From Socialist Voice, March 2010

NAMA—a stroke of genius, or a disaster on an unprecedented scale waiting to happen?

An establishment critique of the National Asset Management Agency

The instinctive reaction of most people on the left to the NAMA project—that it was a class bail-out on an unprecedented scale, and that citizens would be burdened with a further economic catastrophe around the corner—was correct. NAMA is a further example of the class nature of the state and its role in protecting the ruling class, even to the point of risking complete state bankruptcy.
     While the gut reaction of many was correct, there is yet to be a substantial left-wing economic analysis of both the banking side of the crisis and the Government’s attempt at resolving it.
     While there may not be a comprehensive analysis that we can comfortably fall back on, there is one establishment viewpoint that holds that NAMA is doomed to fail in its task of saving the ruling class and could even bring the state to the brink of fiscal collapse. While the politics of the author may not sit well with our readers, the analysis is certainly worthy of study.
     In December 2009 Morgan Kelly of UCD School of Economics produced a paper that ended with the ominous forecast:
                    The issue therefore is not whether the Irish bank bailout will restore the Irish banks so that they can function as independent commercial entities; it cannot. Rather it is whether the Irish government’s commitments to bank bond holders when added to its existing spending commitments, will overwhelm the fiscal capacity of the Irish state, forcing outside entities such as the IMF and European Union to intervene and impose a resolution on the Irish banking system.
     Kelly is not advocating a transformation of the economic and social order: in fact he is very much in favour of saving the banking system; however, his analysis of what led to the credit bubble and of the impact that NAMA will have leads him to the conclusion that not only will it not fix the problems but it will probably bring further devastation on the economy.
     Kelly argues that the phenomenal rise in house prices (in 2006 an average new house cost ten times an average salary) was a consequence of the availability of cheap credit. Rather than demand, interest rates or rising production costs being the dominant factor in increasing house prices, Kelly clearly proves that “rising house prices were driven predominantly by increases in the size of mortgages that banks were willing to give.”
     Bank lending grew to 200 per cent of national income by 2008 (twice the level of other industrialised countries), lending 40 per cent more in real terms solely to property developers than to everyone in 2000.
     Where did this availability of credit come from? Irish banks were able to borrow at low rates from international sources. In 1997 the banks were almost wholly funded by deposits, but by 2008 more than half bank lending came from international sources and inter-bank lending.
     As is well accepted, the collapse in the building boom left the banks highly exposed to losses from property and development loans. The manner in which these loans were allegedly “secured”—often based on personal guarantees rather than actual collateral—left the exposure even greater.
     The paper goes into much necessary detail that is worth reading and leads Kelly to the conclusion that there are three sides to the banking crisis, the latter two of which will make NAMA a failure as regards saving the present order of society.
     1. The banks have suffered large losses on developer loans.
     2. The banks borrowed heavily from other banks and international sources to fund the sharp increase in lending.
     3. Losses in mortgages and other loans are likely to be substantial in the coming years.
     Kelly writes:
                    The Irish government has, through NAMA, addressed the first problem of developer loans and, in so doing, has pushed the Irish state close to, and quite possibly beyond, the limits of its fiscal capacity. However, NAMA does not address the other two problems: on the liability side of the wholesale debt, and on the asset side of further possible losses on other loans.
     The problem with NAMA, as Kelly sees it, is that for the premise of NAMA to be met—that is, for property prices to rise by 10 per cent (to their 2004 level)—bank lending would need to grow to its 2004 level. This is not just unlikely but impossible, according to Kelly.
     Lending and credit will not return to previous levels any time soon on the strength of NAMA, because the banks face further losses on other loans as unemployment increases, wages fall, emigration increases, and small businesses struggle or collapse (particularly those that were connected to construction and property), and with further defaults affecting the banks’ balance sheets.
     In addition to this, banks have to give priority to and meet their own debt commitments, including maturing bonds, to other banks and international sources.
     The paying back of these loans and the necessity for Irish banks to shrink their balance sheets to “normal” levels will mean that credit will remain unavailable (as NAMA funds are used to meet these commitments), and consequently house prices will continue to fall, and certainly won’t rise the required 10 per cent for NAMA to break even—leaving the state facing fiscal bankruptcy.
     Kelly’s analysis leaves us in little doubt that NAMA will be a failure from a variety of viewpoints and will certainly leave future generations heavily indebted and under conditionality imposed by the IMF or the European Union.
     That is, of course, unless the people stand up, demand and fight for an economy and a political system designed to serve the common good.

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