Irish bust video

Max Keiser yesterday posted a video exposé (below) on the damage caused by the bursting of the Irish housing bubble and how the bad debts of the Irish banks have been transferred to Irish taxpayers (h/t Mish and Rota Fortuna).

For readers unfamiliar with what happened in Ireland, consider reading my December article, Unluck of the Irish, where I documented the rise and fall of the Irish housing market.

Max, as we know, is a bit of a nut. But this is well put together and revealing viewing. It makes one wonder just how long the Irish polity can’t stand before demanding their government default. Some key points arising from Keiser’s exposé include:

  • Irish citizens are in debt to the tune of 170,000 euros per head due to the government bailout of Ireland’s banks.
  • Virtually all homes purchased since 2005 are in negative equity (around 35,000 mortgage holders), with another 100,000 mortgagees still at risk of falling into negative equity.
  • Ireland has some of the harshest bankruptcy laws in the world, whereby citizens can be jailed for failing to repay a loan. The threat of jail time is now leading to mass emigration out of Ireland as indebted citizens seek to escape their debts and start a new life. ‘Emigration wakes’ are now held daily whereby an emigrant is seen-off by family members in the  knowledge that they can never return. Of course, the large scale emigration is also exacerbating the downturn in the economy and housing market, and is preventing the absorption of vacant homes (known as ‘ghost estates’).
  • The Irish Government has taken an axe to spending and is increasing taxes, which is also exacerbating the economic malaise.
  • The housing bubble/bust, and the associated bank bailout, is likely to haunt Ireland’s citizens for generations to come.

Cheers Leith

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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Comments

  1. “Irish citizens are in debt to the tune of 170,000 euros per head”

    My God, that really puts the cost of the bailout into perspective.

    Regards
    Darryl

    • Indeed, makes you wonder whether loosing your average savings is all that bad compared with this kind of debt.

      Obviously it would be very hard to sell politically if governments let banks go bankrupt.

      • AnonNL, you can let banks go bankrupt without crucifying depositors. Bond holders and shareholders still lose. Bank deposits are only a small percentage.

      • Just the shareholders and bondholders – read, about 100% of industry and retail super funds and lots and lots of “Mum and Dads” investors.

        Which I have no problem with: you buy shares and bonds knowing there’s risk involved.

        Modern banks are definitely not risk free, even the TBTF (which our big four definitely are).

        The depositors are guaranteed (except those on covered bonds….) by the government at this stage.

  2. Thanks for linking these Leith – the worst part of that documentaries was listening to the “emigration wakes” as the young Irish went overseas (to Australia as labourers in Western QLD perhaps?)

    Could never happen here of course……………….

      • My younger cousin (21 or 22 I think) is a qualified carpenter in Dublin and has been out of work for ages. He’s recently decided to emigrate to Perth and will be leaving in a couple of weeks.

        When he posted this news on Facebook one of his friends said that he’d left him no choice but to be pissed off at the news, to which David replied that Ireland had left him no choice but to leave.

        Quite sad really.

  3. Prince – “could never happen here” for solely logistical reasons. If the world was so screwed that Australia was trying to export labour, where the bloody hell would we go? I mean, we’ve got resources to mine, whereas the rest of the developed world outside of Canada doesn’t…

    • Even if there’s nowhere particularly attractive to go, far away where the banks and their debt collectors can’t find me is still a valid destination

  4. The biggest difference between Ireland and Australia is the Euro. Australia can print money, Ireland cannot.

    Looking back to 2008, Ireland was the first European country to offer unlimited government guarantee for the Irish Banks, and all the other countries are forced to follow. The government guarantee applied to both deposits and bond holders, and it turned a banking crisis into national insolvency. Dr Morgan Kelly wrote a dire prediction of the Irish Times situation.

    http://www.irishtimes.com/newspaper/opinion/2010/1108/1224282865400.html

    Australia is saved by two action : the stimulus package, and the RBA having room to lower interest rate. A mortgage is contract for a person to pay a certain amount of money a month, which is why employment is far more important than house prices in determining deliquency rate. Of course, it would be much better if we never had the bubble in the first place.

    • Ronin8317, I heard that the house price decline precedes unemployment.

      I have to say that I disagree with the notion that Australia has been “saved” by government spending and reduced interest rates. I’d say that property speculators have been given a reprieve (at the cost of those policies). It may have given some time to get out in time but most property speculators are regular (ignorant) folks who are only becoming perhaps a little concerned.

      • There are many unemployment lags a real estate bubble. However, there are also cases where it has no effect. When Bob Carr introduced the 2% speculation tax in NSW, home prices in NSW went down, and in some area by 20%. However, unemployment remain steady at around 5%. Home prices and unemployment does not a direct causality.

  5. Max Keiser is my favorite renegade. Many months before Iceland’s crash, he did a brilliant short doco on naked short selling, hedge funds and the fragility of…Iceland. Has been on about corruption and the kleptocracy for years. Funny, accurate and informative.

  6. The saddest legacy of Ireland’s debt bubble will be the exodus of highly-trained, well-educated, and disenfranchised youth who will find (and are finding) greener pastures, as it were, elsewhere. Same with Greece’s youth.

    Something for Australia to keep in mind. For a look at a somewhat successful model of recovering from a banking crisis I would look at Scandinavia’s efforts in the ’90s as a case study. But do it on the hush-hush, so as not to arouse suspicion…

    • Anthony Peterson

      If Australia does not sort out its housing market in the next 5-10 years I’ll be telling my kids to leave. Australia is not worthy of them. Get the best damn tax payer funded education then go use it in some other country where the bubble has burst.

    • It will happen here too, my family all left Australia in the late 80’s for greener pastures in Asia. I will probably do the same if it gets bad enough.

      Besides, pay in South Asia for professionals is double what it is here and you pay half the tax.

  7. It is very sad that Ireland has come to this. I hope it doesnt happen to Australia but the writing on the wall says something is going to give sooner or later.

  8. I liked those videos but I did find that they denied the average folk’s part in these booms. The banks might be lending large amounts of cheap money but somebody is borrowing it (and probably jumping for joy when the property price goes up and subsequently borrowing some more). I’m not saying that the average folk should take the largest share of the blame but denying any kind of involvement just seems like a lot of hogwash.

      • Yes, but the banks see a bubble forming from way off and what do they do? They lobby the government to allow more exotic securitization products and they lower their lending standards, thereby cashing in on the general population’s fear of missing the boat and being unable to afford a house. Vultures are they and they will deserve all they get and get all they deserve once the sleeping giant (the population) arises.

    • I’m pretty certain in the second video Max or David McWilliams acknowledges this?

      But the particularly bad thing about housing bubbles is that they are a need, or at the very least a strong desire. So unlike tulips, stocks, bonds etc – with housing everyone ends up participating, be it through bidding house prices or competing for rental properties. So yes, the average folk did take part in the boom, but unless we all live at home there’s not much we can do about it.

      However I’m not arguing against the fact that everyone wants something for nothing though.

    • The only blame the average folk should get is that they paid over the odds for property and got caught up in the hysteria. Not everyone is a contrarian nor understands or thinks about the fundamentals of supply and demand.

      It is very easy to think that well if you speculate in property and you get burnt then so be it. And I agree.

      But what has happened in the majority of cases is that parents, thinking they were doing the right thing, helped their children get their foot on the property ladder and in doing so have burdened them with debt on a property that may never recover in value in their lifetime.

      And to add to that, they are also then asked to cough up for the debts of the speculators and banks through the government guarantees of the banks.

      Part 1 was a niave mistake that the average person has to live with and should take responsibility for.

      But part 2 of government bailouts for bad debts is a disgrace and a sham.

    • The part of the blame of individuals is greed. Well try to reconcile that out of human behaviour and you’ll be onto a good thing.

      Blame, and what behaviour you try to rectify is solely atthe banks.

      An individual is not meant to assess their own credit-worthiness.

      That is the primary job of a banker. They are agents of other peoples money, depositors, bond holders and equity holders. They assess credit worthiness to obtain a financial return for these parties.

      That’s it.

      Without an abrogation of this role of agency, no dud loans are given on the basis of ‘never ending upward trajection of property prices’.

      End of story.

      The individual can be as greedy as seeking as many properties as they like, but responsible lending prohibits this.

      End of story.

      Now individuals, will suffer the consequences of reposession and punitive laws of compensation, but blaming them doesn’t accomplish anything.

      And regulation here is required. the current compensation system and tacit guarantees have bankers being rewarding based on the weighted volume of loans written.

      Of our big four, one of the banks in 2005 could have said ‘You know, this things is going pear shaped. We will no longer write any more loans for overpriced property’.

      Game theory demonstrates all that would happen was the other 3 would continue to write loans, the 4th, ‘responsible’ bank will get slaughtered as far as share price goes. Punishing good behaviour.

      It’s a lot easier for that 4th bank to go down with a sinking ship as long as they aren’t alone.

      There’s only one way to prevent the worst outcomes from game theory, and that is death to the participants.

      If a bank becomes insolvent, make the death penalty the outcome for the CEO. Then watch behaviour quickly change.

      • Lol I think the death penalty might be a bit extreme. But what I think you are saying is that clearly the correct incentives are not in place.

        True, without the correct incentives you are then relying on the moral code of the decision makers involved and if the GFC is anything to go by, the morals are in short supply…

        But I would add to this, there has also been a clear lack of understanding as to the ramifications of decisions being taken. Did the Irish government really understand the extent of the commitment they were undertaking when they guaranteed the banks? I would say no and probably not even close. And that just makes matters worse because they have been shown to the world as the cowboys they are. As a result who is likely to want to invest in Ireland anytime soon? And so average person suffers some more…

        • I’m actually serious about the death penalty.

          They get the biggest carrot. They need the biggest stick.

          As far as ‘understanding ramifications’ goes, well I’m pretty sure they did, in a first interation sense.

          But not going beyond that, then they become losers in a ‘Keynesian Beauty Contest’.

          Before all these troubles impacted on the real economy, it was first a financial crisis.

          With no guarantees, with no government intervention, what is supposed to happen is that a default on borrowings (i.e. the realisation of down-side risk) is there is a change of owners.

          Being an owner means you now receive yield, or other perceived benefit.

          If the yield doesn’t really equate in value to the moaunt you lent out, then you didn’t price in the asste properly.

          By not doing this, you deserve to suffer in the very least, and at worst, you then have to hand over your assets to the party that lent you money. it comes to an end, even if it requires recapitalisation with the last person standing with cash available.

          This is the outcome that Ireland should have experienced.

          Homeowners default, they lose all their houses. The Irish banks have a ton of homes, but find out they are not worth what they lent out. The equity and bond holders of the irish banks lose everything, and British and German banks take ownership.

          The assets of Irish residential homes and income streams of various loans written by these Irish banks are now of the benefit of these British and German banks.

          They may become insolvent, and then it goes further up the chain, until someone intervenes, privately.

          We saw how this was going to occur in the U.S. Warren Buffet bought 10% of Goldman Sachs for $6 billion. But it goes to show you can buy 100%, absolve any claim from bond holders and equity holders, and buy still solvent loan books.

          You purge bad loans, you sack dud managers, and pretty much straight away you resume sensible business lending, and the world goes on its merry way in terms of retail, manufacturing and hospitality.

          Ownership changes and returns on bonds and equity becomes zero.

          That what should have happened.

          The ramifications of this however are that some very rich and powerful people lose big time, so they capture public policy, say how ‘Collectively, it is the fault of every Irish person. Drum it so much that many people believe it and blame individuals and decry their lack of responsbility, and then put them all into hock for 170,000 per head.

          But it means their equities and bonds don’t go to zero.

          That’s what a bailout is all about.

          The second iteration thinking bit is about the willingness of individuals to put up with the debt of 170,000 each and the work required to pay it off.

          • I read a recent article that said Wall Street financiers are basically brain damaged – they lack empathy. Combine this with influential lobby groups that have governments in their back pockets, is there any wonder why these scum are able to make governments socialise their losses whilst they walk away with wads of cash.

            Let’s not forget that these same lobbying groups caused the removal of regulations designed as economic safeguards and help foster predator lending practices.

            The other sickening side to this sad saga is that these banksters make money on the downside by shorting the Mortgage Backed Securities market.

            I agree Rusty – we need public hangings!

  9. Australia is currently hanging on economically by the skin of its teeth from my perspective.

    Being a wholesaler and dealing with major retailers, retail sales have noticeably declined over the past 18 months and more steeply over the last 3 months. Consumer spending accounts for approximately 70% of economic activity, so when consumers start shutting their wallets, it’s only a matter of time before layoffs start flowing and the resulting domino effect into housing begins. The ensuing shockwave to the balance sheets of our banking system may cause overseas lenders to question the viability of the Australian economy and either limit, withdraw or raise the cost of lending further exacerbating the effect.

    I have a friend in China who owns a factory and has basically confirmed the rapid rise in inflation, the property hype and the numerous unoccupied cities. He too feels China is scheduled for a major slow-down which pretty much concurs with Leith’s past posts.

    The Japanese Fukashima incident is going to have a major impact to Australia’s exports since Japan is Australia’s second largest trading partner. Once the true nature of the disaster (which is not over yet by a long shot) is unveiled, I think this will result in a significant drop in exports further impacting our balance of trade.

    In knowing how the government is able to massage figures by shifting the ‘goal posts’ with inflation and employment figures, I’m sure they’ll be able to convince people that things are not as bad as it may seem. Keeping confidence high has become a necessity over reality.

    Australia having the ability to print money, may stem the slowdown for a period, but regrettably all this will do is create a bigger hole for this country to slide into.

    Over the past 3 years I’ve become pessimistic about our so called ‘miracle economy’. Once I clearly understood the ‘house of cards’ known as globalisation, which is really just another word for British mercantilism, then the frightening realisation sets in that the entire world is so interdependent and venerable to external shocks. Couple this with an estimated 1.4 quadrillion-dollar derivatives bubble created out of speculation, then major parts of this casino-type world economy we live in today are unsustainable and fundamentally bankrupt.

    Hold onto your hats because the later half of 2011 is going to be a rough ride. Precious metals, as Max Keiser preaches, is a great way to protect ones wealth. Fiat currency is a debt based instrument linked to a country’s economic viability – where gold and silver have intrinsic value dating back some 6000 years and owe nothing to anyone.

  10. One similarity that worries me us that Australia, like Ireland before the crash, has not had a recession in something like 20 years. So there is a large proportion of people who have not had to experience the pain of a recession including myself as I moved to Australia 10 years ago. My worry is that this is being reflected somewhat in decisions being made on a personal, business and government level. A sort of arrogance in a way. Probably more niavety in a majority of the cases.

    I hope Australia does not suffer a similar fate to ireland but there are some big similarities are striking and lessons that could be learned from the collapse of the Celtic Tiger.

    My advice, save for a rainy day …

    • Well spotted, Michael. I had wondered whether folks might be leaving the country. In Brisbane, I’ve noticed a considerable increase in priced at around a million on the market. This could be some kind of an explanation.

    • That is a great article Phil. Only read The Big Short by Lewis but am moving on to Liar’s Poker..

    • One of the best books I have read and I found to be full of useful insights was

      “The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History”

      It is entirely about the US, but I found it to be a great read.

      • Guys, those books on the hedge funds and their use of derivatives, is hugely helpful in understanding that crisis. Did you notice that John Paulson, Steve Eisman, Michael Burry, Kyle Bass, etc, etc, were “shorting” the mortgage markets IN SPECIFIC AREAS? Those areas just happen to correlate with urban growth restraints. The failure of the mainstream econ profession to make these connections, is a catastrophe.

  11. Moving from Ireland to Perth…just following the dominos then?

    Seriously though, Ireland is a disaster. An missed opportunity to force imprudent risk takers to take the loss, now the taxpayer and economy are stuffed for decades to come.

  12. The sad things about being one of the last bubbles to burst is that there will be no place left to go. The vast majority of Australians will have to live in the hole that they have dug (or has been dug for them).

  13. So this is what happens when we gear up and sell overinflated houses to each other.
    Thanks for the link.