Times are not bad enough for State to help out the banks

BUSINESS OPINION:FLOATING OUT there somewhere in the ether is a proposal that the Government should give a helping hand to the banks and by inference to some of their more problematic clients; large developers with portfolios of properties aimed at first-time buyers that they cannot shift.

No one is yet prepared to take ownership of the idea, but the bones of it have been well trailed at this stage. It's relatively straightforward.

The Government, possibly in the guise of the National Treasury Management Agency or the National Pension Reserve Fund, would start buying packages of mortgages off the banks.

The inability of the banks to package up and pass on mortgages in the current climate is one of the main reasons why they have had to tighten up on lending. The transaction would be done on a commercial basis, but the presumption is that the Government - by lending to the Irish banks - will be going where the wider market fears to tread through ignorance and fear.

The sweetener for the Government is that the new money made available to the banks via the initiative would be lent to first-time buyers, which should in theory unlock the property market and get the stamp duty revenues flowing.

The fact that this intervention would also potentially save the necks of some of the more exposed developers - who have hundreds of unsold apartments on their books - is one of the less talked about aspects of this not very talked about scheme.

There is so much wrong with this proposal that it is almost hard to know where to start.

But we shall start with the whole moral hazard argument: the concept that if people are protected from the consequences of their decision, that they will not act responsibly.

The Irish banks are not hapless victims of circumstance.

Admittedly, they cannot be blamed for the global credit crisis, but they must take some responsibility for the property bubble which has made its impact here so much more painful.

It is easy to say with hindsight - but true none the less - that their lending practices contributed to the boom and also underwrote the crazed speculation by the property developers whose demise now threatens the whole banking system.

If follows from the moral hazard argument that if the banks want money to lend in order to unlock the market and save their developer clients, then they should have the rights issues that they are so desperate to avoid.

The pain will then be felt by their shareholders, most of whom happily rode the boom and the associated rise in bank share prices. And if the shareholders feel sore, let them take it up with the banks' management.

It is an appealing, if somewhat extremist argument. And perhaps the more cogent argument against throwing a lifeline to the banks is that it would do more harm than good.

Ulster Bank's economist, Pat McArdle, made a simple point in his economic quarterly update last week. The economy will not return to growth until the painful adjustment needed in the housing market has taken place, he claimed.

Arguably the best thing that the Government could do from this perspective would be to stay out of the market and let prices fall to where they should be.

By intervening now with some sort of support for the banks, all they will do is put a false floor in the market, and it is one that will eventually give way.

The only long-term impact of the initiative will be to put money in the pockets of bank shareholders and property developers; not in themselves bad things, but something that is hardly the job of the Government.

There is of course a time and place for Government intervention. But if the governor of the Central Bank is to be taken at face value, then this is not it.

John Hurley was trenchant in his support for the banks last week. Their bad debts have not increased materially; they are not under pressure to raise fresh capital and have a negligible exposure to the subprime market, he told us at the publication of the Central Bank's annual report.

More pertinently, he said, the preliminary results of the bank's latest macro-economic stress test suggest that the banking sector's shock absorption capacity remains strong.

One can only presume that this stress test involved assessing the impact on the sector of the collapse of a property developer or two, or else it would be somewhat pointless.

Things are bad, but not so bad that the taxpayer has to bail out the banks or their developer clients.