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Voodoo Economics

It is difficult to know where to begin to decry what is happening in the Commission of the European Union. I am referring to the review of the National Asset Management Agency (“NAMA”) by the Commission. A good point of departure is that we do not know what is happening there. The Commission makes no (perceptible) effort to tell us and our Government likewise tells us nothing [useful].

The missing information is of economics [and consequent policies] following the disastrous property bubble here in Ireland. That bubble has caused havoc with the economy; it has driven unemployment upwards; it has destroyed pension plans; it has blighted the work prospects or careers of many young people.

Let’s start with something most people did not know; at least two of Ireland’s banks were and are too big to fail. That innocent phrase implies that we the citizens are to those banks as one conjoined twin is to another. We risk death if the bank expires, it is implied.

If true, how did we permit such a relationship with a private institution?

Leave all that aside. What should we do to “save” the banks?

The Government’s plan is NAMA. That plan is flawed. It has been changed more than once. We know that it has been mis-sold to the citizens of Ireland by the Government; it claimed the purpose of NAMA was to facilitate lending by the Banks to businesses. That is not true and never was, to the knowledge of the Government.

Now the plan is under consideration by the EU Commission. Specifically it is being considered by Joaquin Almunia the new Commissioner for Competition. He is in fact not all that new; he used to be Commissioner for Economics and Monetary policy. The bad news is, he is not good at his job. He failed to spot the Greek crisis that has hit the EU with the force of a runaway train; it was his job to see that problem. Instead he was in Dublin, cheerleading for the Government where he publicly endorsed NAMA. We learned his communication skills tend to emulation of an Electromagnetic Pulse.

Of course, no skills are needed if the EU “review” is just for the “optics” of the process. The heart of NAMA dictates that the citizens of Ireland will pay [consciously] way over the odds for the “impaired assets” of the banks. The pseudo words of justification for this are, “long–term economic value”. There is no such thing.

It’s voodoo economics.

Hints have been given by the Government as to the high price they intend to saddle the citizens of Ireland with. If the hints are correct, we are about to agree to pay €54 billion for these “assets”. We know for sure that this is not the value of these assets. What is the value of the assets? We must look to the cases coming before the Commercial Court. On 19th February 2010, in one case alone the asset had fallen in value from €31 million to €600,000 in a period of just over 3 years. The judge remarked that in his opinion, assets had fallen by 70% to 80% in value. He had previously guessed a fall of 50%. In short, the values are still falling. Let’s take the price of €54 billion; assume that is the book value of these bank assets. A fall of 80% would mean they are worth [now] €10.8 billion. If the case of 19th February 2010 represents the full general fall in value, the €54 billion is worth “just” €1.08 billion.

One sometimes thinks that the true home and centre of he European Union is on the heights above Prague and its poet is Franz Kafka, but a better perspective is to realize that some human capacities are not as general as might be thought. Why do we think that Mr. Almunia must be capable? What if the genius of Keynes is like visuospatial ability? People without the capacity do not know of what they are bereft, and those with the capacity cannot conceive of a person who lacks it.

Wake up Joaquin Almunia!