What has posterity ever done for us?

The debate on how to deal with newly distressed property assets to save the real economy—that’s you and I—has crystallised around the rollout of the National Asset Management Agency, NAMA. NAMA’s remit is to overpay banks for bad loans, to allow the banks to resume normal operations of credit provision to businesses. NAMA will swop assets held on banks’ balance sheets for bonds, which the European Central Bank will convert to cash, thus recapitalising the banks. Because many of those who will owe NAMA will not be able to pay, NAMA will therefore hold and control much of the property used as collateral in the hopes that, one day, the value of this property will be sufficient to repay the bonds issued to bail banks out today. Through NAMA, we all become property developers of a kind.

Once we accept the ‘systematic importance’ of the banking sector in the Irish economy, the question becomes how best to restore their balance sheets. It must be emphasised that NAMA is one option. Another option is for the banks to simply take the current market price for the assets (at, say, a 75% write down) on the nose, and for the government to restore the banks’ balance sheets using a direct recapitalisation. The difference in each plan comes from how we think about time.

NAMA is built on a belief that, eventually, property prices will recover to their peak 2007 levels. A price appreciation to previous levels will surely take place. The question is when. The `market’ solution prices the assets now, takes the hit now, and forces us to weather the inevitable political and economic storm now. The NAMA solution pushes the potential hit the economy might take into the future, trading off the certainty a quick solution might provide for the chance, however likely or unlikely, that all funds speculated in the taxpayers’ names might be recovered.

Each solution shows a difference in the decision makers’ outlooks. We can see it is easier to push problems of this scale into the future, but that does not mean they go away, because we will most likely pay interest (via the coupons on NAMA’s bonds) throughout the time we hold these distressed assets. We thus leave the problem to posterity. And as Sir Boyle Roche—an Irish politician—once remarked: “what has posterity ever done for us?”

Published in the Sunday Independent.

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