Banks must give mortgage holders a break

MICHAEL Noonan made an extraordinary admission in the Dáil on Thursday.

“We cannot believe the banks,” he said. “We cannot believe what they say.”

Here was the second most powerful democratically elected politician in the State effectively throwing his hat at the honesty of bankers. Implicit in his admission was the idea that he can’t do anything about it, that he, or the State, was incapable of dealing with a powerful group which can act with impunity.

Do bankers really rule the world? Listen to Mario Draghi, the head of the European Central Bank and a former honcho in Goldman Sachs. In an interview with the Wall Street Journal last February, Draghi said that “the European social model is already gone”. He pointed out that there would be “no escape” from tough austerity measures in indebted European states. This banker, rather than an elected representative, was telling the citizens of Europe how they must live.

One of the main reasons that these people wield such power is the manner in which debt is dealt with. Banks lend money, and when things go belly up, the borrower is on the hook for the debt, while the bank is vested with the power to recover what it has invested. So if a venture succeeds, both bank and borrower wins. But if it fails, the borrower takes the rap and the bank can chase him all the way to bankruptcy if it so wishes.

Speaking at a conference hosted by Social Justice Ireland last week, UCD academic Tony Fahey questioned the whole notion of debt. He provided an enlightening examination of how debt was dealt with at a time far darker than the one now being lived through.

In the aftermath of the Second World War, Germany was drowning in debt of around 300% of GDP, or nearly three times Ireland’s current indebtedness in GDP terms. Most of that fell on the new West Germany, as the Soviet Union had annexed the east, and there was no prospect of recovery there.

Fahey points out that the USA ensured that the Germans would not drown. It was in American strategic interests, for both political and economic reasons, that West Germany prosper. The aftermath of the Second World War is remembered for the Marshall Plan, in which the USA provided basic foodstuffs and provisions for many of the stricken parts of Europe. Fahey points out that another element of American intervention has largely been ignored. The USA did its utmost to ensure that West Germany would be allowed to come out from under the debt.

Uncle Sam used its leverage with other European countries — mainly through the Marshall Plan — to get them to back off Germany. One of the main elements of the plan was to give the Germans a debt holiday in order to let the economy breathe. The American message to its erstwhile war allies was to allow West Germany get up off its knees.

The plan worked spectacularly. Freed from debt, the Germans got cracking and quickly graduated to an economic powerhouse in its own right. “The effect of the concessions itsecured was to place the new West German state in a uniquely favourable financial position,” Fahey writes. “The broader economic significance was the contribution this favourable debt regime made to West Germany’s spectacular growth rate which was the highest in Europe and double that of Britain in the 1950s and 1960s.”

The debt holiday ended in 1953, when half the debt was written off and the remainder rescheduled over a much longer term. This again ensured that the debt would not be a drag on the economy. Thus the repayments were relatively insignificant, and were only completed in the last few years.

The whole affair reflected well on the Americans in particular. They were not acting out of sympathy for the plight of Germany, or even Europe. They were merely acting on the basis of enlightened self interest. A strong German economy and a stable state were very much in their interests.

Roll it forward 70 years and now the Germans find themselves on the other side of the fence. Effectively, they hold the purse strings over indebted Europe. What to do? Germans work hard and, by and large, take their responsibilities seriously. They see some of their fellow Europeans as having acted with feckless abandon, failing to organise or pay taxes, and wasting money hand over fist in running states.

The natural impulse of the average German in this instance has been to say “no more”.

They want their fellow Europeans to pay all debts and reform the way they run their states. Only then will the average German be prepared to help out.

Yet it is entirely in Germany’s interest that its fellow European countries get up off their knees and begin to grow economically. Apart from the advantages a functioning euro confer on Germany, it also requires its neighbours’ consumers to import German goods.

If the European economy does seize up, Germany will not be far behind.

Back in the late 1940s, the average American’s probable instinct was to strangle the average German. As word seeped out about the Holocaust, as American families mourned their war dead, the notion that America was easing the burden on Germans must have been galling. Yet at the level of government, enlightened self-interest demanded that emotion be put to one side.

Today, Angela Merkel is, in all likelihood, well aware of where German bread is buttered. She must know that debt forgiveness is required, but she also knows that to do so would have huge political consequences for her at home. Enlightened self-interest is all very well at the apex of government, but the average voter is as likely to invest in emotion as what is strategically desirable.

Of course we all live in a different planet from the 1940s. The world is a smaller place. The average voter is better informed. The media is better informed, but elements within can also pander to sentiment as a marketing ploy.

So for the moment it’s unlikely that Germany can be persuaded to act in a manner that forgives on the basis of its own interest. It would, however, do no harm for the narrative Tony Fahey highlighted last week to be put before the German leaders, and equally to be explained to the German people.

What pertains on an international stage can also be applied domestically. Why is it, for example, that banks have the whip hand over the debt that hangs over mortgage holders in particular? The borrowing that went on during the bubble years was reckless, but the lending was, if anything, even more reckless. Yet it is the borrowers who find themselves being dragged through court, humiliated, and, in some instances, in danger of losing their homes.

The recently published Personal Insolvency Bill will go some way towards rebalancing the power in the relationship, but it is still way off kilter. Right now would be the perfect time for a proper debate on the whole concept of debt, for only then will there be some hope of reeling in the ludicrous power enjoyed by the moneylenders.