The image below is taken from Econompic which is a site specialising in visualization of data.

If you look at the different time periods you can see a shift in where the debt was focusing and that tells you the secular trend at the time.

79-89: This was primarily Federal and business debt, on the Federal side it was due to huge tax cuts (compliments of Art Laffer) and on the business side it was due to the dawn of leveraged buyouts.

89-99: During this time we saw the seeds of a housing bubble begin while every other sector deleveraged.

99-07: The big yellow line on the left is the capital flow showing the housing bubble, mortgages grew to 75% of US GDP, this kept consumer debt in check during that time (the home was used to finance credit instead). Businesses levered up and on the Federal level deleveraging continued

07-09: Everything was wiped out with the exception of the Federal side who were again levering up, this is evidence of a counter cyclical approach in action but perhaps it is also evidence of a new and different bubble forming?

However, it may ultimately prove to be the ‘least worst’ solution, up until now the EMU nations and the ECB were all in agreement that Europe would solve its own problems, Sarkozy has been particularly vocal on this, but now the Germans seem to be pulling away from the idea of a bailout. Why? One one hand there are elements of the German leadership that feel that the IMF are the only ones with the ‘instruments’ that can fix the problems in Greece.

Greece has issues deeper than the surface problems visible in demonstrations and minor riots, their statistics are not trusted internationally, something which they have gone to great pains to reverse.

When it comes to German feelings on the matter, their conservative national paradigm doesn’t sit well with what they view as Mediterranean profligacy, if it was ever a case that German workers had to give up certain benefits to allow the Greeks to have same, the distaste of the transfer would be more destructive than the problem it solved.

While IMF involvement in Greece may have negative implications for the eurozone, it would definitely be an effective tool for bringing in draconian austerity which the current government there don’t seem to have a handle on, every time good news comes out about Greece it lasts all of two days then it is back into the trenches. Greece is also a member of the IMF which helps, because (for instance) my home state of California is not and therefore the comparisons of EU Country vs California are not necessarily based on the same parameters.

However, we remain optimistic that the Euro will survive, every major currency faced problems in its development, the US Dollar certainly faced its own tests in the early part of the 20th Century, then it was taken over by the Fed, in the 30’s the revaluation to gold was a major development and then there was the final un-pegging in the 70’s, yet the buck survived, I think the Euro will show similar resilience.

This article features our feelings on the matter, we believe that some of the banking statistics being thrown around make fore ‘good copy’ (good PR) and very little else, as we are not seeing applications turn from approvals in principle into closed loans, and in many cases, approvals are coming in far below what the applicant is actually looking for.

One element of this is natural, after a credit fuelled boom you often have a collapsing demand, credit after all, is like reaching into the future to realise income from that point and transporting it into the hear and now to spend, so when many people use credit and it goes toward a speculative bubble, a normal result is a fear of credit and an avoidance of borrowing as well as a reduction in the appetite in general for credit.

What is not normal however, is the refusal of banks to play their part in the intermediation process, whereby they take money from savers and give it to others in the form of loans, and that is symptomatic of the credit crisis, banks would rather sit on liabilities than make any effort toward the creation of new assets.

This kind of thing would never happen in a traded market because it would be closed down by practising traders, however, in the retail finance channel it can exist due to consumer inertia and the low level of profit that can be exercised in this manner.

It is however an interesting take on the market and the kind of unusual angle we love to see coming to press, (we should also point out that our firm got a mention in the process!).

The situation that currently exists is one whereby a person can borrow (for instance from AIB on a 2yr fixed rate mortgage) at a price which is below the return on another asset, the thing that wasn’t mentioned in the article was the big win available on a person who borrowed to finance An Post savings bonds.

An Post savings bonds offer a 10% return after 3 years, this is tax free and not subject to dirt, a comparable rate on the bank deposit market would need to be about 4.2% or more.

The state really shouldn’t be paying this kind of money given that risk normally (used to) have a relationship with return, risk free means low to no return, but in the case of An Post Savings Bonds it means above par returns!

The new Financial Regulator Matthew Elderfield made his first public appearance since arriving nearly three months ago, and he said “A robust recapitalisation exercise will ensure that Ireland’s banks start this process in a stronger position and with a better funding outlook”. He is alluding to the thing that many people are forgetting, that when a bank has as high loan to deposit ratio they naturally hoard credit during times of widespread credit deterioration in order to ensure they have sufficient capital to face the impairments.

NAMA won’t ‘force lending out’, this is the aspect of fiscal policy not being able to ‘push on a string’, fiscal and monetary policy can pull a string and reign credit in but the force doesn’t work in the opposite direction, what it will do however, is get the banks to a point where they don’t fear impairment will undo their prospects in asset acquisition via loans. A bank is a little different you see, their assets are loans, but those loans can also act like a liability, whereas their deposits are liabilities, but these provide capital and therefore act kind of like an asset, banks are somewhat unique in this respect.

When a bank is in the region of 120% they are operating at very normal levels, NAMA will allow this to happen, and the recapitalisation will enforce this further, meaning the banks will be in a position to start lending again. It won’t force it, but any bank is generally keen to engage in the business they are destined for which is lending, there is no reason for banks to remain frozen once the cogs are in a position to start turning.

The one by-product of this will be repricing risk, this means (for you and me) paying more for financial services, in the UK after their property crash the margins on lending rose sharply, so bank will start to lend but they will do so charging handsomely for the privilege. It is a natural progression from a credit fuelled bubble, decompression of competitive forces won’t be good for the consumer, or for growth, but it will be good for banks, and necessary too, if banks had kept their margins the current dilemma would be better met by operational profit, and the bubble would have had some credit restraint (as stress testing based off higher mortgage rates would reduce accessibility to credit). It wouldn’t have saved us but it would be a different landscape.

Banks are lending, they are just doing so in a cherry-picking fashion, and they are looking to reduce certain channels (primarily intermediaries) first after which direct channels (branches) will start to get shut down, all said, there will probably be 30% fewer bank employees in the institutions of the future.

This is an interesting debate on Public Healthcare v.s. Private v.s. Co-Operative healthcare, the most pressing point is that medical costs have outstripped inflation in developed countries, oddly, average cost has increased with greater output, and marginal cost is higher than average cost - which go against the normal rules of economics. The issue therefore must be something else surely?

The fact that this is so one-sided is evidence that there is an anti-landlord undercurrent which is highly prevalent in Ireland goes so far as to be expressed in legislation. Contrary to popular belief, a landlord has very little ability to turf out tenants or behave in a manner which is one sided.

If you don’t register your tenancy you cannot offset mortgage interest against rental income, the laws on offsetting expenses (mortgage interest) for landlords have changed, and now you can only offset 75% of the interest against rental income, if you had this reduced to zero for not registering with the PRTB you could be sitting on a large tax liability.

The PRTB is not what we would call a ‘fair’ system, there are rights heavily in favour of tenants which don’t give ‘fairness’ or ‘a level playing field’ or even ‘relevant recourse’ rather the law has gone to the extreme of providing a brand of protectionism, whereby a person who invests their capital to provide shelter at a cost can be manipulated by the system with little or no recourse to the individual receiving the benefit of the asset. In other words, a landlord can spend an unlimited amount of money on a property, in its upkeep etc. and a tenant can decide not to meet their end of the contract (pay rent on time) and then there are a plethora of mechanisms that come to their defence be they in the right or wrong, and in the end they usually walk away scot-free. So is it any surprise that the by-product of this is landlords putting more punitive measures into lease contracts? Hardly….