NAMA: And then there are the unknown unknowns

Slí Eile: In the immortal words of Donald Rumsfeld: "There are the known knowns and the unknown knowns. And then there are the known unknowns. And then there are the unknown unknowns". Rumsie may have been referring to Iraq but it could have been NAMA.We urgently need a debate now - on what sort of public ownership and control is required.

A curious feature of the debate on NAMA is the extent to which uncertainty, risk and flexibility apply. Notions of 'paying over the true value', 'writing down', flexible bond-equity swaps to free up cash, discretion to impose levies or not. Fintan O'Toole has already pointed to the odd fact that payments into the National Pension Reserve Fund have been fast-forwarded to cover this year and next.

What is odd about this is that we are borrowing to pay into a Fund out of which, already, money is being re-directed temporarily from long-term pension liabilities to recapitlisation of the Banks. What about the fuss over borrowing and the need to bring it down to 3% of GDP quickly and the impossibility of extra borrowing and the risk associated with same (whether off-balance sheet or on). It is all very odd. One rule for bankers (and developers) and another for welfare recipients and users of public services.

If this isn't the biggest reverse bank robbery in history what is it?

Gambling with a total annual budget of around €60billion Euro and a total national (Government) debt of the same amount and more, we are now taking on a cocktail of toxic assets whose book value is €90billion and real value is unknown and purchase value (for you and me) is somewhere in between. It is Rumsfeld's 'unknown unknowns' that scare me. 'What has posterity ever done for us" is one way of dealing with the matter (i.e. transfer the risk and the tax burden to the next generation). But, that is not moral.

Quite clearly, the whole business is an immoral mess. In fairness to those tasked with legislating and dealing with the current mess (for which of course they cannot avoid significant responsibility) it is not so clear exactly what should be done. Nobody is saying that doing nothing is an option. Delaying action is not an option, either (although the NAMA process is extroardinarily long considering the pace of economic events and the credit crunch on businesses). Roughly there are the following options (readers may wish to add a few more or re-phrase these):

Proceed as the Government is doing now through the draft NAMA legislation with all the risks involved;

Change NAMA (e.g. version 2.0 per Patrick Honohan);

Let the banks go to the wall post-guarantee or get taken over by some foreign bank, merge, clean up etc etc;

Set up a new State Bank (and leave the existing banks under guarantee until 2010 without fresh capitalisation);

Nationalise (or take majority interest in) the remaining Irish banks - either temporarily or long-term;

Writing on 22 May, Jim Stewart said (NAMA or nationalisation unlikely to work)

But there is one area in which it is vital that immediate action is taken, and that is to ensure that credit and loans flow to small and medium sized enterprises, and not just those involved in exporting. Large corporate entities and the multinational corporate sector have other sources of finance. Some large firms have no need for additional borrowing. What is needed is a new entity designed to lend funds to the SME sector. Such an entity cannot be “for profit”. It cannot be run on strictly commercial lines, because in the current crisis lending to SMEs is certain to result in losses. This new entity could be funded on the basis that 20% of loans would fail. Lending is thus made with the knowledge that there is an explicit subsidy. The return to the State (and the economy) is indirect in terms of job preservation, so that when the economy recovers there is an existing base which is a potential source of growth and job creation. Such a policy could also act as a certification device to other banks. It would reduce risk to other banks provided claims on collateral were ranked below that of additional funding from other banks

Well, Fine Gael, at least, concur on the need for a new State Bank. Richard Bruton commented, today:

Furthermore, there is no guarantee that this huge gamble will result in a resumption of normal credit flows to struggling Irish businesses. Irish banks will remain poorly capitalised and concern will turn to new categories of non-performing loans. If restoring credit flows is the prime objective of banking policy, taxpayer investment in a new, State-owned bank with a clean balance sheet and an appetite to lend, such as Fine Gael’s proposed National Recovery Bank, would be far more likely to succeed at a fraction of the risk.

My view is that, given the absolutely critical nature of banking and finance to the economy and society and the complete failure of the Irish financial system to fulfil its social role, there is no just alternative to nationalisation at this point. As I argued, previously:

An extremely low level of share prices provides the best of all opportunities to nationalise now. Allied to a National Recovery Bank credit needs to be put on a new footing driven by social need and not profit. What you don't own you cannot control - at least properly. Banking is too important to be left - ever again - in the hands of those who have wrecked the Irish economy and forfeited our children's future.

Posted in: Fiscal policy • Fiscal policy

Tagged with: nationalisation • NAMA