what I’m talking about is a recognition of the devaluation of Irish property that has taken place, and will continue to take place, until we get back to an income-based house price and mortgage ratio of around two and a half to four times the national average industrial wage. What drove prices to snap from this ratio was the credit boom of the past fifteen years in Ireland. The credit boom is over, and is not coming back for a long time, especially given the moves at an international level to bring back regulation. Any move to flush out the bad debts in the system - something that has to happen otherwise the Irish banking system is finished - must include a recognition that property is overvalued. A re-evaluation of property would, in turn, lead to a re-evaluation of mortgages that were based on the previous, overvalued, prices. What we’re talking about is nothing short of a complete rebooting of the Irish banking system, one that involves writing off billions in “assets” as the banks are already doing. Now, it could take up to ten years to get all of this back on track, but until you have an asset base based on reality, the system’s going nowhere but down.

So, I’m not talking about the price of mortgages per se, I’m talking about having a national mortgage bill based on the actual price of housing, which traditionally hovered between two and a half times and four times the average industrial wage. It’s the move to that well-tested link that would lead to a reduction in mortgage repayments for a lot of people. The micro-management of such a system is the reason for the agency, but the principle is such as stated.

So, I am not talking about smashing the capitalist banking system, I’m not talking about having bankers flipping burgers. What I’m talking about is the opposite - I’m talking about a way for banks to rebuild their asset base. A banking system that has a mortgage asset base of €60-80 billion is in a much healthier state than one with a fantasy €132 billion mortgage asset base. I mean, the situation today is that your house is worth half a million unless you try to sell it, as one estate agent told the Irish Times last week. Any reorganization of the Irish banking system worth its salt has to take that into account, because current prices were set by easy credit, not demand, not bricks and mortar, not location, but easy credit.

furthermore, a society where people are paying a real price for their house, instead of a fantasy price, a hangover from the pre-crash days, is a lot more equitable than one where people are struggling to make repayments on overvalued houses, or where the Department of Health and the Department of Social Welfare are making mortgage repayments for unemployed people which run into millions of euros each month, but repayments based on overvalued houses.

No worries, though, have a good weekend!

Well I myself ain’t goin’ nowhere, so the market value for me is meaningless. But I have a big debt to pay off. When I say asset, I am thinking about how the bank sees my house, not how I see it. And for the purposes of the bank, the asset’s value is based on a) the revenue to be earned from interest repayments b) the potential for sale after repossession if the repayments fall through. b) has to reflect market value in some respect, or we are talking pie in the sky. So I don’t see how assets such as these can form part of a viable asset base unless they reflect some form of market value. And it’s hard to see how they can be described as assets at all if a) in fact results in a net loss for the lending institution.

I have no problem with your argument that the problem is structural. But the idea of having a viable asset base seems to me still an element of the existing structure. And what I don’t quite understand, still, is what you mean by reducing the cost of a mortgage: are you basing this on the cost of a mortgage in terms of the principal outstanding, or the cost of a mortgage in terms of servicing the debt, or some sort of synthesis of both? If you simply say ‘you can’t take britches off a highlander’, and force through a cut in the debt burden on these terms alone, you’re probably talking about a banking collapse. I don’t see how that’s in anyone’s interest, much as I would be delighted to see capitalism smashed and banking executives flipping burgers. Where will the cash come from, that’s what I want to know. Fine to say that shareholders and executives should take the hit: problem is, shareholders don’t own that much these days, and executive pockets don’t seem deep enough to fund what you appear to be advocating.

Hugh, house prices in Ireland were pushed up to their present bizzare levels through bank lending policies, government tax breaks, and unfettered land speculation. That’s the problem. That’s why we have a bubble. you can’t now talk about holding on to the price of your house in terms of market price, ´cos the “market” didn’t set the price - in other words, only a proportion (around 40-60%) of the “market value” of your house is linked to the bricks and mortar, location, demand, etc. The main energy behind the bubble, i.e. cheap credit, has now collapsed, and there is, I believe, a bit of a suspension of reality going on in Ireland at the moment, as the country seems to be thinking of house prices in terms of the hidden hand marketology, that there will still be a “correction” when in fact this problem wasn’t caused by exchange of values, but through the availability of fantasy money.

Overall, though, I mean, correction implies that the problem is not structural. But the problem is structural, so any solution that links itself to maintaining the structure, well, it isn’t going to work. We need to completely reconfigure our banking system, and the place to start is with a viable asset base. what I’m proposing is part of that process, but it has to go hand-in-hand with the smashing of housing speculation as an economic template for an island economy.

The entire world is struggling to find value that’s linked to real products, not just fantasy credit. In the past, bad assets did indeed form value, but look where that got us? The world has changed, and for the foreseeable future, value has to be viable. And a property bubble that was created in the manner the Irish one was created, aint going to “correct” itself, as the problem is structural. Irish banks, even merged Irish banks, aren’t going to be able to borrow on the international markets until they prove to the international markets that their value is indeed viable. That aint a correction, that’s structural.

I think Conor mentioned that the banks are writing off debts as we speak:

Just in case anyone thinks that what I’m proposing is fantasy, it should be pointed out that Irish banks are doing EXACTLY the same thing for their property developer customers as we speak - but not, it needs to be pointed out, for their mortgage customers.

This is from Wednesday’s Irish Independent:

Goodbody Stockbrokers estimates AIB, Bank of Ireland and Anglo Irish Bank will write off €19bn of bad debts — mainly to residential property developers — within the next four years. While most of these will be absorbed by the banks’ profits, the broker noted that the three lenders currently have core equity — a key measure of capital reserves — of €20.5bn on their balance sheets.

One aspect of any recapitalization is a realistic assessment of a bank’s debt. There is a regulatory mechanism (I think its regulatory) in banking called Marked to Market, which I’m sure you know all about, but which means that the assets of a bank are only worth what they would get in today’s market, and not the price of the property when the bank first offered the loan. So their assets are being devalued daily anyway.

The softening up news that Irish banks might consolidate is a clear attempt (I think) to provide an adequate capital base to make sure that at least a couple of banks can continue to exist and proves that there is little prospect of an international lending institution offering them money on the basis of the assets they have. The assets of the other banks will be devalued but their remaining resources might be sufficient to offset the incredible losses in value of the assets across all the banks.

The attempt now is to prop up the inflated price, or to halt the fall in some way, and by consolidating banks try to keep mortgage repayments at the level they are now, and let the banks foreclose on houses where repayment is a problem due to a stagnating economy, unemployment etc and hope that this will be limited.

Is that true though? Take my own house (please, take it!), and I apologise for the lack of proper technical vocab here.

The burden of charges on the house does not as yet exceed what might be the fair market value of the house. But it might do in future, meaning that if the bank repossessed my house, it would incur a loss, since it had loaned me money in excess of the sale value of the house. And if I put my house on sale at what is perceived as the fair market value now, it would simply not sell, and its price would have to fall. Houses are now taking years to sell, so this is a likely scenario.

Bear with me here, because I’m a bit shaky on it. If you look at the total value of assets held, and you base your valuation on the fair market value of the house, then at any given moment this is likely to be way in excess of the total sum these assets would actually sell for if they were all put on sale at once, because a massive sell off would inevitably lead to a plummet in prices due to a huge supply surplus.

Now this creates a headache for the bank as well. The bank has no interest in seeing the value of houses plummet, but in terms of outstanding mortgage debt, nor has it any interest in seeing the capacity of mortgage holders to pay off their mortgage diminish either, since that in itself causes asset values to plummet even further, and they lose more money.

So it seems to me that there needs to be some sort of restructuring program whereby some proportion of outstanding debt is bought up by some agency, and terms set at a lower rate of interest, making it easier for mortgage holders to continue repayments and giving them more money to spend in order to stimulate the economy. And there needs to be some coming to terms with the fact that the property ladder as previously known has vanished.

Where the cash to do this might come from, I have absolutely no idea, I’m afraid.

And in fact, I may be talking out of my hole.

Indeed, I would rather be wrong and thought of as some masochistic madman, than be right and walk the difficult path that I believe lays ahead of us. If mortgages need to halve, as you say, then that means a lot of people stuffed with huge amounts of negative equity, at a time when I think that unemployment is going to continue rising. For me, that is an impossible problem to resolve quickly and painlessly.

In this respect, the real difference between you and I here seems to be that you think that there is a viable short-term solution (as proposed above), whereas I do not.

This brings me back to saying that I really do disagree with you on this issue of value and why I therefore cannot agree that your proposal has practical merit (no offence meant)! However, if you want to show me otherwise, then all you have to do is to satisfactorily explain away this scenario!

• A bank lends money to customers that it mostly “borrows” from its deposit holders.
• If mortgages are reduced by 25-50% in the manner that you propose, that is 25-50% less money that the bank will now receive back from those customers.
• However, the bank is still obliged to return 100% of the money that it “borrowed” from its deposit holders.
• How does it make up the shortfall?

what I’m saying is that overvalued assets are NOT assets. We are not getting out of this until we recognise that.

And there’s something Victorian about WANTING people to suffer,no? (and it seems to be a common theme these days.) I mean, it’s a theological approach to economics, one I don’t understand, especially when there are mechanisms to alleviate some of the pressure, and to help us begin the process of building a solid asset base once again in Ireland. I mean, extreme pain and suffering as an economic model? Is this Sunday school? We have to suffer for the sins of our brethren, now lets sing Psalm 23 and pass the bowl.

To save having to restate my points on what I am proposing, have a read of the post and the comments again.

What you are proposing would represent banks needing to write off at least €50-60 billion in cash already lent to houseowners, if they were not compensated for it. The banks have roughly around €15-18 billion or so in capital. Writing off €50-60 billion against this amount would render them insolvent several times over!

Also, the possibity that the government could pay for this through some agency is an utter non-starter also. €50-6o billion would more than double the current national debt. Hell, they cannot even afford the €3-4 billion or so needed to recap the banks right now!

Besides, gve a heavy lifetime smoker a new pair of lungs and watch him waste them away again. Never underestimate the like-clockwork predictability of our greedy natures!

No, this is going to be a long, slow, and painful recovery and we are all going to have to grit our teeth about that. I just hope this is as bad as it gets. There are worrying signals right now coming out of the US markets once more that the banks there may still be in deep trouble…

Interesting idea, but totally unaffordable! I am not being smart-arsed when I say that the only way to avoid the shit that we are heading into is to have not put ourselves in this position in the first place. However, that ship has now long-sinced sailed…