Grinding despair of negative-equity generation hangs over all our lives...
All truth passes through three stages.
First it is ridiculed.
Second, it is violently opposed.
Third, it is accepted as being self-evident.
Ireland, 2031. A teenager and his teacher are walking out of an economics class. "My God, what lunacy," says the teen. "I can't believe that the banks were allowed to behave like that."
"I know," answers his lecturer. "Imagine, they were able to sell full-recourse mortgages to naive first-time buyers, often way over 100 per cent, without any risk to themselves whatsoever. No wonder they all went mad and pushed money on any poor sod they could."
"And then when the crash came, all the big property borrowers and the banks were protected by the Government via Nama and the bank guarantee, while all the small homeowners were screwed?"
"That's not capitalism, that's extortion," says the teen. (He knows his Adam Smith, does this lad.)
"And even while billions of taxpayers' money was being used to pay off unsecured British, French and German bonds, the Government and
banks still refused to help any of the small struggling homeowners break out of a life-time debt sentence."
The teen scratches his head. He studies ethics as well as economics, you see.
"That doesn't make sense. Ireland was a democracy -- surely the people refused to put up with that?"
"Ah, yes," answers the lecturer. "The ultimate conundrum. Why were the people so
docile? But remember, even though it became obvious later that the banks and the regulator had seriously misled the public, the Government was also in on the whole swindle -- it was making a fortune from all that property swopping.
"The massive amounts of cash the Government pulled in through stamp duty alone was keeping it -- and all the crony friends it placed in myriad State quangos -- in perks and pensions that they would demand to be paid for the rest of their lives."
"Thank God they eventually saw sense, reduced stamp duty and banned recourse mortgages," says the teen.
"Yes, they did -- eventually -- but not before hundreds of thousands of people's lives were ruined by rising interest rates, falling wages and the curse of negative equity."
"And the bankers, regulator and politicians who allowed this to happen -- what happened to them?"
"Eventually, some of them were charged with economic treason and either fined or jailed. But most of them -- along with the property developers that they supported -- fled to the US or Australia. The present government is still trying to extradite some of them."
"Mad," says the teen, unable to envisage a cowboy country that allowed such injustice to occur.
"Totally mad," agrees his lecturer.
Unfortunately, we are still a paradigm shift away from the time the above conversation takes place. But it will eventually occur. Non-recourse mortgages will be self-evidently the fairest way to go -- as happens already in many other countries. It's already started.
Bank of Scotland has admitted that it has agreed to write off some of the debts of some of its mortgage holders -- it is reducing capital owed by people in negative equity.
But Irish banks haven't followed suit, with one mortgage expert being quoted as saying that our banks "do not have the capital to make the kind of decisions Bank of Scotland has made".
I wonder how long the banks' head-in-the-sand attitude will last?
Last week Permanent TSB increased its mortgage rate by a full one per cent, while EBS pushed its rate up by 0.6 per cent. It's expected that most of the other banks will follow them in due course. Cue even more households around the country finding themselves in a position where they cannot pay their mortgage or sell their house, and rent instead.
Last week Fine Gael announced an interesting proposal geared to help the "negative equity generation", where it proposed to give increased mortgage interest relief to first-time buyers who bought between 2004 and 2009.
The proposal has some flaws -- not least of which is that it may assist people who are not in need -- but at least it recognises the elephant in the room that is negative equity combined with rising interest rates and falling wages.
"Debt forgiveness", "co-responsibility", "burden-sharing", or whatever you want to call it, basically means banks doing deals with impoverished homeowners in negative equity. But the mere mention of it seems to raise the hackles of the most compassionate of social democrats. Why is this?
Oh, please. As Stephen Kinsella, David McWilliams and other independent economists have repeatedly explained, moral hazard is only relevant when individuals do not suffer the consequences of their actions. This may apply to the banks -- which drove the boom relentlessly despite being far more aware of the potential for it all to fall down than many of their hapless customers -- but it does not apply to the ordinary Joe and Josephine Murphy who worked and saved and eventually were able to buy their own home.
Sadly for them, it occurred in the middle of a bank/government/regulator-induced property bubble that was then followed by a chronic recession, fuelled by the need to pay off the banks' debts.
These people weren't landowners or investors or property gamblers. They didn't follow the stock market or know what a 'property portfolio' was. They just did what all Irish people did before them. And they trusted the experts.
But now the Jo Murphys of this country are in serious distress. In fact, most of them are terrified.
Not just that they will lose their home -- that seems like a preferable outcome -- but that they are being forced by the banks to stay in a home they can't afford and can't sell.
They've already gone through all their savings and anything they could borrow from family and friends. Means test them if you want to, satisfy yourselves that they haven't a pot of gold or a half loaf of bread stashed away somewhere (the Department of Social Protection should manage that easily enough). But don't condescendingly tell them to sit it out with a bowl of gruel and a tallow candle until property prices rise again: that ain't going to happen anytime soon -- nor should we want it to if we are to improve our competitiveness and kick-start the economy.
And yet the critics of co-responsibility are piously concerned that if these people are allowed hand the keys of their homes to the banks, they will go straight out and get themselves right back in the same hole again.
Not only is this bad logic, it's bad economics.
"Why should Jo Murphy get help when he/she was stupid enough to buy during a bubble?" is what we hear on the street and the airwaves, time and time again.
Why? Because if Jo doesn't get help, an entire generation will be poverty stricken and the economy/society will go completely under.
The markets are looking at this country and suspect that if the Government doesn't do something to address the situation, there will soon be massive defaults on home mortgages. Small wonder they aren't investing.
And, ultimately, if you drive a generation to despair, if you leave them with no help, no hope, no reason to dream for their future and the future of their children, yet still demand every penny they earn to give to foreign bondholders, they will explode.
Co-responsibility begins at home. We must accept this self-evident truth -- before it's too late.
Report by Carol Hunt - Sunday Independent