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.
Who owns Ireland? Well not the Irish thts for sure… cause the BANKS DO!! Who ever owns the banks, owns Ireland. Look at this a poll! Oh my GOD its contrary to the consumers “5% growth optimisim” translates infactually as opinion -> converts to => reality => converts to => relative => converts to =>rubbish All this was trumpted aobut in the media by all the vested intrests(BANKS) and agents blah balh balh … just look see the poor dog-o-de-street, they know the big lie, oh and its a BIGGY. http://www.unison.ie/polls/index.php3?ident=Irish% 20Independent&mypollid=930 How about “Do you think the Price of… Read more »
Nice one David. good article! Its funny to notice that men with the rough hands and no nonsense attitudes are creaming it in comparison with us the supposedly educated bunch. The brickie who’s throwing up our house is on more money than Roy Keane. I liken the rise of house prices to that of a Jenga tower. (you know that game we play at christmas where you carefully slide out the wooden bricks and put them on the top.) The vested interests are putting up the tower, they’re cheating here and there, and the tower keeps rising. As Dougal says… Read more »
It has been a long time since I agreed wholeheartedly with your article. Shareholders are asking stupid returns, and institutional shareholders particularly are the most predatory, undercover and ruthless kind of them all. Overall the process of corporate governance (management, director, shareholder triad) is a right shamble. Corporate governance worked in the past as directors used to be the main shareholders and would have the long term protection of their investment at heart, but today’s directors are merely puppets in front of obsenely paid CEOs and shareholders behave like absentee owners, there is no system of balance and check anymore.… Read more »
David, Without a real interest rate shock, as distinct from an gradual rate increase, what do you believe will be the trigger to upset confidence in property? With so many apartments coming onto the market in Dublin and so high a proportion of our inward immigration involved in construction of yet further property, the forces for some market change seem very clear, but there is no apparent prospect of a sudden jolt to affect confidence. Maybe mainstream media reports of some change will do it, but for the time being they are all singing the same song. What do you… Read more »
Great article!
Stephen, My feeling is that the external shock will probably have to be an interest rate rise, which we can’t rule out. Even a small rise in basis points will push the mortgage repayments higher. It is clear, that the latest round of house prices , are being caused by inward migration of a scale absolutely unprecedented. An article in the Irish times today talks of 50,000 extra Poles since Accession last May, other Eastern Europe’s probably bring that number to 80,000 plus. Then there are the non-Europeans. In total that gives one hundred thousand or more extra migrants last… Read more »
Perfectly explained Eoin,
It seems odd that the shareholders arent selling bank
shares which are exposed to the irish housing market. Maybe
the banks are very safely diversified into foreign markets.
I hope they are.
excellent article. I think people are finally starting to realise what globalisation really means. It is interesting to note that in the week following the announcement by the bank of ireland there was unprecedented uproar in the media about how dare the bank get rid of 2000 workers. However there was hardly anny comment about the 500 manufacturing jobs lost in clondalkin in january or the textile jobs lost in donegal. It was as if these jobs didn’t matter because they were just manufacting and anyway wasn’t ireland “moving up the value chain”. However the bank themselves described the jobs… Read more »
The rapid rise in house prices is, as you say, directly related to the cost of borrowing.The Banks are screwing every penny out of their customers that they can possibly get,one reason this is happening is because there is no real competition in the banking industry.Not much room for manouvre at low intrest rates they say while earning two million euros profit per day,every day of the year.Something rotten here. However there is another side to the rapid rise in house prices that is not highlighted nearly enough.It is the fact that the government now force the local authorities to… Read more »
Banks are like middle men They give out deposits, and they take the interest. But what interests me is I couldnt care who owns the bank because when the economy does contract led by the stockmarket everyone will lose. The bank, the depositors and the lenders. The banks will deserve it, you could argue if the depositors do as is true for the lenders. Its catch 22. Only real banks in the World are in Switzerland and Singapore. Some of them dont even lend money out. Which is why I guess they have the oldest banks in the World.( Switzerland… Read more »
…but on the bright side when the bubbles pops: save your pennies for the WONDERFUL assets that will be on sale when the blood is really flowing on the streets all those lovely assets at pennies on the pound…. mmmm, allied irish at EUR 2…mmmmmm ! take note : HK property and Jap property has been DECLINING for over a decade…hang on, it’s now 2005, make that 15 years……now how many people in Ireland could possibly comprehend a situation where property doesn’t go up but DOWN over a multi-year time frame ??? name two !! go on ! To address… Read more »