It’s all about restoring our confidence and self-belief
WHEN I READ media coverage on the current state of the Irish economy, I wonder whether most of the younger economists are more interested in building their own profiles than engaging in any constructive analysis. Meanwhile, the Sunday Independent takes cheap shots at the Taoiseach and the Minister for Finance and publishes highly inflammatory “The End Is Nigh” banner headlines each week.
Many of these articles are written by political writers, not economists. There is no constructive or reasoned suggestion from these commentators on how we can trade our way out of where we are.
We are fortunate that we have had very able ministers for finance in succession (Quinn, McCreevy, Cowen and Lenihan) and they are to be commended for not caving in to media pressure, particularly where vested interests are at work. (The issue of State funding for Waterford Wedgwood comes to mind).
Yes there are problems, but talking down every part of the economy every day will not do anything for us. The creation of a panic environment for homeowners, investors (small and large) and the public at large only increases our problems and prompts people into making wrong decisions.
We are in a classic Anglo-Saxon credit bubble and we have become closer to New York in thinking than to Berlin. The French and Germans are not as leveraged compared to the UK, Ireland and the US, hence, they are not suffering to the same extent. There is no big bang idea to solve the downturn in the economy. It is all about holding the head, doing the right things and instilling confidence in consumers and the economy at large.
Personal or corporate investment is as much about confidence as it is about capital. In this downturn we need leadership and there is no better way to show it than by example. If Ireland was a company, the CEO would be gathering all their key managers together to rework the plan to boost revenues and reduce costs.
I believe that Brian Cowen has the ability and the team to inspire this confidence but they must be seen to take charge and be decisive:
• Every Cabinet Minister should be back at his desk on Monday, September 1st;
• All Cabinet Ministers should be involved in selling Ireland, be it in trade, agriculture, tourism and so on;
• There should be a 12-month pay freeze for the Cabinet and senior civil servants to show example;
• Agreement to reduce public expenditure by 5 per cent.
In the part of our economy devoted to property, the question is, are we in denial? Many of the people who have bought homes in the last two years or more are under water on their investment. The value of these homes won’t stabilise and start to rise until first-time buyers get the confidence to start to buy houses again.
People who have invested money in property funds (Irish and overseas) can’t cash in their units. This will be compounded later in the year when fund managers will have no option but to sell assets to create liquidity, so that they have money available to pay the redemptions.
All of us are looking at our property investments and hiding behind the historical price level we paid for these assets, but, when comparable properties are sold, then we will know the value impairment that is there. Banks in particular will be the first to realise this. The big five lenders have about €100 billion lent on commercial property. You can do the sums and percentages and see the pluses and minuses.
The key here is to try and ride it out, ie keep mortgages current. There is a strong moral code in Ireland of paying your debts, whereas in the US, homeowners and commercial property owners have been throwing the keys in like at a swingers’ party. The number of new houses being completed this year is drastically down, ie 40,000-45,000 from 77,000, and it is very likely that because of this there could be a shortage of houses within a few years.