BUSINESS OPINION: ANONYMOUS LETTERS are usually best ignored, but one which awaited me on my return from holidays was hard to ignore, not least because of the following opening line: "I am writing this letter in a state of extreme anger, this very week I have seen my brother go out of business or to be more clear he was put out of business by his bank."
The letter writer went on to encapsulate the chronic problem with credit for business and also the debate about the wider costs of the approach being adopted to fix the economy.
The brother in question had been in business for more than 20 years and had expanded before the recession at a time when credit was easily available from the banks.
His business was struggling, but all 17 employees and creditors were being paid. The owner was not drawing a wage and had sold his home in 2010 to release some equity for his business. According to his sibling he had regular reviews with the bank and they had agreed to accept interest-only payments.
“Up until now he was compliant with all their demands. Then all of sudden they re-called his loans which they knew well he would not be able to pay. He is a broken man. He always had such high regard for employees’ welfare, now we have 17 new people on the live register, 10 of whom have mortgages.”
It is a far from unique story, but the writer did a good job of capturing the sense of unfairness and bafflement most people experience when confronted which such a story. “Will someone please tell me where is the sense of justice in this and how they are able to get away with it? Who the hell is sanctioning this behaviour? We bailed out the banks and this is how they are treating hard- working people. Of course my brother is not unique. He is the third business that I know for a fact this has happened to . . . ”
The letter-writer asks a lot of questions, but they all seem to boil down to one: why is the Government allowing this seemingly counterproductive and wrong-headed behaviour to continue?
It’s quite an easy question to answer. An economic crash as widespread and severe as the one that has engulfed Ireland does not lend itself to the sort of overarching solution or co-ordinated policies that would, as the writer seems to suggest, maximise the number of jobs retained in the economy. It’s not that it’s not a good idea, it is just that it is beyond the capacity of our Government, or probably any government.
The approach that has been adopted, at the behest of the EU-IMF-ECB troika, has been to focus on sorting out the Government finances by cutting spending and increasing taxes, even if this is counterproductive in the short term because it hits growth.
Banking is another area and the focus here is to return the banks to solvency and profitability which will in theory allow them resume lending normally to business. Part of this process involves the banks biting the bullet on non-performing loans. The short-term consequences of this – such as the decision to pull the plug on the letter-writer’s brother’s business and the 17 jobs that will cost – are judged a price worth paying for solvent banks.
However, this doesn’t really go anywhere near answering what seems to me to be the deeper issue raised by the letter-writer which is why and how we have decided to go down this particular policy path with its calamitous social consequences. Or as he puts it: “This is achieving nothing but destruction. Are the government thick, blind or just don’t give a damn? People need to know what is happening. The bank are not paying for this, the taxpayer is.”
The writer is in good company when it comes to questioning the economic arguments for the current policy prescription. Many eminent economists, notably Paul Krugman, believe the solution is more spending by government, not less.
It is also common case that the approach adopted in Ireland has never been applied to a developed democratic economy. It is a mix of IMF policies forged in less developed countries overlaid by an unforgiving type of economic thinking typified by the ordoliberalism that has taken hold in Germany. But as long as Ireland remains in a bailout, we have little choice but to follow the path prescribed by the troika when it comes to the banks.
So to try and answer the writer’s questions more fully: the Government probably does know what the banks are doing. But whether they approve or not is arguably irrelevant as long as Ireland remains in a bailout as we have little choice but to follow the path prescribed by the troika. Whether they have any better ideas or could implement them is a moot point. I am not sure this helps.
