Middle classes are hung out to dry

Forget working-class, middle-class, rural, urban, blue-collar or white-collar – the Irish workforce is now divided into two distinct tribes: the ‘nailed’ and the ‘non-nailed’. The nailed have clean, healthy, neatly-shaped nails with well defined half-moon cuticles. The non-nailed have chipped, broken, grubby stubs on the ends of their fingers, typically moderately deformed or covered with plasters.

The nailed work in offices, banks and the page-shuffled, memo-obsessed, paper-trail world. The non-nailed toil away (usually on higher incomes) in the real world, making, breaking, fixing, putting together and overseeing.

In contrast with the 1970s or 1980s, there are now few more secure or prosperous positions than that of the non-nailed craftsman. He who can create, weld, craft and sketch is in the ascendancy again. At the same time, the position of the nailed has declined both in terms of overall status and security.

Nowhere is this uncertainty more evident than in the banking sector.

Bank of Ireland’s announcement of 2,100 job cuts this week is the opening salvo in the first great industrial relations battle of the 21st century – the shake-out of the nailed sector. Across banking, insurance and the rest of the nailed sector, thousands of workers are about to lose their jobs.

The reasons for this are complex and go far beyond the typical �technological change’� stuff thrown around at times like these. BoI’s announcement is the beginning of a process which, when it is over, will have totally changed the Irish suburban landscape.

For the first time in many years, the solid car-washing, hedge-trimming, kitchen-extended, rugby-shirt-wearing middle classes will be affected.

Ironically, the new class war will pit two distinct middle class groups against each other. It will go to the heart of the dilemma for modern wealthy societies that have made old left/right politics irrelevant.

This is a battle where neither of the protagonists actually knows that another might be the enemy. In fact, they might play golf together, drink together, compete in Brown Thomas with each other for limited this or first-edition that.

This is a battle where the reasonably rich non-nailed Irish pension-holder squares up to the reasonably rich nailed Irish bank worker.

To understand this, we have to understand who owns the banks, who demands that they cut costs and who has become drunk on the greedy expectation of yet another year of bumper profits.

Let’s take some altitude in order to better understand this shift.

Banks lend money. The price of this money is called the rate of interest. Today the rate of interest is just above 2 per cent.

This means that people are prepared to pay a bank just above 2 per cent for the pleasure of doing business. This constitutes the natural rate of return that one should expect for the risk of being involved in the money-making game.

If you are in the long-term lending game, the rate of return rises to above 4 per cent, to take into account that you are risking your money with some lender for longer. (This interest rate is called the long bond rate.)

It seems cheap, doesn’t it? Well, the reason that money is cheap is because it is actually free to print. There is lots of it around. Banks are creating money at a rapid rate, because their balance sheets allow them to, and because they are using land as collateral.

In Ireland, we operate a land standard, where all lending is backed by property.

So banks lend, and house prices go up.

This creates the impression of a stronger balance, against which they can create more money. They lend this new money to the housing market, and house prices go up again. This allows the banks to create more cash and lend more again.

In most countries all this demand for new cash would force the interest rate up, because there is typically only a limited pool of savings from which the banks can borrow/create money.

Because we can borrow in euro currency from any of 200million odd EU savers, the four-million-strong Irish market can borrow all it wants at rock-bottom interest rates. Thus the banks and the housing market become indistinguishable.

Because the banks and the property market are so interdependent, it is hard to know what is driving what. Is the price of property being driven by bank credit, or is bank credit being driven by property prices?

Either way, the financial system and the Irish property gluttony are umbilically linked. As long as credit is cheap, the banks will lend. Arguably, the behaviour of the banks is the main reason that house prices remain high, and the banks’ future is so tied up in land that if they stopped lending now, prices would fall.

Any fall in prices would lead to bad debts, profit warnings, share price collapses and bank takeovers.

Therefore, instead of being the guardians of prudence, the banks can become the agents of profligacy.

But all this rebounds on the bank workers, because the inflated expectations of what can be achieved in the housing market (fuelled by bank policy) has also inflated the expectations of how much money and profits should be made in a bog-standard industry like banking.

Remember, they are not lending something scarce or precious. They are lending money for which we are only prepared to pay 2 per cent a year.

Despite the low-rent nature of this business, investors expect that Irish banks should make a rate of return on equity of close to 20 per cent a year.

That drives the price/earnings ratio – which is a fancy way of measuring corporate profitability. But how can the financial markets logically expect that a low-rent business such as lending cash at 2 or 3 per cent could generate 20 per cent profit a year? Because they are deluded.

Deluded or not, this is the return that Bank of Ireland chief executive Brian Goggin is expected to generate. How could he do this when he is selling a product for which the market is only prepared to pay 2 per cent?

Well, he can either charge hefty fees from the public or squeeze more workout of fewer workers. In the past, Bank of Ireland and AIB have extracted more money (a total of more than �350 million a year) from customers than any other bank in Europe.

This cannot last. Last week, Bank of Scotland (Ireland) said it would move into the retail banking market, by buying ESB’s shops for �120million. Mark Duffy, the chief executive of Bank of Scotland (Ireland), wants part of this lucrative action.

So Bank of Ireland knows the fee gravy train is coming to an end. Therefore it has to squeeze more workout of fewer workers. This is why it is firing 2,100 people.

But let’s get back to the nailed-sector civil war. Who is forcing Brian Goggin’s hand? His board? His management team?

His workers? His missus?

No, the owners of Bank of Ireland are putting the gun to his well-paid head.

But who owns Bank of Ireland? Well surprise, surprise, you do!

Yes, you – the average Irish pension fund owner who has a policy with Bank of Ireland Asset Managers or AIB, or Hibernian, or Irish Life, or New Ireland.

Irish pension funds own the Irish banks, and it is we, the pension fund holders, who have inadvertently sacked the 2,100 workers.

Our old age pensions will be paid by the money saved by sacking our neighbour, the father of our daughter’s friend, our golf partner or our drinking buddy.

So the enemy of our future prosperity is our present neighbour, whose job has to go for the pension funds to generate cash for us in the future. In this way, the opening salvoes of this middle class civil war have been fired.