Sobering up

Martin Kenny

By Martin Kenny

OUR housing boom was like a party that just kept bringing in more of the neighbours. It was a great party with lots of fun and lots of solid benefits. And the tax incentives and subsidies which eventually overheated the market were an absolutely necessary stimulus to get the party going. It’s not all bad news, though. There are lots of lasting benefits, not least of which is the creation of new capital resources nationally, and also in places where virtually no capital existed previously. But the party IS over, the hangover is here, and the clean-up has to be done.
Who’s hurt? The most innocent victim I think is the small homeowner who bought late at inflated prices and with a mortgage that they really can’t afford but the bank made it too easy to sign. They are faced, at best, with difficult budgeting problems and a negative equity that will last for a considerable while. At worst, they risk the financial catastrophe of losing their home, a foreclosure if the recession cuts into their income, and then their negative equity has to be unwound immediately, leaving them deeply in debt.
The construction workers and small craftworkers including the small farmers who were using construction income to subsidise their farms, now face very uncertain employment prospects. Many of them, especially the farmers, will become invisible. And the small developer was badly hurt too. He was encouraged to go to excess by professional advisors and enabled by the banks through overly liberal loan policies and he now faces bankruptcy. Then there are the big developers, with the major portion of the €100 billion in potentially bad developer debt and the good old banks, who lent them that money, are also badly exposed. Some of them will fail. But almost all, like the proverbial phoenix, will rise again, from the ashes.
Who is accountable?  The Government has to take a major share of the responsibility. Economic history clearly shows that the early stages of development everywhere tend toward boom and bust. That’s precisely because of the extraordinary tax incentives, subsidies, and other fiscal policies usually needed to kick-start development. Those incentives are grand ideas but, like whiskey, they bear careful watching lest it all get out of control and turn into a wild party. Government should have known this and been more conservative but it chose, for political reasons, to leave the incentive programmes in place long past their ‘best before’ date. Bank lending policies, financial professionals and other experts all got caught up in the mania and fuelled it further. They, too, should have known better – that’s the definition of professionalism.

VILLAIN AND VICTIM
The speculators who drove up prices by adding yet more fuel to the market mania - on what economists call the greater fool theory, that they would be able to sell at the top - they are both villain and victim. They turned a real market in property into a speculative futures market and are now left holding excess stock with no real or speculative buyers in sight.   
Who is likely to be bailed out?  Well, that’s the political question of the day. It will be decided by political clout. And the workers and the homeowners, whose influence is principally their vote, don’t get to vote again for a while and may yet come to regret how they used their votes last time. They’re probably not first in line. Those with more political influence are already lined up.
That’s what happened and that’s why the Government needs to take action now, not just stand watch, to see how bad the hangover will be and how long it will last. It would be a good idea, for us all to consider right now what effect the clean-up policies by the Government will have on future economic prosperity. Welfare for the great and good, which has come to dominate the economic practices of centre-right governments, will only exacerbate our problems and further widen the gap between haves and have-nots. But even worse, bail-outs will actually delay a return to a healthy and growing economy by delaying the important changes in policy which have to be made.
Preventing a wave of foreclosures and keeping the individual homeowners in their homes has to be a first priority. Putting the construction workers back to work is next. That will require new jobs in new industries and that will require a new round of targeted incentives to generate the productive investment needed to kick-start a healthier and more sustainable economic development.
Those are the priorities that should be the guiding goals. That is the core of a responsible government economic policy: secure our gains and expand our opportunities. Given government’s responsibility to protect its citizens, it is not only the right thing to protect the weak. It is, with current conditions, also the wise and far-sighted policy choice. The party was bound to come to an end but we shouldn’t be as exposed as we are. Much remains to be done to broaden the base of our economy and extend its reach to all the regions. It is not too soon to begin the critically important debate on how that is best done.