Sep 21, 2009

Government fears Nama ‘n-word’ backlash

The Government is pushing ahead with their ill-advised plans to rescue the banking sector. They claim that their Nama scheme will release credit to struggling companies, although there’s nothing in the legislation to achieve this. But it’s not too late.

Although not lightly considered, Nationalisation is still a better option. At least the Government would then be pouring money into assets that it already owns, rather than simply bailing out share-holders. Unfortunately, politicians are afraid of even saying the ‘N-word’.

Nationalisation is no panacea, and there are hurdles that need to be surmounted. It’s bitterly ironic that the Government has long claimed to oppose government ownership because of the possible politicisation of lending.
This risk is not insignificant, but can be overcome by keeping the nationalised banks at arms length from government policy. For example, they could be made semi-state. But somehow, recognition of this problem by government advisers doesn’t precipitate the obvious solution.


Let us consider the problems with the Government’s plan as it currently stands. First of all, they have not addressed the problem of releasing credit. There is absolutely no guarantee that the banking system will not remain frozen if left in private hands. This was the experience in the US after the Great Depression, under the New Deal initiated by Roosevelt in 1933. Banks will simply hoard credit and consolidate their position.

Secondly, critics have now been vindicated by the long, drawn-out process of asset evaluation. This process continues to take time the economy doesn’t have. Although the public are getting worked up about it, it probably doesn’t matter too much.

Any capital seized from banks if the troubled assets are sold to Nama at a discount would have come from the government regardless in the form of recapitalisation – or cause reduced lending and proliferated economic stagnation. Similarly, overpayment is just fiscal stimulus. So any victory declared by the Government in negotiating the sale of the troubled assets will be most Pyrrhic in nature.

Even if you disagree with that analysis, such problems disappear with nationalisation. It really is then completely irrelevant what NAMA would pay for the troubled assets from nationalised banks.

The Government purchases the banks at current market capitalisation, or maybe after gaming share-holders. The troubled assets depart, and are managed by Nama (as in either case). Any money which then went into the banks, either from recapitalisation or remuneration for troubled assets, is then increasing the value of an asset that the government actually owns.

When the Government eventually sells the banks, having quickly cleaned them up, this price will reflect all the money that the government has poured into the banks. Meanwhile, under the government’s system, recapitalisation and troubled asset sale merely increases the value of shares which are privately owned. The return on the government’s actions goes to share-holders, and the tax-payer foots the bill.

Yet it gets worse. If optimistic forecasts of asset performance aren’t realised, the costs to the tax-payer could rise significantly under the auspices of Nama. And they don’t like talking about it, but every political party has made it quite clear that “partial nationalisation” may be necessary if things don’t go according to plan. It will probably prove an expensive policy turn-about.

As regards the ability of banks to raise capital, will investors be more wary of a nationalised banking system? Certainly not. In uncertain times, they are more likely to have confidence in the ability of governments to pay them back (even one so heavily debt-ridden as our own). Meanwhile, the government’s ability to borrow to fund massive budget deficits is unaffected until the banks are recovered, due to their erstwhile guarantee.

Recapitalisation and sale of troubled assets to Nama will increase the value of these banks. The government can own these banks, and profit from the increase in value through their actions. The alternative, is that they increase the value of somebody else’s shares through their actions. Which sounds more like socialism to you?

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