Is the ECB providing a premium service to Ireland by being lender of last resort providing 1% funding to our banks?
from NAMA Wine Lake by namawinelake

……Taking a step back from the details of the bailout, the reason the ECB’s position is relevant is that it is the ECB that is stopping Irelandfrom forcing bondholders with €36.5bn of bonds in insolvent Irish banks – banks which depend on the support of funding from citizens via the bailout – from taking haircuts. But is the ECB providing a premium service to Irelandin return for a commitment not to “burn” unguaranteed senior bondholders? After all, Irish banks are in receipt of some €117bn (at the end of March 2011) from the ECB which only charges the banks 1.25% for accessing these funds so doesn’t Ireland owe some debt of gratitude to the ECB? Absolutely not – in return for this €117bn of funding, the ECB is provided with collateral by the banks and the ECB has high standards for the collateral it will accept, set out in some detail here. So all the ECB is doing is its job and no more.

This issue was touched upon on here, two weeks ago & it seems lamentable that there hasn’t been any challenge fromIreland about the ECB’s apparent extortionate threat to withdraw its role as lender of last resort. Although membership of the euro constrains our monetary policy, membership was also supposed to give us a colossus of a central bank inFrankfurt to provide a lender of last resort service. So as long as the assets in Irish banks were eligible then the ECB had to, that is, didn’t have discretion, provide liquidity funding to those banks. There seems to be an acceptance inIreland that we are somehow getting a premium service from the ECB in it providing a lender of last resort service – this isn’t the case at all, it is the role of a central bank to provide a lender of last resort service on eligible assets. But in return for this perceived premium service, we have promised, in return, not to burn bondholders. If we hadn’t joined the euro and relied wholly on the Central Bank ofIreland, I cannot imagine that institution demanding that bondholders in insolvent Irish banks be repaid with funds provided by Irish citizens, in return for providing a national lender of last resort service.

…The most common question that comes up time and time again after the initial questions is ’should we bailout the banks and companies or let them go bust?’ This is my favourite question that seems to divide the nation. The question is much more about identity then anything else. It is loaded with many previous thoughts and philosophies and is never as straight forward as the question first appears – the free market v. the welfare state and government intervention, the left wing v. the right wing, classical economics v. Keynesian economics, the conservative v. the labour, Capitalism v. socialism, Jim Rogers v. Gordon Brown, Ron Paul v. Barack Obama. Bail them out or let them go bust. My response – neither will work.” Link to article

Internet activist John Gilmore famously said, “The Internet interprets censorship as damage and routes around it.” A key event of the Internet age was the invention of Napster, the direct online music-sharing program that helped erode the business model of the global music industry. This capability of the Internet to route around middlemen is becoming more apparent. A reader of the Financial Times in December won £10,000 for identifying peer-to-peer lending through the Internet as the “next big investment idea.”

How such a directly connected financial system could work is a question that has interested me for almost a decade.

At a recent conference in Tehran on the current financial crisis, one of my fellow speakers observed that “it is not possible to solve 21st century problems with 20th century solutions.” I agree. The emergent partnership-based enterprise model, however, has evolved in response to the challenges of this direct Internet connectivity.

Finance consists of three things: credit, which facilitates trade and enables the creation of productive assets; investment, which consists of financial claims over productive assets such as secured debt (e.g., mortgage loans); and equity, which is an ownership interest in a corporation, and typically exists in the form of shares.

Credit and investment may be achieved without the intermediation of banks. Since bank capital will be further depleted as the credit crunch spreads into the productive economy, peer-to-peer finance offers a solution from an entirely unexpected direction.

Direct Credit

Trade sellers have extended credit to trade buyers for thousands of years. As trade has developed nationally, regionally, and globally, one of the key enabling factors has been credit intermediation by banks. This intermediation protects sellers by taking on the credit risk of buyers and enables trade to flow by providing liquidity to sellers.

It is possible to dispense with a credit intermediary and provide such a framework of trust through the use of an agreement—a guarantee society—whereby sellers and buyers collectively provide a mutual guarantee. This mutual guarantee may then be supported by provisions made by both seller and buyer into a default fund in the hands of a neutral custodian.

A service provider could then set guarantee limits, operate the accounting system, and deal with defaults in return for a fee. The crucial advantage for banks of such a guarantee-society credit-enterprise model is that they would no longer have to put capital at risk by creating credit based upon it.

Direct Investment

When we distinguish the public sector from the private sector, we are actually distinguishing between enterprises and assets that are owned by the state and those which are owned by that specific enterprise model known as the joint stock limited liability corporation.

In recent years, media attention has focused on developments and events in the field of credit. The emergence of new generations of alternative investment vehicles—such as income trusts, real estate investment trusts, exchange traded funds, and hedge funds constituted as limited partnerships—has passed relatively unnoticed.

In particular, there has been an explosion in the United States of the use of the simple and flexible new partnership-based Limited Liability Company. In Britain and elsewhere, an even simpler form—the Limited Liability Partnership—is emerging at a phenomenal rate for purposes never intended by legislation introduced with the intention of limiting the liability of partners in professional partnerships.

Such partnership-based entities may be used as framework agreements—not organizations—which bring together investors with users of investment in a capital partnership. In this way, it is possible to create new revenue- and production-sharing mechanisms for direct investment in productive assets of all types, and particularly in real property and in energy assets through what I call “unitization.”

Unitization

Let’s consider how this might be used to refinance a portfolio of distressed mortgages. The properties are transferred to a neutral custodian, and an affordable rental is agreed upon. That rental is then index-linked. The resulting Rental Pool is divided into proportional units which are allocated between investors and a suitable management consortium.

For the “co-owner” occupier, this is a new form of rent-to-buy, since any amount paid in excess of rental will buy units. For the “co-owner” investor, units provide a reasonable, index-linked, secure revenue stream, ideal for risk-averse long-term investors such as pension funds. For banks, this is an optimal form of refinancing through a “Debt/Equity Swap.”

Similarly, we may finance a wind turbine simply by creating units redeemable in, say, 10 kilowatt hours of energy and selling these to investors. In the United Kingdom, the sale of between 30 and 40 percent of production finances the turbine, and with a few percent of production to a manager, the balance is pure surplus.

Direct peer-to-peer investment gives rise to shares, but not as we know them. Once again, we see a role for banks as service providers, appraising investments, advising investors, and providing liquidity—all classic investment banking roles. As with direct peer-to-peer credit there is again no need for banks to risk capital by creating credit based upon it.

The enabling factor for a new generation of peer-to-peer finance is a new generation of networked partnership-based framework agreements and entities. The work of visionaries like David Johnson of New York Law School and Oliver Goodenough at the Vermont Law School in creating the new Vermont Virtual LLC is a major advance in this direction.

Outcomes

A generic clearing-union network of direct financing will enable a simple but radical new approach to global economies. It could enable systemic fiscal reform based upon taxation of privilege rather than earned income, and it also offers new solutions for financing public assets. Most exciting of all, it enables a new networked generation of global markets, and even the potential for a “New Settlement”—a Bretton Woods II—establishing a new global architecture for world trade.

Chris Cook was formerly director of the International Petroleum Exchange, and is now a strategic market consultant, commentator, and enterprise architect. He is currently developing new partnership-based enterprise models and financial products based upon their application to Internet market networks.

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The Liquidity Network proposal – a quick guide.

1. The Irish money supply is contracting rapidly. The value of the notes and coins in circulation plus the funds in bank accounts to which people and firms have instant access has fallen by about 14% over the past year. This is extremely serious. It limits the amount of buying and selling that can go on and cuts employment. It reduces the taxes people are due to pay. It also makes it much more difficult for borrowers to get the funds together to pay their taxes and to service their loans. If the contraction goes on, the banks’ bad debts will soar, and, as a result of the guarantees it has given, the government will have to borrow the funds to make their losses up. At some point, the banks’ losses may exceed the state’s ability to raise more funds and the nation would default.
2. The contraction in the money supply has therefore to be reversed. There are only three conventional ways that this can be done. One is that the money could be borrowed, whether by government, business or private individuals, and spent into circulation. However, this road seems blocked because firms and individuals are reluctant to increase their extremely high borrowings in present circumstances while the state is already borrowing so much it would be unwise, even if it were possible, for it to borrow more. The second and third ways are also blocked. One is to earn more money from overseas by exporting a lot more than the country is importing. The other is to attract in foreign direct investment. Neither presents good prospects in view of the global recession.
3. An unconventional way to get more money into circulation is therefore necessary. One such way would be for the government to announce that it was starting an emergency currency to be used as a supplement to the euro and that it was proposing to proceed on the following lines:
   1. A trust will be set up to operate the new exchange system which will be owned and controlled by the participants as it is they who give its units their value. An elected management committee will run it under a trust deed setting out the basis on which it is to do so. The commercial banks will operate the system under contract to the Trust.
   2. Each person with a Personal Public Service (PPS) number will be asked to nominate a bank to operate their account. Once their account is open, it will be credited with the equivalent of €1,000 in the system’s unit, the quid. The banks will also open quid accounts for their business customers but these will not be given an initial float.
   3. Quid will only exist in electronic form. It will be possible to transfer them by a laser-type card with a PIN, via a mobile phone or by computer.
   4. It will be up to employees to agree with their employers how much of their wages they will take in quid. Similarly, shops and other suppliers will state what percentage of the price can be paid in quid. Taxes due on payments in quid will be paid in quid.
   5. It will be impossible to prevent an unofficial exchange rate developing between the quid and the euro but there will be no recognised exchange rate between the two currencies. The Trust will not sell quid for euros nor euros for quid but some participants undoubtedly will. Although there will be no target exchange rate between the quid and the euro, it might be advisable to manage the number of quid in the system for the first few months so that the price of a quid is roughly one euro.
   6. The quid in an account do not belong to the accountholder – they are only there as a measuring tool. The velocity of circulation in each account will be monitored by the system’s software and, if an account’s velocity is tending to rise, more quid will be assigned to that account. If the velocity is falling, quid will be removed. Accountholders will be provided with information so that they can know when to expect quid to be added or removed. The overall number of quid in the system will be adjusted each month to keep them scarce in relation to the total amount of trading going on. This will maintain their value.
   7. Quid must not be used for capital investment. Funding for that must be sought in the conventional money system. The quid is only intended to provide liquidity to allow trading to take place, not investment capital. People should not save quid because the units should not be expected to maintain their value and, in any case, if the quid in their account are not moving, a percentage of them will be taken away each month.
   8. No credit will be extended in the system. Accounts will not be allowed to go into deficit. A participant dispatching goods or providing services to another member of the network will issue an invoice immediately the goods are dispatched or the services performed and enter the charge against the customer’s account in the way hotels sometimes do with credit cards to ensure that their bill will be paid. The quid involved will be placed in escrow and will no longer be available to the accountholder for other trades. When the goods have arrived and been checked, the recipient will notify the system that the sum held in escrow should be released to the supplier’s account.
   9. Accountholders will pay a monthly fee in quid based on the turnover in their account to cover the operating costs of the system.

This arrangement would inject the equivalent of €3 billion into the consumer economy, about a quarter of the amount that has been lost to the M1 money supply since it peaked. More quid would be given into the system each month to the accounts with the highest velocity and those with a low velocity would have quid removed. People would quickly realise that if they did not spend their quid they would be gradually taken away. If the amount of trading going on in quid was increasing, the total number of quid in the system’s accounts would increase too. However, if the euro ever became abundant again, the use of the quid would fall and units would be removed from circulation. At some point in the decline, businesses would begin to refuse to take quid and the system would quickly run down to nothing. This is what makes the quid a true emergency currency. On the other hand, if the euro remains scarce, the quid will stay in use.

The advantages of the system for the government are:

*  Increased tax income.

*  Lower unemployment

*  More competitive economy because a proportion of all costs would be payable in the new currency which, unlike the euro, could fall in value relative to currencies used elsewhere.

*  Much reduced bad debts for the banks and therefore for the taxpayer because borrowers would be able to conserve their euros for debt service.

*  Seignorage gains: If it ran its accounts so that the velocity stayed high, the state’s high turnover would mean that, while the system was expanding, it would be given, and be able to spend, a lot of the new units being put into circulation.

15th February 2009

1. Background and Objectives
The aim of the Liquidity Network is to address the Irish national liquidity problem – the slow down in economic activity triggered by the credit crunch.  Currently virtually all economic activity is powered by debt based credit – individuals and businesses borrow in order to finance their activities. Using the credit released by these loans they employ or do business with other individuals/ businesses who in turn do business with *their* suppliers and so on. There is thus a multiplier effect whereby the initial credit fuels transactions worth many times more than the value of the initial loan.  When the ‘seed’ credit from banks dries up, as in the current crisis, the multiplier effect which normally helps to create liquidity efficiently acts in the reverse way and removes liquidity quickly.

FEASTA’s Liquidity Network aims to address this problem by creating an alternative ‘liquidity stream’ which is not based on debt.

Bartering has existed since before so called ‘fiat’ money (money created ‘out of nothing’ , normally by a nation state, printing it or giving banks quotas to create loans against) was widespread and doesn’t need anyone to go into debt to get things done. But bartering per se relies on an exchange of goods or services between two.

Barter networks take this a step further by keeping tabs on the exchange of goods and services within a network using some sort of barter ‘unit’. But typically these networks seize up after a time with some enthusiasts building up lots of credit and others ‘owing’ but having no real incentive to earn.

Many other innovative ‘social credit’ projects have been created to address the systemic problems of barter networks and have thrived to a greater or lesser extent, especially during recessions. They all work with pseudo-currency ‘units’ (FEASTA’s is called the Quid) or notional ‘hours-worth’ of labour.

The FEASTA plan is novel in a number of ways (as will be described later), but these innovations might be only of academic interest were it not for the planned scale of the Network.
Networks of this sort always face a critical mass problem. Typically they would grow slowly and organically outwards from a core group usually based in one locality. While there are few participants there are only a few alternative ways to spend your ‘units’ and a smaller market to earn them from, so growth can be slow.

FEASTA believe the seriousness of the current Irish crisis is such that there is no time for the Liquidity Network to grow organically in this way if it is to have the impact desired. The reasons for this assessment are not repeated here (but see e.g. http://www.irishtimes.com/newspaper/opinion/2009/0203/1232923383096.html ).

FEASTA therefore plans as follows:

1. to give away a ‘float’ of Quids to new participants in the network in order to kick start economic activity within the network.
2. to reward the more active members of the network by issuing them with more Quids the quicker they use their existing Quids; and to penalise inactive members by removing Quids from their accounts (demurrage).
3. to develop partnerships with private and public sector institutions and companies that can help to deliver and manage large numbers of Quid accounts quickly.

2. Giving away Quids

The idea that you can give away Quids to get the Network flowing is somewhat counter-intuitive (at least to a non-economist). But it turns out that it doesn’t matter if a minority of Quid accounts just use their float and never try to earn any Quids themselves. If they spend their Quids, another member of the Network will have earned them and will go on to spend them, circulating the Quids and creating the multiplier effect referred to earlier.

If everyone ‘use and sit’ like this of course, then there is a problem – similar to the barter problem with winners and losers. The challenge for the Network is to generate quickly an extensive range of Quid-accepting products and services. And the strategy for this is a combination of:

1. starting with a large number of accounts rather than starting small and growing organically
2. creating some ‘no-brainer’ ways of spending Quids (e.g. paying your tax bill with them) to create Quid-confidence
3. prioritising the operational side of the network by partnering with organisations who have infrastructure to manage the Quid accounts (Network-Partners). The Network doesn’t have time to develop these systems from scratch.
4. developing and sharing ‘meta information’ about Quid-usage options via directories and member marketing support

3. Quid Velocity

A key objective of the Network is to keep the Quids circulating quickly. It is this ‘velocity’ of circulation that gives us the multiplier effect that eases the liquidity.

It is therefore vital to reward quick spenders and penalise Quid-sitters.

The exact algorithms for this are important in one way but irrelevant in another.

To an economist the ways in which Quids are added into circulation or withdrawn from inactive accounts determines the ‘Quid-supply’ (analogous to M3 money supply) at any one time. This in turn determines the real value of a Quid and whether there is Quid-inflation or not.

There is no direct link between the Quid and the euro – they can not be cashed in or (officially) converted to normal currency. But there is nevertheless need for stability – Quid-accepters dont want to have to keep repricing their services every week. And if for example taxes were indeed payable in Quid then public sector partners would insist on stability.

So it is important to have confidence that the Quid-M3 control algorithms can prevent Quid-inflation and to be able to demonstrate that to the satisfaction of Network-Partners.

To the Quid-user in the street there is also a confidence issue though there is perhaps more time to develop this confidence. The fact that unused Quids devalue over time anyway is helpful because there is a built-in ‘use it or lose it’ factor irrespective of any underlying Quid inflation. So just as the workings of the internal combustion engine are largely irrelevant to most car drivers, what goes on under the Network bonnet is likely to be of limited interest to the average Quid-user.

But there is a third audience – FEASTA itself. An open question is the extent to which FEASTA needs confidence in this area in order to deliver compelling propositions to the outside world.

4. Network Partners

FEASTA needs Network Partners to deliver liquidity in time to have any impact on the crisis.

This forced marriage however may create tensions that wreck the project.

Many FEASTA members will see the institutions and organisations that are potential Network Partners as being those to blame for causing or at least allowing the crisis. Their greed and introspective arrogance are seen as deep-seated. As Naomi Klein has pointed out capitalists will sell you anything even anti-capitalist T-shirts.

While at an intellectual level FEASTA realises that it has to give away ideas in order for them to succeed there may remain a concern that potential Network Partners may take what is useful from the Liquidity Network project, for as long as it is useful, and that it will ultimately evolve into a quite different animal.

We can rationalise this by saying that we have no choice. At an organisational level this is largely true but FEASTA projects are driven by (mostly) unpaid volunteers. If the contrast between the mindsets of FEASTA (sustainability, co-operation, open-source) and Network Partners (profit, competition, intellectual property) becomes too sharp, volunteer effort may dry up.

This dimension must be borne in mind when developing Network Partner relationships, gravitating to the least-worst contacts/ organisations and accepting that trying to retain a degree of FEASTA-influence in the project (or securing that influence on behalf of the Quid-users) is a valid aim, no matter how difficult that is.

13 February 2009

http://www.voxeu.org/index.php?q=node/3065

This is not an ordinary recession that differs from other recent episodes simply by being somewhat more severe. It differs in kind.

The end of the Cold War brought a decline in military spending and a recession which impinged most heavily on the states, like California, where the military-industrial complex was an important part of the local economy. The nationwide unemployment rate rose from 5.25% in 1989 to 7.5% in 1992. It then fell every year reaching just under 4% in 2000. The “free market” took care of the recession of the early 1990’s. Resources moved from the defence industries, trickling into other uses through innumerable channels. The federal government did not need to take a hand. Beginning in 1993, the federal deficit in fact shrank every year turning into a modest surplus in 1998. That was a very ordinary recession.

If the current situation were at all similar we would expect a recession in residential construction with unemployment among construction workers and mortgage brokers. Naturally, recent boom areas would be hard hit but we would expect resources gradually to trickle into alternative employment. Instead, we are threatened by a veritable disaster.

Balance sheet recessions

What is the difference? It resides in the state of balance sheets. The financial crisis has put much of the banking system on the edge – or beyond — of insolvency. Large segments of the business sector are saddled with much short-term debt that is difficult or impossible to roll over in the current market. After years of near zero saving, American households are heavily indebted.

The holes that have opened up in the balance sheets of the private sector are very large and still growing. A recent estimate by Jan Hatzius and Andrew Tilton of Goldman Sachs totes up capital losses of $2.1 trillion; Nouriel Roubini thinks the total is likely to be $3 trillion. About half of these losses belong to financial institutions which means that more banks are insolvent – or nearly so – than has been publicly recognised so far.

So the private sector as a whole is bent on reducing debt. Businesses will use depreciation charges and sell off inventories to do so. Households are trying once more to save. Less investment and more saving spell declining incomes. The cash flows supporting the servicing of debts are dwindling. This is a destabilising process but one that works relatively slowly. The efforts by financial firms to deleverage are the more dangerous because they can trigger a rapid avalanche of defaults (Leijonhufvud 2009).

Three examples

Richard Koo (2003) coined the term “balance sheet recession” to characterise the endless travail of Japan following the collapse of its real estate and stock market bubbles in 1990. The Japanese government did not act to repair the balance sheets of the private sector following the crash. Instead, it chose a policy of keeping bank rate near zero so as to reduce deposit rates and let the banks earn their way back into solvency. At the same time it supported the real sector by repeated large doses of Keynesian deficit spending. It took a decade and a half for these policies to bring the Japanese economy back to reasonable health.

The US Great Depression saw no consistent policy of deficit spending on adequate scale in the 1930’s. War spending not only brought the economy back to full resource utilisation but also crowded out private consumption to a degree (Barro 2009).¹ The deficits run during the war meant that:

1. At war’s end, the federal government’s balance sheet showed a debt of a size never before seen, but also
2. The balance sheets of the private sector were finally back in good shape.

At the time, a majority of forecasts predicted that the economy would slip back into depression once defence expenditures were terminated and the armed forces demobilised. The forecasts were wrong. This famous postwar “forecasting debacle” demonstrated how simple income-expenditure reasoning, ignoring the state of balance sheets, can lead one completely astray.

The lesson to be drawn from these two cases is that deficit spending will be absorbed into the financial sinkholes in private sector balance sheets and will not become effective until those holes have been filled. During the years that national income fails to respond, tax receipts will be lower so that the national debt is likely to end up larger than if the banking sector’s losses had been “nationalised” at the outset.

The Swedish policy following the 1992 crisis has been often referred to in recent months. Sweden acted quickly and decisively to close insolvent banks, and to quarantine their bad assets into a special fund.² Eventually, all the assets, good and bad, ended up in the private banking sector again. The stockholders in the failed banks lost all their equity while the loss to taxpayers of the bad assets was minimal in the end. The operation was necessary to the recovery but what actually got the economy out of a very sharp and deep recession was the 25-30% devaluation of the krona which produced a long period of strong export-led growth. Needless to say, the US is in no position to emulate this aspect of the Swedish success story.

US predicaments

Strong contractionary forces are at work in the US emanating both from the capital and the income accounts. Stabilisation requires major policy actions on both fronts.

• First, the financial system must be recapitalised so as to remove the relentless pressure to deleverage from the banks.
• Second, a spending stimulus sufficient to reverse the rapidly worsening decline in incomes must be administered.

When the entire private sector is bent on shortening its balance sheet and paying down debt, the public sector’s balance sheet must move in the opposite, offsetting direction. When the entire private sector is striving to save, the government must dis-save. The political obstacles to doing these things on a sufficient scale are formidable.

If banking system losses are of the magnitude estimated by Goldman Sachs or Roubini, the banks need capital injections of at least another $200-300 billion. Even if injections equal to all their losses could be effected, the banks might still want to contract, now that they know how dangerous their leverage of yesteryear was.

The American public understands clearly that the present disaster was fashioned on Wall Street (albeit with some stimulus from Fed policy). Outright bail-outs are a “hard sell” therefore. But the American ideological taboo against “nationalisation” also stands in the way of dealing with the matter in the straightforward way that Sweden did. The present administration, like the last, would like to recapitalise the banks at least partly by attracting private capital. That can hardly be accomplished as long as the value of large chunks of the banks’ assets remains anybody’s guess. Government guarantees against (some part of) losses that may be incurred might solve this problem. But it would be a strangely contrived way out of a political impasse.

Fiscal stimulus will not have much effect as long as the financial system is deleveraging. Even if that problem were to be more or less solved, the government deficit would have to offset both the decline in industry investment and the rise in household saving – a gap that is rising as the recession deepens. Here, too, the public is sceptical and prone to conclude that a program that only slows or stops the decline but fails to “jump start” the economy must have been a waste of tax payers’ money. The most effective composition of such a program is also a problem.

Almost all American states now suffer under self-imposed constitutional balanced budget requirements and are consequently acting as powerful amplifiers of recession with respect to both income and employment. The states will spend everything they get, as will a great many local governments. The point of the stimulus package is to increase spending. Income maintenance for unemployed and other low income households will also be effective.³ Tax cuts will produce considerably less spending per dollar than these other programmes. However, the political prospects seem to portend a less than ideal program mix.

Perils, present and future

If government programs end up not being large enough to turn the recession around, we have to look forward to a deflationary period of indeterminate length. If they do succeed, however, severe inflationary pressures may surface quite quickly.

The US ratio of federal debt to GNP is not particularly high at this time. But it does not take into account the very large off-balance liabilities of entitlement programs. Since the present crisis began, moreover, the Federal Reserve System and other federal agencies have made bail-out, loan and credit guarantee commitments totalling many trillions of dollars with uncertain eventual implications for the consolidated federal balance sheet.

Much will depend on the willingness of the nation’s foreign creditors to continue to accumulate or at least to hold dollars at low rates of interest. Should this willingness falter, inflation will be hard to contain.

There is much to fear beyond fear itself.

Editors’ note: This column is a Lead Commentary on Vox’s Global Crisis Debate where you can find further discussion, and where professional economists are welcome to contribute their own Commentaries on this and other crisis-linked topics.

References

Robert Barro, 2009, “Government Spending is no Free Lunch” (Wall Street Journal, January 22).

Leijonhufvud, 2009 “Two Systemic Problems,” CEPR Policy Insight No. 29, January

Richard C. Koo, 2003, Balance Sheet Recession: Japan’s Struggle with Unchartered Economics and its Global Implications, Singapore: Wiley

Footnotes

1 The crowding out at full employment, Barro thinks, “most macroeconomists would regard … as a fair [test case] for seeing whether a large multiplier ever exists” (italics added). Most macroeconomists will presumably agree that World War II was not a free lunch but are not likely to agree to Barro’s test case inference.

2 There were plenty of bad loans but at that time they did not have the non-transparent “toxicity” that “sliced and diced” CDO’s were to generate in the present crisis.

3 Milton Friedman’s negative income tax proposal seems to have become anathema to conservatives by now. It would work in our present situation.
This article may be reproduced with appropriate attribution. See Copyright (below).

Published: February 10 2009 18:06 | Last updated: February 10 2009 18:06, martin.wolf@ft.com

More columns at www.ft.com/wolf

Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.

What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.

Yet hoping for the best is what one sees in the stimulus programme and – so far as I can judge from Tuesday’s sketchy announcement by Tim Geithner, Treasury secretary – also in the new plans for fixing the banking system. I commented on the former last week. I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years’ economic crisis, has let Congress shape the outcome.

The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. If this “progeny of the troubled asset relief programme” fails, Mr Obama’s credibility will be ruined. Now is the time for action that seems close to certain to resolve the problem; this, however, does not seem to be it.

All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency.

Under the first view, the prices of a defined set of “toxic assets” have been driven below their long-run value and in some cases have become impossible to sell. The solution, many suggest, is for governments to make a market, buy assets or insure banks against losses. This was the rationale for the original Tarp and the “super-SIV (special investment vehicle)” proposed by Henry (Hank) Paulson, the previous Treasury secretary, in 2007.

Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities. The International Monetary Fund argues that potential losses on US-originated credit assets alone are now $2,200bn (€1,700bn, £1,500bn), up from $1,400bn just last October. This is almost identical to the latest estimates from Goldman Sachs. In recent comments to the Financial Times, Nouriel Roubini of RGE Monitor and the Stern School of New York University estimates peak losses on US-generated assets at $3,600bn. Fortunately for the US, half of these losses will fall abroad. But, the rest of the world will strike back: as the world economy implodes, huge losses abroad – on sovereign, housing and corporate debt – will surely fall on US institutions, with dire effects.

Personally, I have little doubt that the second view is correct and, as the world economy deteriorates, will become ever more so. But this is not the heart of the matter. That is whether, in the presence of such uncertainty, it can be right to base policy on hoping for the best. The answer is clear: rational policymakers must assume the worst. If this proved pessimistic, they would end up with an over-capitalised financial system. If the optimistic choice turned out to be wrong, they would have zombie banks and a discredited government. This choice is surely a “no brainer”.

The new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem identified by informed observers. Indeed, any toxic asset purchase or guarantee programme must be an ineffective, inefficient and inequitable way to rescue inadequately capitalised financial institutions: ineffective, because the government must buy vast amounts of doubtful assets at excessive prices or provide over-generous guarantees, to render insolvent banks solvent; inefficient, because big capital injections or conversion of debt into equity are better ways to recapitalise banks; and inequitable, because big subsidies would go to failed institutions and private buyers of bad assets.

Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing. Trying to make up for this mistake by imposing pettifogging conditions on assisted institutions is more likely to compound the error than to reduce it.

Assume that the problem is insolvency and the modest market value of US commercial banks (about $400bn) derives from government support (see charts). Assume, too, that it is impossible to raise large amounts of private capital today. Then there has to be recapitalisation in one of the two ways indicated above. Both have disadvantages: government recapitalisation is a bail-out of creditors and involves temporary state administration; debt-for-equity swaps would damage bond markets, insurance companies and pension funds. But the choice is inescapable.

If Mr Geithner or Lawrence Summers, head of the national economic council, were advising the US as a foreign country, they would point this out, brutally. Dominique Strauss-Kahn, IMF managing director, said the same thing, very gently, in Malaysia last Saturday.

The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once. It is an important, but secondary, question whether the right answer is to create new “good banks”, leaving old bad banks to perish, as my colleague, Willem Buiter, recommends, or new “bad banks”, leaving cleansed old banks to survive. I also am inclined to the former, because the culture of the old banks seems so toxic.

By asking the wrong question, Mr Obama is taking a huge gamble. He should have resolved to cleanse these Augean banking stables. He needs to rethink, if it is not already too late.

Copyright The Financial Times Limited 2009

See graphs etc FT website http://www.ft.com/cms/s/0/9ebea1b8-f794-11dd-81f7-000077b07658.html

Feasta; Foundation for the Economics of Sustainability www.feasta.org

27th January, 2009

The world economy is collapsing at frightening speed. Sales and orders are drying up, not because people’s wants have been satisfied – they are as large as ever – but because many people’s ability to find the money to pay for their wants is shrinking. The root of the problem is that money is being returned to the banks to repay past loans faster than new money is being injected into the global economy by fresh loans being taken out.
Governments have injected billions into their banking systems in the hope that the banks will stop the money supply contracting by lending more but, in the US and Europe at least, the strategy has failed. The rate at which loans are being taken out for everyday purposes such as property purchase and industrial investment is still falling.
This is entirely understandable. In present circumstances, why would the banks lend to the public and why would the public borrow? The fall in demand has left excess capacity in every major sector of the global economy and prices are falling. In the light of this, what projects can be found that would give borrowers a return sufficiently high to compensate them for running the risk necessarily involved in pledging their assets to secure a loan? They could lose their assets and make themselves substantially worse off. And, since their assets are falling in value anyway, would their banks accept them as adequate collateral to safeguard them against losing money themselves? The only people wanting loans these days are likely to be those whose businesses are in such deep trouble that the banks would not want to lend to them anyway.

This situation is called a liquidity trap. No matter how low the base interest rate goes – and in Britain and the US they are approaching zero – almost no-one is prepare to lend or to borrow. As a result, the amount of money in circulation is continuing to contract, cutting demand and making it progressively difficult for existing borrowers to assemble the money they need to service their loans. Whenever they fail, the banks’ bad debts increase and the governments responsible for them feel compelled to come to the rescue by borrowing money themselves and handing it over to make good the losses. Unfortunately, these government injections do nothing to improve the situation. They merely stop things getting worse by preventing the banks collapsing or having to call loans in prematurely to maintain their capital adequacy ratio. (Calling in loans would be very damaging as it would force customers to try to raise money quickly by selling off property in a market in which no-one could borrow the funds to buy it.)

For the government money to do any good it has to find its way into the accounts, or pockets, of people and firms who would spend it. However, it’s surprisingly hard to put it there while maintaining conventional ideas on what constitutes financial discipline. For example, now that it has become clear that ultra-low interest rates are not solving the problem, the US government is trying to get more money into circulation by “quantitative easing”. This involves it buying up government bonds and other securities from individuals and pension funds at attractive prices.

This puts money into the vendors’ bank accounts but it does not mean that theaccountholders will spend it. If the assets they sold were being held for savings purposes, it’s very likely they will continue to save the government payments they receive and will lodge them in a short-term interest-bearing bank accounts until they can think of something better. The banks themselves will be happy to get the money, even though they will not lend much of it out, because it improves the ratio between their customers’ deposits and the amount they have in outstanding loans. (It was Northern Rock’s poordeposits-to-loans ratio that made it very reliant on the wholesale money markets and,when these refused to lend, led to its nationalisation.

Banks with better ratios have lessneed to borrow internationally and are therefore perceived as being safer. This means thatthey get a better rate when borrowing wholesale. It also improves the price of their shares.) So quantitative easing is unlikely to work unless the new money is used to buy bonds issued by manufacturing companies which plan to invest. Such companies are currentlythin on the ground.

There are only two other conventional ways that government money can get to where it’s needed. One is for the government to spend it into use. It could, for example, place contracts for infrastructural development. The second way is for the state just to give the money away, perhaps by making extra payments for a limited time to groups such as pensioners and social welfare recipients who would be fairly sure to spend it quite quickly. The problem with either way is that, if the government proceeded along orthodox lines, it would incur a massive deficit and have to borrow the funds. No government likes doing that because it increases the national debt and means that a higher proportion of its tax income has to be used for servicing its loans, thus restricting its freedom of action for years into future.
A government has therefore to be prepared to adopt unconventional techniques if it wishes to avoid borrowing the money it needs to spend to keep the economy from collapse. One such technique is to create the money using exactly the same method that the Americans are adopted for quantitative easing. The US money is being issued without debt since it would make absolutely no sense for the government simply to borrow the funds to buy its own securities within the country as, if it did, the whole exercise would have no effect on the amount of money in circulation nationally. Governments other than that of the US are currently reluctant to use this technique. Although Britain has been borrowing money in order to try to stimulate demand by cutting taxes, the Chancellor of the Exchequer, Alistair Darling, has said that nothing on
the lines of quantitative easing is planned. “Nobody is talking about printing money,” the
BBCi reported him as saying on January 8th.
The European Central Bank is also unlikely to inject debt-free money into the economies
for which it is responsible until things get much worse. This is because all sixteen countries that use the currency would have to approve the scrapping of the ECB’s statute which prohibits it from funding governments by purchasing their bonds. At the moment, it can only buy already-issued bonds from those holding them. The governments would also have to agree how much new money was to be created and how it was to be divided up amongst them. This is likely to be contentious as, naturally, they would all like to be given “free” money.
The main reason for the European reluctance is that the technique has been badly misused

almost every time it has been tried. This is because, once a government can use the method, it is very much easier for it to create money that way than it is to raise it through taxation. Taxes are politically unpopular. Issuing debt-free money isn’t, at least at first. So governments become lazy and spend too much of their new money around, creating an inflation that erodes their people’s savings. Some inflations caused by government-created money have been dramatic, like the 5,000% a year rate in Argentina in the late 1980s or the 231,000,000% produced by Robert Mugabe in Zimbabwe in July 2008ii. Accordingly, the conventional wisdom is that if governments were to take over at least part of the money creation function from the commercial banks, which is what this technique involves, inflation fears would reduce the value of the currencies concerned in comparison with those created in a conventional way.
Two things can be said about this. One is that, for the immediate future, deflation is a much more serious risk than inflation. Most governments would breathe a sigh of relief if demand became strong enough to start pushing prices up at 3% a year again. Professor Willem Buiter of the LSE, a former member of the Bank of England Monetary Policy Committee, regards refusing to create non-debt money on the basis that it might be inflationary as equivalent to refusing to drink water because one might be drownediii. The second point is that there is no essential or legal or political requirement for politicians to be in charge of governmental money creation. Just as the Bank of England’s monetary policy committee was given sole responsibility for setting the interest rate, a truly independent body working to a clear and legally-enforceable brief could be set up to control the issue of non-debt money.

It is important to recognise that debt-based and non-debt-based monies are very different
animals and have different roles to play. Non-debt money is intended purely as a medium of exchange. It is being created out of nothing in the US purely to get trading going again. It is not intended as a store of value, a currency in which people keep their savings. If debt-based and non-debt-based currencies are given different names and kept apart – something the US is not doing – then the public’s concerns about inflation should be minimised. There is no legal or political reason to have only one type of money in circulation at a time.
Having one currency for trading and another for saving would enable the economy to adjust more readily to changing circumstances. For example, if energy prices rose considerably in future, the prices of goods would have to change to reflect the cost of the energy involved in their production. These changes would be by different amounts, and the only way that the different rises could be accommodated easily is in an inflationary environment. A trading currency that was not relied on to keep its value because no-one saved in it and which could be issued in a controlled amount to allow a planned inflation would allow the adjustment to proceed quickly and smoothly.
Non-debt money has another massive advantage over the debt-based kind – it does not disappear from circulation when loans are repaid. Nor does it require people to continue
to get into debt for the economy to remain healthy. This characteristic is likely to be very important in future since people are bound to be reluctant to borrow on scale required to
keep an adequate amount of trading going on if the economy begins to shrink as the use of
fossil energy declines, whether the decline in energy use is as a result of actions to limit
climate change or because of resource depletion. Debt-based money worked tolerably well
in an expanding world. It is totally unsuited to providing the means of exchange in an
economically-contracting one.
So Feasta believes that the new method of money creation required by the liquidity crisis is one that is needed anyway to cope with the peak in global oil production and climate change. However, even if one rejects this view and believes that the world economy will recover and resume its path of expansion, the temporary use of non-debt money can be seen as a pragmatic response to a temporary emergency. Willem Buiter certainly sees the use of non-debt money in this light and talks of its being withdrawn from circulation when the crisis has passed. Whoever is right, once the liquidity emergency is over, the situation can be reassessed in the light of experience. The non-debt money can either be withdrawn or, if it seems that it would be useful on a continuing basis, adopted as a permanent monetary policy tool. If that happened, an arms-length body should be set up to run the currency and the rules governing its creation and distribution established.

The conclusions for Ireland
It looks as though the number of euros in circulation in Ireland will continue to contract because the government is unwilling – and possibly unable – to borrow enough itself to make up for the fall-off in private-sector borrowing. If that’s correct, the growing shortage of money will lead to widespread hardship and increase the difficulty that firms and families experience in paying their taxes and servicing their loans. The banks’ bad debts will grow and the government, unable to meet its guarantees and its other spending obligations, will be forced to default. This outcome seems unavoidable unless some form of non-debt money is introduced to replace the missing euros and free up the remaining ones for meeting debts and external obligations.  Such a currency could be issued like this:

1. A new unit, the quid, would be announced as an emergency currency to be usedexclusively for trading purposes. It would not have any fixed exchange rate with the euro although, at least initially, the intention would be to keep it scarce enough for people to change it on a one-for-one basis.
2. The commercial banks would be instructed to open quid accounts for each of their customers. Individuals with current accounts in more than one bank would be asked to nominate the bank at which they wished to hold their quid account.
3. A quantity of quid would be deposited in each individual’s account to allow him or her to buy goods and services. They would transfer the quid they received to each other and to companies using their mobile phones for small amounts and from their computers or through their banks for larger sums. Quid would only exist electronically. This is essential so that quids can fully controlled and easily be removed from circulation.
4. Firms would also have quid accounts. It is not yet clear whether they too should be given an initial float or be expected to earn their float by supplying the public. It would be up to each company to tell prospective customers which goods and services they were prepared to supply for payment entirely in quid and, if not, what the price was in a combination of euros and quid. Equally, it would be up to employers and employees to negotiate how what proportion of wages could be paid in quid.
5. The government would announce that the tax due on quid transactions and earnings could be paid in quid. It, like everyone else, would have to work out a way of handling the two units.
6. Quid accounts would not be confidential; the issuing body would have access to them, regardless of the bank which provided them. so that it could manage the system. The units in each account would not belong to the accountholder. They would be there purely as a measure of value. Anyone wishing to save should use the euro instead.
7. As the volume of business being done in quid increased, the issuing body would watch the velocity of circulation closely and, once it had crossed a previously announced threshold, it would give more quid into circulation by adding them to the accounts of those who had the highest velocity themselves. Anyone whose velocity fell below a certain level would have a percentage of their quid removed.

The aim would be the keep the supply of quid tight to maintain its value. If the euro economy began to pick up and less trading in quid was done, units would be removed from the slowest accounts. Presented as an emergency measure to avoid a default, this system would attract muchless criticism from the European Commission, the ECB and the other member states than a decision to leave the eurozone and revert to a national currency. The government would point out to its partners that if the global economy recovered and euro flows increased, the use of the quid would naturally decline and that this would mean that they were automatically be withdrawn from circulation. Eventually the system would wither away entirely because companies would not want to bother with keeping their books in two currencies and would stop accepting quid. Privately of course, the government might regard the quid as long-term hedge against a permanently depressed eurozone in which the euro continued to be scarce because it was issued as a debt.
Besides being more acceptable than leaving the eurozone to Brussels, the quid system would be very popular with the public. They would credit the government with responding well to the crisis and with giving them something free. After months of what has been seen as the bailing out of the better-off, the state would be seen as doing something for ordinary people. Anyone with euro debts would immediately find that their problems were eased because, now that they had the quid for some of their expenditure, they could use their euros to keep up payments to their bank. This would immediately cut the banks’ bad debts and thus the risk of the state’s guarantees being called.
References

i http://news.bbc.co.uk/1/hi/uk_politics/7817623.stm
ii http://www.guardian.co.uk/world/2008/oct/09/zimbabwe
iii BBC World Service “Analysis” Thursday, 22 January 2009, 00:41 GMT

November 2008

The essential message of this paper is that unless urgent action is taken, the Irish banks will suffer massive losses in the next year or two. Because these losses are now the responsibility of the state as a result of the guarantees the banks have been given, Ireland may have to default on its obligations.

The amount of money in circulation is shrinking rapidly. In August 2007, Irish residents had €32,857 million in their current accounts. This August they had €29,601 million, a 10% fall; , a 12.6% decline. In July alone.  If the money supply continues to contract it won’t be enough for the present level of trade to continue and national income will fall even more. As the money supply contracts, borrowers will have increasing difficulty getting the money together to service their loans. As every billion the banks lose means ten billion less they can lend, a frightening spiral of bad debts leading more bad debts would develop.

In order to stop the spiral, the government would have to make good the banks’ losses by injecting capital.  If half of the developers’ loans have to be written off over the next two years, the state would have to borrow €45 billion to inject into the banks. This would double the national debt.  Some commentators put the banks’ likely losses at less than this figure – analysts at JP Morgan estimate that €7.6 billion will be needed while NCB Stockbrokers say €14.1 billion – but €45 billion is not unrealistic, particularly as other types of borrowing will turn sour too.

Injecting €45 billion into the banks to make good their losses would be to pour it down the drain. It would be far better for it to use the money now to prevent as many as possible of the bad debts being incurred rather than throwing it away in a year’s time to honour the guarantees.

To avoid having its guarantees called, the State must get more money into people’s bank accounts to spend, so that their spending gives at least some of the businesses which have borrowed the means to service their loans.  Any new loans should be invested only in ways which bring down Ireland’s demand for imports and thus free up enough money to allow the foreign portion of the borrowed money to be serviced and repaid.

The government should initiate this money-creation-by-lending cycle by the stimulation of projects with the priority of either reducing energy use or producing it from renewable resources.

For the economy to return to the state it was a year ago requires an increase in bank borrowing of around €50 billion. The government could stimulate that extra borrowing if it borrowed €5bn itself (on top of whatever it is going to need to borrow anyway) and spent it wisely. This is less than the amount it would have to inject into the banks if they default.  It should aim to stimulate borrowing at three levels, domestic, community and  industrial.

Domestic Scale:
€20 million for the Home Energy Saving Scheme in 2009 and the  €5 million for the Warmer Homes Scheme is inadequate as is likely, the new scheme for energy savings in local authority housing stock through the retrofitting of older heating systems with new green energies.  Even the CIF scheme of 15% grants to homeowners costing 6 billion over six years would be inadequate, although well worth doing.

The use electricity billing to facilitate financing should be reconsidered with existing energy suppliers or with new Energy Service Companies (ESCos). Locally produced materials and products should be prioritized in the new grant schemes.

Management companies of new apartments and housing estates are particularly well suited to initiate and run retrofit and CHP schemes as described below and should be offered inducements and capacity building to do so.

Community Scale:
New schemes for distributed energy combined heat and power energy using local organic waste and biomass offer great potential.  A guaranteed high level tariff for distributed energy generation-circa 17cent per kw- worked in Germany and can work here.  In addition the ESB should borrow whatever it takes to upfront investment in the distributed grid and cease its requirement that first movers pay for grid up-grades.

Pilot schemes should be grant aided to establish best practice and identify unnecessary regulatory impediments in community scale AD of wet organic waste and low temperature pyrolysis of biomass.

Capital Allowances for non grant aided element of distributed energy generation should be given against income from any area (subject to a cap) to enable rapid and wide scale rollout.  Pension fund investment should be facilitated.

Farmers should be incentivised to maximize CO2 sequestration in their soils such as planting for short rotation biomass to provide feedstock for distributed energy generation, co2 sequestration and organic fertilizer production.

The cost of the above measures is difficult to estimate at this stage but 2 billion public investment matched by 10 billion private sector finance will produce at least 120MW per annum of dependable electricity as well as heat energy, fertilizer and co2 credits co-products.  A large part of this investment will go to Irish construction firms especially of steps were taken to attract the more sophisticated component manufacturers to relocate here- see next.

Industrial Scale:
Massive investment can be made in interconnecting and strengthening the grid so that our abundant wind and wave and tidal energy potential can be realised.
The transmission grid will need to be strengthened before more wind energy can be allowed on to the network. Commit €4 billion to enable the grid to carry 60% more power under the Grid 25 plan by Eirgrid.

The Hibernian Ring;  The grid needs to be strengthened between the west of the country, where many of the windfarms will be, and the east, where the power will either be consumed or be exported by the interconnectors by a high voltage direct current (HVDC) system.

The government should establish a cluster of energy product manufacturing companies here in the way that it has done with pharmaceuticals and computing. A combination of research and capital grants could be effective. The IDA’s shopping list could include firms making:

•    Smart meters. The Irish market is worth €600 million and one of the leading companies, Landis & Gyr is run by Cameron O’Reilly, Sir Antony’s son. It is based in Switzerland.
•    Flow batteries: These enable large quantities of electricity to be stored. The leading firm is in Vancouver.
•    HVDC cable: The market leader is ABB, another Swiss company. This type of cable obviously needs to be made in a seaside location so that it can be loaded straight on to cable laying vessels.
•    Wave power devices: The snake-like Pelamis device is currently the leading technolpgy. The first commercial installation is in Portugal because the Portuguese government wants it to be made there.
•    Floating offshore platforms for wind turbines: The strongest winds are off the west coast but the water there is often too deep for the turbine tower to be mounted on the sea bed. Floating platforms are being developed. Ireland should lead this technology.

Investment in infrastruce and technolgy for transport includes:
•    Light trams: Parry People Movers might be induced to move from England. Its technology could be combined with that used in the Swiss-developed gyrobus so that the trams use electricity at each stop to store enough energy in their flywheels to carry them on to the next..
•    Electric cars: A consensus seems to have developed that we’ll be driving electric cars in future and several policymakers, including one from the ESB, have visited Israel and Denmark to follow developments there. The Electric Transport Programme will be announced by Minister for Energy Eamon Ryan and Minister for Transport Noel Dempsey shortly.

Seven points can be made about the borrowing strategy Feasta proposes;-

1. Any further fall in the money supply is likely to destroy the business confidence required for people to take on new loans. Action therefore needs to be taken urgently, particularly as there is only a limited amount of time before lenders begin to question the value of the state guarantee
2. The prices of houses and other properties will still fall but a deep overshoot before they stabilise may be avoided. No attempt should be made to prevent the fall happening because property prices are out of line with incomes and forcing people to tie up extra money in unproductive assets would mean that they had less available for energy investment.
3. Because of the property price fall, some of the outstanding property debt will still go bad. However, if the banks can make money in other areas because of the new activity, the losses which the government has to bear will be reduced.
4. The energy investments made will put Ireland in a much better situation in relation to its climate obligations and give it increased energy security. They will also cut the costs of fuel imports.
5. The country will get a better balance between state and private borrowing. The state was borrowing indirectly during the property boom, collecting perhaps a third of the amount the private sector borrowed. It would have been better had it borrowed itself because the cost of servicing the loans would have been lower and no capital repayments would have had to be made. If the state now borrows itself in a way that enables private lending to fall as a proportion of total debt, the overall debt burden will be reduced.
6. The government should be far more concerned about getting enough money borrowed than ensuring that the borrowed money is well spent. It should weigh the losses that will result from rushed projects against the losses it will have to make good if the banking system collapses.
7. If the strategy fails and the state cannot prevent a banking system collapse which forces it to default itself, the financial consequences would be no worse than if the strategy had not been tried. The country’s economy and infrastructure would, however, be in better shape.

Controlling Emisisons and Energy Prices: Cap and Share
Even with generous grants, none of these projects – the domestic ones included – will go ahead unless investors are convinced that energy costs will be high enough in future to make them worthwhile. The trouble is, now that the world economy is entering a depression, oil prices are falling, This is weakening the immediate incentive to save energy and to develop renewable sources.

The solution to this, and the foundation for the success of the strategies outlined here, is to introduce Cap & Shareand use it to restrict the use of fossil fuels to such an extent that their price, in Ireland at least, is high whatever happens on world markets.  This is because C&S would guarantee that the carbon price, and thus the price of energy, would not fall below a specific figure for each year.  Essentially this provides a feed-in tariff that rises each year for all types of renewable energy production and for energy saving. Another way of looking at C&S is that it imposes a declining annual quota on energy imports so that domestic energy production can develop to fill the gap. This would give borrowers/investors the security they need.  C&S is an essential part of any plan for a rapid transition to a low-carbon economy.

Protect Commons Assets
On no account should the government consider the sale of state assets, to meet its debt obligations.  In particular, the major land assets held by Coillte and Bord Na Mona should be retained in the national energy and food security interest.  In the first instance, the price obtainable at this time or in the near future will be heavily discounted from recent past, secondly it will be worth considerably more post Kyoto as carbon accounting for land use and soil sequestration is adopted.  Oil, gas and other potential fossil energy assets should be held in trust for future generations or used to build a new renewable infrastructure.  Non-material commons such as the broadcast spectrum should be leased to the private sector in competitive auction for the highest price subject to a reserve to ensure community communication rights.

Debt to Asset: Limited Liability Partnerships
Augmenting Policies will be necessary such as the restructuring the existing debt and future financing of property and infrastructure development for the future.  No interference with the altogether necessary fall in property values should happen until overshoot levels are reached.  There is no avoidance of a painful write down of property asset values, especially development land.  What should be avoided if possible is excessive calls on developer security of other income producing property and the resulting fire sales that would further accelerate write-down of assets.

The budget proposals for local authority lending to first time buyers are premature and at the very least should have been accompanied by a requirement for a high sustainability rating – i.e. high DEAP energy rating and good access to transport infrastructure.

The banks, developers and State should investigate restructuring conventional financing of investor equity capital, bank loans and State supports into Limited Liability Partnerships LLPs.  In effect this mechanism converts developers, looking for short term profits from property sales, into long term partners with the banks, local authorities, pension funds etc.  Tenants also become part of the LLP and can move to ownership in a gradual process as their income allows.  LLPs also suit pension funds as the return, although modest, is protected against inflation losses.

LLPS are very attractive to Islamic Sovereign Wealth funds investors as they do not include an interest element.  The PPP model for major infrastructure investment that seeks to move risk to the private sector is demonstrably fragile in the current climate even where banks were still willing to lend or insurers underwrite.  Instead the LLP model that seeks to manage and share risk should be considered.

The introduction of a Parallel Currency : Liquidity Network
The money supply in Ireland is contracting rapidly – it fell by 11.4% in the year ending September 30 – and the only safe assumption is that an emergency money system will be needed to prevent hardship and maintain a reasonable level of economic activity.  Emergency monies were used in Argentina during the peso crisis in 2001-2 and prevented a great deal of social unrest and distress. At one stage, they provided over 20% of the money in circulation.

If the money supply continues to fall, it will be because people are either unwilling to borrow because of uncertain market conditions or that, despite the encouragement of energy-related investment, they cannot find a potentially profitable project which appeals to them sufficiently to risk borrowing for it. In theory, interest rates should be reduced to overcome this reluctance to borrow until sufficient investment is taking place but Ireland no longer has control over its interest rates and, in any case, they cannot be reduced below zero to bring forth adequate borrowing.  This situation is known as a liquidity trap and the only way to escape from one is for the additional money to be put into circulation on a non-debt basis.

Both Milton Friedman and Ben Bernanke have spoken, facetiously, of scattering it from a helicopter.  In fact, it can it can either be spent or given into circulation.  In Argentina, both methods were used.

Feasta is developing plans for an emergency currency which would be given into circulation according to the amount of trading an individual or company was doing and thus the amount of liquidity they required.  The money, which would be transferred from one account to another via the web or a mobile phone text message, would be issued by a Currency Trust mandated under its Trust Deed to operate in the interests of the money’s users.

The Trust would track the velocity of circulation of the monetary units it issued – which would not be euros. If the velocity was rising, it would indicate that more money was needed in the system and this would be given to those accounts which were most under stress in proportion to their average balance for the month.  If it was falling, units would be removed from the accounts with the lowest velocity in proportion to the average amount of units held.  It should be noted that this “money” is designed to be a pure means-of-exchange currency and its exchange rate with the euro will not be guaranteed.

The operation of such a currency could greatly ease the banks’ situation because, as it would ensure that an adequate supply of a means of exchange was available for day-to-day dealings, euros would  be more readily available for the repayment of debts.  This would reduce the banks’ losses and, consequently, the amount the state had to find to cover them.

Ensuring Housing Affordability & Funding Infrastructure : Land Value Taxes
Land value should be measured before and estimates made of the upswing of value after investment as part of cost benefit analysis and impact assessment.  Nearby landowners not directly involved in the development but created by it should be required to pay back the unearned upswing in value in the form of annual land value taxes (LVT).  This measure will go a long way to recouping investment by the State in the years to come.  It should also form the central criteria against which projects are assessed.  Most important, it would ensure that a property bubble and resultant bust would never reoccur.

Current fiscal supports for first time buyers, affordable and social housing and rental supplements require a fundamental review.  These siloed programmes hinder transparencies and much needed efficiencies.  A single housing benefit that could be used for any tenure and in any local authority should replace them.  All housing sectors should continue to design and build housing so as to provide genuine competition, flexibility and choice to the consumer.

The public sector must take a more proactive role in sustainable settlement development particularly in rural areas where, against trend elsewhere, an increase in one off house building is very likely.  Development agencies should be resourced to open up land for self-build in existing villages and in new eco villages pioneering distributed energy, waste recycling and carbon negative construction as described in the earlier sections.

An annual land value tax (LVT) should be announced and when a proper cadastre and land value assessment made, introduced for all land in phases as conditions allow. The LVt should replace transactional taxes that hinder investment i.e. Rates, Stamp duties and Development Levies.  The LVT could provide the greater part of local authority funding for infrastructure development and management to encourage responsible planning and development control.

Citizens Income
As receipts rise, along with receipts from Cap & Share, it can form the basis of a citizens income.  A citizens income is the least the public should expect for their bailout of the wealthy financial sector, the failure by the government of their regulatory function and their pandering to landowner and property developers lobby groups.