seeing that the collapse in house prices is the result of previous lending, and is now also the cause of present indebtedness.
Unlike previous slumps, this is not a recession prompted by a massive oil shock, a war or some enormous technological change, which leaves certain economies stranded in the past. On the contrary, this is a payments crisis, where the lenders can’t accept that they won’t get paid and the borrowers can’t see a way out. So the borrowers stop spending until they get clarity about how much they will have to pay back and the lenders stop lending until they know for certain how much they are going to have to write off. As a result, the economy stalls.
If you doubt this, just look at the news flow in the past 48 hours. At home, retail sales slumped again in July, the banks have reported that they won’t meet their own modest lending targets because people don’t want to borrow and all the while, mortgage arrears all over the country are rising relentlessly.
Internationally, things aren’t much better. The US is losing altitude, as is the UK, markets are falling and even in Asia growth is slowing down.
This is all because there is too much debt.
But rather than focus on this, our politicians are still dealing with this slump as if it can be solved without co-responsibility on debts. Debt forgiveness is part of this co-responsibility agenda, yet even in the past few days we have had Irish politicians who won the election on the platform “not another cent” to the banks, coming out defending the interests of the same banks. They are fighting the last war — and if the last three years has told us anything, it is that it is time to start thinking afresh.
How do you solve a problem of too much debt? You solve it with less debt, not more debt. You never make a balance sheet stronger with more debt, you make it stronger with less debt. This is why we have bankruptcy procedures. In fact, strange as it may sound, bankruptcy is good for business.
In the US when a company is in trouble and its balance sheet is broken, it can go into Chapter 11, where the creditors of the company are told that they will have to take a huge haircut if they want to get any money back. Crucially, the company is saved.
In Ireland we have a similar legal mechanism called “administration”.
The reason we have these mechanisms is that they mean good business. Consider a company that has too much debt and is contracted to pay the debt, but if enforcing that contract will cause the company to fold, then enforcing the contract is reckless for everyone concerned. Therefore, it is financially irresponsible to enforce the contract. This rule is the basis of all business.
However, if you think like a lawyer and not an economist, you are mesmerised by the sanctity of the contract and don’t see that the very contract is now reckless because underlying conditions have changed. So the lawyer will always undermine a business that is in trouble.
The same goes for a household. A household with too much debt that can’t pay its bills will sink if it is forced to pay all its debts, so it must get debt forgiveness. There must be co-responsibility.
We in Ireland have to stop thinking like lawyers and think more like business people when it comes to resolving our debt mountain. Enforcing old debt contracts when the underlying economy has changed dramatically makes things worse not better.
The great economist Galbraith once said: “Faced with the choice between changing our mind and proving that there is no need to do so, almost everyone gets busy with the proof.”
On the issue of solving our debt crisis, we need to change our minds; but understandably, the Irish establishment is busying itself proving to itself that it doesn’t need to change its minds. In the process we are losing time and the crisis gets worse. Very soon we will run out of time.
I enjoy most of the articles on your blog, and sometimes even leave feeling positive about the future. Then I realise thats its all just words on a page and you are generally preaching to the converted. Knowing what has to be done to fix things is all well and good, but how do we make these things happen? We live in a broken democracy, where one failed government follows another, with more broken promises and empty gestures. How do we get them to see the light? Or how do we move on and get a new government thats on… Read more »
This is a good article and debt forgiveness will definitely help our economy.There is another option that we could explore . We could push out the mortgages for a longer period. The mortgage on 200,000 euro is about 1000 a month so if mortgages were pushed out another 10 years a portion of the debt could be restructured in this way. The rest of the debt could be written off. I think its important for the optics of the situation that people be seen to be treated with fairness and in the same vein there is a price to be… Read more »
This government is fighting a war ? That must count as news to me. Seems to me that they are shying away. More sober than the last crowd, and that is about the height of it.
Great article. Pravda RTE had a guy on this am whose name shall be nameless beating the same old tin can: “We need greater austerity to prove to the markets we are serious about fixing our economy, we can do it, we are not like Greece” Also funnily enough and no coincidence intended not, the ESRI have published in their latest report, we should bite the bullet and cut more, not less. Actually no, unsurprisingly there were no spokespeople for balance expressing arguments contra to the above position. Why? Because of PRavda RTE ubiquitous dirge bugles propaganding once again:) The… Read more »
David is 100% correct. This crisis started when the banks started lending recklessly. This is completely obvious.
The problem with this truth, is that it undermines the entire establishment right across the board.
Subscribe.
Consistent with the sentiments of many posters here over the years! The truth is that none of our decision makers are true business people! Over the last 90 years we’ve been governed by mainly school teachers and so it is today. They by nature lack the confidence to make decisive moves – That’s why they’re always commissioning a report! Because they are not business people the following sentence is only a string of words to them; “Fear and success are always found together!” The reason why they will not and never have taken courageous decisions is that they lack confidence……and… Read more »
One thing is for certain, if someone doesnt purchase some Sudafed for Noonan, we wont be able to hear him at all. This guy is as bad or even worse than the last congested fella, with the the sleepy, nasal, tired barely able to speak delivery, everyday! Imagine listening to him this coming budget. Jesus H. Kee-rist, were doomed.
I laughed out loud when I heard Mattie McGrath of Fianna Fail warn of the moral hazard of debt forgiveness. Also we have forgiven the banks twice, when they could not pay their deblts to their lenders we gave them loans to clear their debts and when they could not clear those we swapped them for equity. But they have a voice close to the permanent government who make theese decisions. Ordinary borrowers are a disparate group with no collective voice so are easy to ignore. We do not or never had democracy we have bureaucracy. It will try stick… Read more »
Off-topic here is a good article about people and their storage habits – more evidence of the obscene consumerist culture that surrounds us.
http://www.bbc.co.uk/news/magazine-14718478
From David´s article above: ,When are the powers in this country and internationally going to understand that this economic crisis is a debt crisis and will only be solved when the debtors and the creditors sit down and hammer out a deal with each other?´, Well the people of this country elected same powers that be, so to en extent got what they asked for. DSE had an enlightened candidate in Paul Sommerville who understands the mechanisms behind the creation of debt and how to deal with the issues. Instead Lucinda(¨I will look up the details during the break¨[sic.VB]) sits… Read more »
As usual David you are spot on. I had hoped the new Government would be miles better than the last but I fear not. I truly fear for the future for us in Ireland. All these new taxes and cutbacks are pushing me more in to the red and I’m already up to my nipples! I am just a number now, a statistic on a welfare document, when I hear the unemployed numbers on the six one news I think, Hey I am one of them, this is one of the few things I can be proud of these days!… Read more »
Woody
I couldn’t agree more with what you had to say.
I rarely comment on sites like yours as I am involved in this whole business acting for clients who have come unstuck with lenders – I started my debt negotiation and mediation business in the mid 90’s and did not realise for a decade that I had started an industry here ! There is so much waffle and bullshit talked by so many commentators about “debt” and what “needs to be done” and I have to say IMO you generally get it right David. What you have written today is spot on. The parties need to mediate and take joint… Read more »
“How do you solve a problem of too much debt? You solve it with less debt, not more debt.” The opinion of the government’s advisors appears to be the direct opposite of David’s. From today’s Irish Examiner: “Other options being looked at by a body of banking figures and civil servants set up by the Government include enabling people already in negative equity to trade up to a new home. This would be if they can sustain the overall debt after selling their old residence at a loss and carrying the previous mortgage “hangover” with them.” In other words, the… Read more »
The world is run in favour of creditors, particularly in Ireland. I think once you see this the rest makes more sense.
For those who haven’t seen it, there’s a good discussion about debt forgiveness from all angles here:
http://www.irisheconomy.ie/index.php/2011/08/22/lack-of-debt-forgiveness-not-realistic/
I got a letter this morning from the Irish Property Owners Association asking me to renew my membership.(I was a landlord some 9 years ago) Reading it is extremely enlightening. The property investors who “bought to rent” during the Fianna Fail inspired,tax relief/incentives era,represented about 50% of all buyers in the market at its peak due to the ridiculously generous tax breaks. This resulted in buy to live in owners having to pay the same money for a totally overpriced property-but which still made sense for a landlord to party on.. Now the bust landlords dare not even attempt to… Read more »
David says : ‘ The debt crisis started in Ireland in the late 1990s and early 2000s when the banks started lending wildly.’ Can we not be more specific and explain that it really started immediately after the Report on The National Crime Forum in 1998 ( that included Fraud ) published by The Dept of Justice ,IGNORED any mention of recommendations on Irish BANKS and FRAUD .Despite oral and written and filmed submissions made to this forum it acquised in deliberately witholding significant professional information submitted to this forum .It also ignored the Bank Regulatory Reforms submitted and the… Read more »
Drumming More Thoughts
Why does it take the Irish Laws to use a foreign law as in USA to seek non bankruptcy of a former member of Anglo so as to seek revelation of the facts of evidence on Anglo Rogues in a Maple Tryst that is believed to be fraudulent .We have No Banking Laws in Ireland where it matters to the Irish Electorate / Citizens.
Dear all, Agree with the article’s main thesis and the need to “true up” the debt at all levels. As I’ve advocated here before, whilst not a panacea for all of Ireland’s debt woes, the introduction of 21th century bankruptcy law would help greatly. “No-fault” bankruptcy to be discharged witinh 6-9 months by a supervising judge would provide the catalyst for both debtor and creditor to reach swift resolutions. “Fault”(Malfeasance, fraud etc) bankruptcies could follow the proposed three years. In addition to the above, the insolvency and bankruptcy procedures need to be rendered less litigious through the use of standardised… Read more »
David says : ‘We in Ireland have to stop thinking like lawyers and think more like business people when it comes to resolving our debt mountain. Enforcing old debt contracts when the underlying economy has changed dramatically makes things worse not better.’ I agree with the message he conveys in principle nevertheless law reform is needed to implement any sensible resolution to constitute a valid agreement that is enforceable. Message is : THE LAW REFORM COMMITTEE needs to be seen to do its duty to protect the citizens and with membership to include professional business people and not confined to… Read more »
Irish Examiner gives this figure for unemployment in its editorial: “For the fourth month in a row the number of people out of work has risen. A figure of 469,713 – 14.4% of the workforce – was reported as this terrible statistic climbs inexorably towards 500,000. These figures, for such a small country, are on a frightening scale and represent so many lives, so many families in turmoil. ” http://www.irishexaminer.com/opinion/editorial/a-society-divided–its-time-to-scrap-these-insane-deals-166009.html#ixzz1Whp3LyLA On a front page article however, it gives this figure: As employment figures show 1,600 joined the Live Register in August, bringing the total close to 450,000, the think-tank (ESRI)… Read more »
Regarding debt forgiveness, we could look at the way a typical 250,000 mortgage, drawn down in June 2006 for 30 years, is structured. It takes 18 years (ish) before the interest repayments match the loan repayments. In other words, the banks take the bulk of their cut first. The interest repayable on this loan is a staggering 261,000 over the term, or obviously double the original loan. We could start out debt forgiveness there, with our bailed out banks repaying us taxpayers with reduced interest demands. When some poor sod restructures, this usury carries on, with the bank trousering the… Read more »
This is really rubbish journalism/economics our debts are mainly to the ECB , 160 billion of it and its all collateralised. Specfically who are the creditors David wants to burn. Is it about mortgage debt or national debt? If its mortgage debt then this will be dealt with on a case by case basis . If it is national debt then this would be a disaster. Imagine never being able to borrow again ….ever, we would need massive budget surpluses to stay afloat. This would mean immediately balancing the budget, yes cuts of 18.5 billion. we are better limping along… Read more »
Amortization calculator here;
http://www.amortization-calc.com/
Can’t find an irish one because they probably don’t want people to realise the big mortgage lie….
David,
I reckon the power structure is not changing its mind cos it rewards better not too. Like the banks secret negative equity sweet heart deals for insider customers as reported in the Indo today.
That right there that story reveals everything anyone who is interested in how the economy works behind the spin and fairy story it hides behind.
http://www.independent.ie/business/personal-finance/property-mortgages/mortgage-debt-banks-are-doing-secret-deals-2863723.html
Click on link and have a look at the insider network in action!!
I highly recommend you check the following out this interview interview Charlotte Iserbyt, http://www.youtube.com/watch?v=ezTIYd5UFRY&feature=share
An interesting and relevant view:
http://www.oftwominds.com/blogsept11/Zeus-debt-forgiveness-9-11.html
Everyone knows what needs to be done David. You have been telling them for years and it is obvious You are dealing with human nature and nothing you say will change it. Just a lone voice in the wilderness of space The world does not function like it does in Economics and Management textbooks. If it did then everything would be functioning perfectly Too much thinking, greed and ego is the reason why humanity has failed to run its affairs and build a healthy society. The world is insane and if you doubt it then you must be an eternal… Read more »
@ Elpenor Dignam wrote: “we all want to see a fairer more just economic system” I wish it were as simple as those words imply. There are many who believe that inequality and elitism is ‘fair & just’. Some even believe it is the will of god. Loyd blankfein of Goldman Sachs believes he is doing god’s work and deserves his 50 or so million a year ‘compensation’ for wrecking the global economy (these parasites don’t get paid they get compensated). Many Old Testament Christians believe this too; they obviously don’t read the New Testament too carefully. Even on this… Read more »
Power of numbers: If developing countries can stand up and displace their dictators and regimes through coordinated revolution surely it should give us hope that we can achieve the same. This time the enemy is debt. There are 9000+ David Mc Williams likes on Facebook. Surely more on the newsletter. Thats enough to take to the streets, and drop the keys of the debt burdened property into a bucket at central bank in protest. The tail wags the dog in current society. We serve the banks rather than the banks serving the people. If the global problem is to be… Read more »
“The comments came hours after Mr Noonan said people would think he was “deranged” if he followed Mr Matthews’ strategy of pushing for €75bn owed by Ireland and the banks to be written off.”
http://www.independent.ie/national-news/minister-respects-me-says-exbanker-despite-jibes-2864822.html
So we are paying banks losses because Noonan doesn’t want to be seen as deranged. News flash – They think we are deranged.
It is typical of government policy in Ireland. It’s not because the Irish people should pay or because it’s the correct business practice as David pointed out. It’s done to defend someone’s fragile ego.
David says:
‘GOVERNMENT IS FIGHTING THE WRONG WAR AND STILL LOSING ‘.
I believe if the Laws are not there in Irish Statute Books then the Government cannot fight . We are only seeing ‘shadow boxing’ …..a lip service to the masses .
http://www.oireachtas.ie/parliament/mediazone/pressreleases/name-2384-en.html You can watch live from 10am. If, like me, you don’t have time to watch this live, seems looking at their archives it takes about a month to put up previous archive webcasts. Yesterday, we had Laurel & Hardy, Noonan and Matthews, entertain with some suggestion made by Matthews that brought the riposte from Noonan…”if I made that suggestion to them, they would look at me as if I was deranged” (Posters, I missed the early part of the news item, if you can fill in the context some more:))… It was a bit like Raleigh on one of… Read more »
Have been reading the comments for months but never subscribed until now. I was watching the RTE news last night and the story about the special needs kids getting one hour of schooling due to no special needs assistants really annoyed me. The education system is reducing the amount of teachers yet Mary I, St Pats, Hibernia etc are still churning out graduates, many of which will end up on social welfare. How can there be flexibility in the Labour market if there is none at 3rd level! Just an idea, but if there is such a lack of resources… Read more »
re: Noonans dismissal of Matthews What Noonan is really saying in his dismissive comments to Matthews is that he and his crew are part of the Euroland consortium, and from within that weltanschauung talk of writing-off Irish banking debt would be ‘deranged’. Why? Because it gives them enormous leverage on us; leverage to fast-track all kinds of adjustments including European integration and ultimately Federalisation. As I have said before: the global debt crisis is not a crisis for the global financial and political elites. They are all personally insulated from it and will prosper through it. For the global elites… Read more »
OT I found Karl Whelan’s piece here of interest.
http://www.irisheconomy.ie/index.php/2011/08/25/economists-and-the-media/
“However the media aren’t too interested [in my specialized area]. Instead, they often ask me to discuss issues that a very good command of undergraduate or master’s level economics would allow a person to explain. In most cases it does not take a frontier-economics level of expertise to answer the questions about bank balance sheets or fiscal policy that the media are often interested in.”
Irish Electorate
We shape clay into a pot but it is the emptiness within that holds whatever we want.
Max interviews Dr Paul Craig Roberts who says revolution is the only way…
http://www.youtube.com/user/RIPSOCompass#p/c/1E0FFDC72761AE77/0/kEPob3kQ-6g
Glenstal Boarding School Recently on the grounds of this magnificant settlement many boarders from all over Ireland and their families gathered for their annual week end picnic day around the farm and enjoying the comraderie between the students while they expouse their civility and leadership that some day will be exercised at some future time as has done so over the years from their aluninae in Ireland that made their mark on Irish society . In one small such gathering under the forest trees and within the strong smell of dark coffee , tea and sandwiches friends of two students… Read more »
correct :
Finbar :Its simple , if you find one ( a rainbow ) there are pots of gold at each end and no one knows where it came from and no one cares .
On a more positive note it is fair to say that the economics’ that underpins our present situation have come to the fore. This is a worthwhile development, as the debate for much of the time since 2008 has been concerned with what I would call “the politics” of the situation. Now for old stock observers of Ireland like myself this was not surprising, especially when you consider that most, if not all of Fianna Fail are economic illiterates and as such will spend all of their time clouding issues with rhetoric and gombeen driven agendas. The new government of… Read more »
You fools, all of you.You all think you have the inside track.Stop wasting your time writing here and take the advice “TALK TO JOE”. We have been treated to a full week of car crash radio compliments of RTE Radio and Liveline.This has become the new reality TV.Sod the X Factor and You’re a Star.This is cutting edge in cringeability.Desperate people hanging on a thread ringing in and pouring their hearts out about debt in the hope that “St Joseph”, as he was called on Friday’s programme, will somehow miraculously bail them out. Brendan O’Carrol pitched in 7k to help… Read more »
The best that government can do is to leave us alone, reduce their size and expenditure, reduce taxes as much as possible, leave us to put money where everybody of us want, leave to the market to downsize itself and start growth from the proper saving/investments. After they distributed wealth wrongly (to themselves, banks stuff, builders, …) and did the damage nobody expect them to revert it back. It is the broken window fallacy, the damage is done, the wealth is gone. The reversion is not possible, to preserve the state of 2008 or any other year. The broken window… Read more »
In the past decades of lobbied (purchased) deregulation the financial markets moved steadily towards a state of anarchy, in the technical sense of that word; the freedom to do as you please with no constraint; other than maximise profit. What this crisis is showing us clearly is that as a species we are not ready or able yet to handle the degree of freedom the financial markets were given in the past decades. At this stage in human development we need democratic agreements to frame and constrain our activities. I mean agreements such as constitutions and laws and regulations. Without… Read more »
http://www.youtube.com/watch?v=419aPXb7Uhg
Has Iceland ignored Davids Message or Was David Wrong or is there a Question We Need To Ask ?
Changing of The Guards.
http://www.independent.ie/business/european/recovering-iceland-set-to-pay-114bn-to-landsbanki-depositors-2865719.html
Hi Realist Thank you for your replies. We perceive the situation differently. I will try to present my perception. First we need to distinguish between the real physical markets where commodities and services are exchanged and upon which we all rely for life and livelihood; and the financial markets where virtual leveraged capital is used to speculate or gamble on the exchanges in the physical markets and other esoteric manipulations. The financial markets produce nothing other than profits for the gambling syndicates (Goldman Sachs et al) who control and operate them. They have developed a range of virtual financial instruments… Read more »
Wolfgang Muncau in his final FT paragraph today: http://on.ft.com/q07hp5
seems to agree with me that this is an existential crisis.
“There is, as yet, little recognition in the eurozone’s cacophonous capitals that an economic downturn poses an existential threat. I would expect therefore that the downturn will hit the eurozone with full force, and without defence. When that happens, the eurozone crisis will turn ugly.”