Ireland’s lost decade… a wiki-tale yet to be written?

So. “Ireland v Japan discuss.” I’m not endorsing it, but undergraduates with assignments to write on the factors that led us from 100 per cent mortgages and predictions of a soft landing to nationalisations and Nama in the space of two years could do worse than to give a quick onceover to the following piece of wiki-faction:

“The Lost Decade is the time after the Irish asset price bubble collapsed, which occurred gradually rather than catastrophically. The Lost Decade consists of the years 2008-??? The strong economic growth of the 1990s ended abruptly in 2008. In the years 2002-2007, abnormalities within the Irish economic system had fuelled a massive wave of speculation by Irish companies, banks and securities companies. A combination of exceptionally high land values and exceptionally low interest rates briefly led to a position in which credit was both easily available and extremely cheap. This led to massive borrowing, the proceeds of which were invested mostly in domestic property… this bubble was unsustainable… leading to a massive crash in the stock market. It also led to a debt crisis; a large proportion of the debts that had been run up turned bad, which in turn led to a crisis in the banking sector, with many banks being bailed out by the government.”

It’s a wiki-tale yet to be written. Except it already has - for Japan. The above passage is the opening paragraphs of the Wikipedia entry for the Lost Decade of Japan, with only the words in italics changed. You can read the rest of the entry here. The story gets worse before it gets better. Citing a 2008 article by Michael Schuman of Time magazine (who in his case was comparing Japan to the Detroit motor industry), it includes the familiar phrase “Too Big To Fail” (TBTF). One economist, Schuman noted, described Japan’s policies of bailing out its bankrupt banks as “a loser’s paradise”.

So are we in our own loser’s paradise? I was pretty surprised when there was little mention of Nama at the annual Dublin Economic Workshop policy conference in Kenmare this weekend. (Pat Farrell, chief executive of Irish Banking Federation, alternated between criticising weak banking supervision - yes, really - and lobbying for less regulation for the IFSC.) I guess, economists must be just as sick of Nama talk as the public, as the schedule allowed for only one presentation on the subject and it was from Morgan Kelly, the property crash soothsayer once dubbed “Mortgage Kelly” round these parts. That was in happier times.

Kelly describes Nama as “a very simple idea, cash for trash”. Rival economists don’t much like the UCD economist’s style, which comes heavily peppered with sarcastic one-liners. “People say about the Lost Decade… [it happened] because these guys didn’t have Nama,” he said, adding wearily: “The Japanese tried pretty much everything.” Meanwhile, the assumptions in the draft Nama business plan, published last week, are all “at the extreme upper tail of optimism”, Kelly said: “When you have every assumption like that, you no longer have a forecast, you have a fantasy.”

Not everyone believes the Government’s assumptions - the conditions necessary for Nama to breakeven or make a profit - are rose-tinted, fingers-crossed, wishful thinking, however. Take, for example, the Department of Finance’s projection that there will be a 20 per cent default rate by borrowers on the €77 billion loans that will be transferred to the “bad bank”. This, it said, was double the 10 per cent default rate experienced by Barclays bank during the UK property crash in the early 1990s. And these developer-types have a strong moral compass, right? Surely, no more than a fifth of them will be non-performers?

But Barclays is not the right comparison to make, argues Kelly. Its losses were across its whole loan book, taking in safer residential mortgages as well as buy-to-letters and Anglo-esque property development speculators. The Nama assets are more akin to those of the Japanese commercial development banks known as the “Jusen”, he thinks. By 1991, 38 per cent of those loans were non-performing. Several injections of taxpayers’ money later, they were finally wound up in 1995, by which point 75 per cent of the loans were non-performing and 60 per cent of them had been deemed completely unrecoverable. Forget TBTF. The banks, he concluded, are Too Big To Save.