Last Wednesday night at the Historical Society in Trinity College Dublin – the Hist, as it’s known – Professor Joe Stiglitz, winner of the Nobel Prize in economics and former chief economist of the World Bank, gave a stirring speech about the impact of globalisation on the poor.
Sitting in the debating room where Douglas Hyde, Oscar Wilde and many other brilliant Irish and international orators have held forth, I thought to myself that this setting was a far cry from the first time I met Stiglitz. Then he was a mere professor of economics and known only to the economics world for the elegance of his mathematical models.
Back in 1991, Stiglitz was invited by the Irish Economics Association to give a talk in Carrickmacross. His interest in Ireland was heightened by the fact that his daughter chose to go to Trinity. After the talk, Stiglitz, dressed in jeans and runners, said that he would like to visit the North.
So we drove to Crossmaglen, where the Columbia professor downed a few pints in a bar just off the main square, chatting away to the publican who would probably not have seen a more incongruous visitor in his bar since Robert Nairac walked through the door.
Stiglitz has come a long way since the smiling New Yorker raised his glass in Crossmaglen. The conversation was then drowned out by the constant clatter of Chinook helicopters hovering around the British Army base right above the metal IRA sculpture of the Republican phoenix on the main square.
Today Ireland has changed, though the professor hasn’t changed that much. He is still forthright but charming and, during an interview after the speech, he spoke to me at length about current Irish economic policy.
When asked whether he would implement a Nama-style bailout for the banks, he responded: ‘‘No, this is the kind of highway robbery which we see happening all over the world, with guns pointing at the heads of the political leaders and the bankers claiming the sky will fall down and the economy will be devastated unless they get this money.”
He went on to compare the employment of mass fear as the single justification for bank bailouts with the same weapon of mass fear that was deployed by President George W Bush after 9/11.
‘‘It was invoked to justify anything the president wanted to do, such as the Iraq invasion,” Stiglitz said. ‘‘Well, the bankers now use 15/9 [September 15, 2008 was the day Lehman Bros went bankrupt] as the new weapon of choice to force politicians into the huge bailouts, which will bring us enormous debts on our balance sheets with no real assets on the other side. But the bankers will be saved. When we gave them the money, the bankers said ‘don’t worry, you will get your money back’, but no one believes that now.”
When asked if letting the banks go would be the end of the world, which is the default position of Ireland’s current government and banking and economic establishment, Stiglitz laughed.
‘‘This is nonsense,” he said. ‘‘Countries which allow banks to go under by following the ordinary rules of capitalism have done fine. The US has let 100 banks go this year alone, as did Sweden and Norway in their crises. In the US, it’s just the big, politically-powerful banks that have not been allowed to go down, for political reasons.
‘‘The important thing to remember about financial markets is that they are forward-looking, but what they do remember is the size of your national debt.
If you spend money in bailing out banks without taking all the equity, you will end up having a huge national debt, a liability with no assets to show for it. Now that will scare off investors in the future.
“[In Ireland], this bank bailout is a simple transfer from taxpayers to bondholders, and it will saddle generations to come. The only thing that might give you solace is that, as chief economist of the World Bank, we see this type of thing happening in banana republics all over the world. Whenever a banking crisis happens, the financial sector uses the turmoil as a mechanism to transfer wealth from the general population to themselves. I’ve been very disappointed to see that it has happened, not only in banana republics, but in advanced industrialised countries.”
Digest these words and their implication for us. Here we have a Nobel prize winner for economics, a former chief economist of the World Bank, the head of former US president Bill Clinton’s Council of Economic Advisers who presided over the US’s sustainable boom of the 1990s – when it grew while, at the same time, paying off its debts.
He is comparing Nama and what is happening in Ireland – a country with which he is very familiar – to a smash and grab banana republic exercise.
The extent of this robbery can be seen if we look at the real cost of our bank bailout.
When you borrow for your house, the mortgage you pay off is much greater than the principal because you pay compound interest.
So for your house to be worth the investment after you pay everything off, it just doesn’t have to be worth what you paid for it in principal, but it has to be worth what you paid for it in its entirety, including interest. The cost to you of buying that house is also the ‘opportunity cost’ of what else you could have done with all the money.
With these basic economic principles in mind, let’s look at the likely cost of Nama and the opportunity cost of Nama, given what else we could do with the money we are about to borrow to buy land that nobody wants.
We need to get an idea of the likely costs over a ten-year cycle. At the moment, interest rates are historically low, but that will not always be the case. So let’s look at market interest rates and the current rate of inflation as real figures.
On Irish interest rates, the latest long term bond issue was a 15-year â‚¬7 billion bond. The press release last Tuesday, October 6, gives the yield at 5.472 per cent.
So, the â‚¬54 billion we are throwing into the banks, if invested at that rate would earn â‚¬38 billion over ten years. Therefore, not counting inflation, the opportunity cost of Nama is â‚¬38 billion. If we had loaned to our own government, we the people would get back â‚¬38 billion and gain a social dividend from the roads, schools and technology invested. Not with Nama.
But, of course, we don’t have â‚¬54 billion to invest; we have to borrow it all. In any calculation, we should also look at the rate of inflation, to try to get an idea of the ‘real’ cost. At the moment, the Consumer Price Index (CPI) is falling and, without some inflation coming along soon, we will be in big trouble.
The current CPI, which was announced last Thursday, is minus 6.5 per cent. Prices and wages are falling, which drives up the cost of borrowing, because you have to take more of your income to pay off the debts. So the ‘real’ cost (the interest rate minus the rate of inflation) of a 5.472 per cent interest rate is actually a jaw dropping 11.972 per cent.
If the figures were to be repeated for the next 12 months, property would have to increase in value by nearly 12 per cent just to keep the real cost of Nama neutral. The idea of property prices rising while inflation is falling is something even Brian Lenihan, our Minister for Finance – who dismissed Professor Stiglitz during the week – would find hard to sell.
I don’t know about you, but I’m with Professor Stiglitz on this one.
Ireland is in the crapper, being run by a shower of incompetent cowboys who legitimated cronyism and by some collective psychosis got repeatedly re-elected. The Greens have sold out. The opposition is a joke. Come on David – don’t just blow the whistle of impending doom, tell us what we can do to avert this disaster that will hold the country back for decades to come. For a country brimming with educated, articulate people I just don’t know how we ended up with a Noddy government, no attractive alternative, and up to our necks in it. What can we do… Read more »
Wills says :’ Resistance will prove itself a far greater force for victory in the long term’.
I admire his optism however the French resistance fighters only became lucky after the Allied Invasion. We have an Anglo American EU Alliance wanting the NAMA to be successful.What does resistance do then?I think this site has become voiceless finally .The above article is good but what can we do with that knowledge now?Unless we have a realistic objective our ‘talking shop’ is over.And our Time should then be spent doing hard manual labour.
I’m with yourself and Professor Stiglitz on this one also.
However I would love to see a detailed explination of exactly where the â‚¬54 billion we are throwing into the banks went to. i.e that money was borrowed to pay the cost of development projects. A small portion went on construction labour and materials which were consumed, but the bulk went on land which is “INERT” i.e. did not absorb the money, so where is the money that was paid for land lying now? Who has it, can we get any of it back?
Excellent article. Prof. Stigliz is telling it exactly as it is. Gordon Brown is trying to raise 18 Million Euro by selling UK state assets – and it is abig thing. But coughing up 70 Billion Euro for useless bankers is seen as almost discretionary if you are listening to government ministers. We are completely off the scale in terms of the delusions that sit in the minds of the senior government ministers. Tim – you and Joe Behan are our only hope. Time to start hassling your local FF TD or councillor concerning NAMA. It will have the added… Read more »
Joseph Stiglitz is looking at the Irish economy from a wider perspective and he’s also independent of vested interests, unlike many (or most?) Irish economists who work for financial institutions. It is these same people who predicted ever-increasing property prices in the past who are now predicting significant increases over the next ten years (making NAMA a success) and who are also spreading panic about how a few bankers might react if NAMA is not implemented. Brian Lenihan’s dismissal of Stiglitz is pathetic and an insult to the intelligence of anyone who has been following the financial crisis for the… Read more »
DMcW’s recent articles have tried to maintain balance between ‘tell-it-like-it-is’ admonisments and ‘we are we we are’ practical pragmatism about baby steps forward out of the abyss, ie: networking the diaspora tribe. But that balance is going to become ever more difficult to maintain if events unfold as I expect. There’s an elephant in the room that periodically roars: “Euro!” The NAMA proposal to bind current and future generations to these colossal debts is terrifying because those debts are denominated in a world reserve currency. A currency that could assume increasing reserve status, given the demise of both the American… Read more »
Hi David, Of course I and many others agree with you and Stiglitz on Nama and what you write is correct. But what can be done about it? Is Nama, plus the public sector deficit going to lead this country into ruin, or are the current controllers (FF+GP) aiming for these to be an equivalent of a ‘soft landing’ ? Its very hard to second guess the thinking behind these problems as they just do not make economic sense! We still need to get back to jobs. And how many jobs could 4b (given to Anglo) provide if used in… Read more »
I have said it before and I will say it again. It is so obvious that Ireland is bankrupt, the country is finished.
As soon as I get a valid sell signal on AIB, I’m going short of the stock, I know and it is so obvios that AIB, BOI have to much debt and they need to raise massive amounts of money, I’m talking about half a trillion euros each.
Remember personal debt in Ireland is bigger than the mortgage market.
It seems hard to know. NAMA does seem like a Turkey, created by vested interests for vested interests. Stiglitz was part of the Clinton administration, which revoked the Glass-Steagall act, something that played a massive role in leading us to where we are today, not aware of his role, maybe he objected, I’d like to hear his side of things. He was also a leading member of the World bank, which according to many commentators has played an enormous role in impoverishing developing countries….again would like to see Stiglitz respond to that, but these questions never seem to be asked,… Read more »
Forgive my ingorance, and my somewhat dissenting voice, but there is a fundamental issue that I do not believe has clearly beenaddressed by those who reject the NAMA concept. Essentially as i understand it, the single fundamental issue around NAMA is whether it is worthwhile keeping the Irish banking system afloat. End of. All other arguments appear to me to be secondary to this fundamental issue. For example, the debate over paying current market value, or hope value is somewhat pointless, as if NAMA pays current market value, then the State will end up coughing up the rest of the… Read more »
Hi Mojo, Replace the word “State” to “us” or “The ordinary people of Ireland”. “For example, the debate over paying current market value, or hope value is somewhat pointless, as if NAMA pays current market value, then the State will end up coughing up the rest of the capital required for the banks to stay solvent in the form of equity. Either way, the State is going to pay what ever it takes to keep the banks solvent — either through NAMA, or through Equity. ” -: The state is going to raise the extra revenue through either an increase… Read more »
Stiglitz makes a fair point, and maybe we would have been better to let one or more of the banks go to the wall.
Uh-Oh! Look here:
Hey, there’s another D McWilliams on the block. No kin?
“McWilliams describes as ‘the fiscal policy lever pulled right back while the monetary lever is fast forward.’ He expects deep cuts in public spending and tax rises, combined with more monetary easing and very low interest rates.”
FG and Lab are and have been utterly useless. Their opposition activity has been nothing short of damp. You’d swear there was nothing worth opposing or they were on dope. Dozy is the word. Maybe they are dozy and playing it a bit too safe. Maybe the Greens are not the only ones selling out. Our only hope (and I never thought I would find myself saying this) is grassroots FF. What is happening is the beginning of the end of this republic and this people’s sovereignty. We are facilitating a failing European Experiment which is based on the political… Read more »
David, brilliant. Bringing Stiglitz in on the NAMA bank job to call it for what it is, brilliant. Keeping with it, hammering home the truth about NAMA, brilliant. NAMA is a big fat stinking LIE. The ‘brains’ behind NAMA know that NAMA it is a big fat stinking LIE. The instigators of NAMA know that NAMA is a big fat stinking LIE. They know NAMA is a SCAM. An inside job. The bankers are robbing using the banking system to pull a dick turpin on the money printing presses. They know that the NAMA bank job is so blatant, so… Read more »
NAMA is not highway robbery . With highway robbery it is over in a few minutes , Stand and deliver . Your cash is gone . At least you know how much you were robbed of and you proceed on down the road . When somebody robs you with a pen it is a whole different ball game . NAMA will be slow and painful . Has anybody noticed that they now keep on linking recovery with ‘ a recovery in house prices ‘ ? I think that they have just given up on the wider economy and are now… Read more »
Alan42, I agree.
Let’s keep at it!
If you want to see what a country looks like after it has been ransacked . Go to Russia . Its an amazing place in that there is poor people and very rich people . You don’t actually get to see the rich people as they are in blacked out Merc’s . You do get to see a lot of poor people . After a while you realise that there is not a lot of middle class people . In Moscow I picked up an English language newspaper and it had the most amazing article . 4 out of 5… Read more »
Folks, “The Emergency”, on Newstalk 106-108 is bang-on. (I recommend you listen to it) But it is “bang-on” in more ways than you think. It mimics (for comedy purposes) Dev’s voice, always, addresses the “People of Ireland”. http://www.theemergency.ie/ We need to address “the People of Ireland” now. The problem is that we do not seem to have a free Media, in order to do that. I firmly believe, that if we had a free media, “the People of Ireland” would respond, positively. People, given the TRUTH, will make good decisions. The problem is, in recent elections, etc., etc., the “people”… Read more »
Folks, have a look:
O secind thoughts, maybe I should have said”Yeats, “September 1913”;
Of course, 1916 was the apology (and it was Easter).
what happened to Leinster? left me with a big Munster face on me!!
“Old Moores Almanac” that’s all ye need to consult,or so the Bull Donoghue told me last week ,when he came into my pub.”When I saw the dry spell coming up,and was sure of getting home the last of the turf,I gave Gilmore the nod to ask His question” he said…. “We’ll be seeing more of ya round the Kingdom then Bull”…. Kate Ann is delighted ,Her poor hands were destroyed carrying in turf every evening,with me away on official buisness. “How about this Nama Bull” I asked. ” there’ll be nothing left to chance this time Seaneen.I was in the… Read more »
Philosophically speaking when did it all start ……..that got us to here .Was it any of the following:
Second Vatican Council
Women at Work
End of Corporal Punishment
Pope John Paul
Ml O’ Leary
Prancing Ml. O Leary
Lots More Bankers
Bankers/ Gangsters with Mobile Phones
Gangsters who thought they were Bankers with Mobile Phones
Who/What is the next morph?
http://www.ft.com/cms/s/0/6f4d1236-b51a-11de-8b17-00144feab49a.html A debt for equity swap with a property developer, for a property portfolio not covered by the NAMA legislation… in a nationalised bank (it seems somebody is listening). Note that Pat Gunne is a shareholder in Tysan Investments, an ANIB nominee company (in theory it holds the shares of the bank’s shareholders, but its practically a phantom: its has no employees, just two directors, who are also on the boards of other ANIB companies, a secretary and a list of 11 shareholders), is also MD of Green Investments, to whom this portfolio was sold. Draw your own conclusions. Just… Read more »
Liam, absolutely spot-on! (I was just about to post those links; saw your contribution on gavinsblog ;-) I hope that people will read those links and see the connections. “Nama is highway robbery”, but it appears the robbery has been going on for a long time; I wonder what the revenue commissioners think of it all, or if they have been instructed to ignore it? This is relevant to my ealier post, about the Irish people being unable to make good decisions without knowing the facts. There is and has been alot of hoodwinking going on (hoodwinking is the “mask”… Read more »
http://www.examiner.com/x-6012-State-of-the-World-Examiner~y2009m10d12-Banks-brace-for-Latvias-collapse?cid=examiner-email Not this is ‘educational’. Basically Sweden’s finance minister is saying “Houston we have a problem” and the problem is that Latvia is about to default on it’s loans and leave the Swedish banking system picking up the pieces. So the Swedish government is basically saying that the Latvian government is letting Sweden down, by not making the Latvian taxpayer pay for the mistakes of Latvian banks and Swedish banks. And I am wondering – isn’t Lenehin the type of Minister for Finance that the Swedes would love to have running the Latvian Finance Ministry ?? Any thoughts on the… Read more »
John O’D speech today is really just proof (if proof were needed) of the utterly weak & out of touch leadership Cowen provides.
There’s just no way that man should have been allowed to grandstand today (after being fired).
The fact he was allowed to, just evidences a total lack of respect for the Irish People.
It was another distraction play on the whole Expenses issue — where the real issue is:
There are simply far too many TDs
According to the FT today, the ESRI says that even after â‚¬4 billions of savings proposed for November’s budget, the government still will have a deficit of 12.9% of GDP.
That is more than 4 times what is allowed under ECB rules.
How far can Lenihan bend the rules of this game of Liar Poker before they tell him to put up or shut up.
Some people were wondering where Brian Lucey has been recently, well, it seems like he paid a visit to planet Bertie.
His response to FO’T today is “I am sorry Fintan, but for no other reason but common sense I support an amended version of NAMA. ”
David , Maybe some kind of article on how you see the Irish economy in 5 or 10 years time ?
Folks, some posters have been asking gquinn about numbers: the corporate (non-banking) debt in Ireland is over â‚¬1.67 Trillion.
No-one is talking about it.
gquinn is correct.
David, you know that the Chinese will never close-down on the USA debt. The Rich Chinese will screw their own 1.5 billion people so that they can remain rich – just like Ireland.
Time to call “a spade a spade”?
One “coup d’etate” happened last September.
It is time for another one.
Folks, so…. we are back (one year later) to Philip’s suggestion of supporting our communities.
“Grow your own vegetables” – forget the economic forces. They are defunct; they have failed.
My guess is that without NAMA the ECB would have told Ireland to sling its hook. Either devalue or get out of the Euro. Joachin Almunia of the ECB was more or less giving the message last week. The EU would devalue the farm payments as a penalty. I dont think the Multinationals would be happy dealing with this kind of carry on, but who knows, as they are a law unto themselves. I think the greens are using NAMA to push through banking reform and Ryan is more in favour of the smaller enterprise than the rest of them… Read more »
Just won a tenner off one of the o’malley’s tonight. I bet “the bull” would’nt make it back from Dublin by official closing time, now that He’s under his own steam so to speak, for his usual 2pints and a half-one. Bloomberg Donovan was in tonight. He got that name since He got the Sattelite dish, and now spends his time watching Bloomberg in between the horse racing. “how is things on Wall St.” one of the Clancy’s asked, just to rise Him, knowing well Donovan worked as an illegal for years as a sweeper on Wall St.(that’s where he… Read more »
Ladies and Gentlemen, Dear David, Good evening. First, allow me to express gratitude for the work and efforts put into the program aired currently, Addicted to Money, of which I just finished to see the second part. I am somewhat amazed that RTE is broadcasting it to be honest, I would not have been astonished to have it served with a gag order instead. Second, allow me to freely brainstorm for a second. We live in times where 250 people sign for a cash networth of 1,547 Trillion USD. This is certainly more than the combined GDP of the 40… Read more »
Bear in Mind :
We are ALL – Lepracauns
I’ve posted repeatedly to the Farming blog but nothing appears. What’s up?
….same happened to me in another thread, I posted something and it never appeared. This is porbably down to the wordpress installation/service provided for the blog.
I am with the professor on this on here is my probably simplistic thinking on NAMA – If a house was worth 500,000 at the peak of the boom and is now worth 300 how much has it fallen in price by = 40% If it grows in value by 40% what will it be worth = 420,000, to get back to its original worth it has to grow by 66%. So why do the Government think that property prices are actually going to grow stronger than they did in the boom time — answer — they won’t! Although Far… Read more »
Why are they smugly and confidently getting away with this? Why aren’t we out on the streets revolting!?
Because the same drugs that got us into this are preventing us from seeing the scam and revolting against it, a truly amazing arms-free coup against a totally subdued mass… stupefied by oil and it’s financial and media tentacles.
Television, drug of the nation, breeding ignorance and feeding radiation.
Inaction is a weapon of mass destruction.
WAAAKE UUUUUP, WAAAKE UUUUUP, WAAAKE UUUUUP, WAAAKE UUUUUP, WAKE UP!
Oh, some other recommended watching…
The Corporation (on DVD and YT)
How about a new ‘Comhar Party’ based on the economic principles of Feasta and Comhar with Richard Douthwaite as Finance Minister; let’s stick it to Colm McCarthy and his neoliberalist cohort who are frustratingly and ignorantly out of touch and step. BUT we as Irish patriotic individuals have to stand up and be counted in regard to resisting dishonest or unsustainable or corrupt practices in this country. Our regard and national respect for the ‘cute hoor’, for the fella who skives off work, or just general intellectual laziness is sad and immature. Populism will not save us. In essence it’s… Read more »
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