The Recession

[Bogball XV]

Bogball,
the government are giving it to us with jam on it, I hear of a lot of lads in mayo doing damn  all, i have a job that needs doing for a while now, decided again to see if I could get a quotation, well they not only gave very reasonable quotes in record time but they are calling me every day to see when will they start.

Yeah, agree totally, as I said earlier in the thread the figures are a bit misleading anyway, since many construction workers are sub-contactors or 'self-employed', since it's not possible for these people to sign on the live register then the first we'll hear about their lack of employment will be when the revenue say that the self-employed tax receipts in October have been slashed dramatically.

[blast05]

All of those numbers are predicated on the one notion - that oil will continue to be traded in dollars. Americans don't pay down debt, they never do - they inflate it away.

How many countries have actually re-paid their debt ? As already outlined, American public debt is about 40% of GDP (including private debt its 65) of which 30% is owned by the US so in real terms its public foreign debt is 10% of GDP ..... about half of ours

[Smokin Joe]

Surprised this hasn't been posted here yet:

Time for the banks to cut ties with their builder mates

29 June 2008 By David McWilliams

The longer the banks go on protecting their developer clients, the bigger their problems are eventually going to be.

The Irish banking system is facing meltdown. The choice for the banks is now simple: they allow one of the big developers to go under or they risk going under themselves.

At the moment, the banks are frantically engaged in a game of bluff with the property market. Many of their builder-developer clients -the former crown princes of the boom - have no cash and cannot service the loans they took out in the past five years. Sites they paid fortunes for - confident that they could flip them on to a ''greater fool'' after they got planning permission - are now worth a fraction of what they paid.

Many sites are lying idle as no one wants to build, now that residential demand has fallen away. Huge debts are mounting and former high-flyers - the 'Algarve and blacked-out Jeep brigade' - haven't a farthing.

The simplest way of getting the cash back (or at least some of it) would be for the banks to force the developers to sell sites and property. However, the banks know that the psychological damage of such an event would be so traumatic and the panic in the market so destabilising, that they are postponing this day for as long as they can.

Another possible reason for the unwillingness of the banks' management to put up the land for sale is that they do not want to face the consequences of their own recklessness. They are in denial about the true valuations of their portfolio.

The developers know this and have recently begun referring to the banks as their 'partners' in mega-deals. The larger developers are assuming that the 'too-big-to-fail' moniker will save them. They are mistaken.

As a result, the Irish financial system is living in daily fear of the domino effect, where one large developer failing might bring them all down.

How long can - or should - the banks carry these bad loans? Are we talking weeks, months or years? Clearly, bank shareholders, who have been dumping bank shares for months now, believe that enough is enough.

Ultimately, the banks are caught in a brace. If they protect their developer mates, in a futile effort to protect themselves, their share prices will continue to fall. So will their bond prices.

More importantly, they could run out of cash because no one will lend to them as long as their balance sheets are hiding such colossal non-performing loans. Two events last week shed light on the banks' position.

Banks are offering 6 per cent for 'touch' deposits. These are deposits you can withdraw at any time. For the banks, this is the worst, least secure deposit it can have. Yet they are prepared to pay close to 2 per cent above the market rate of 4.09 per cent.

The other story is just one of hundreds doing the rounds these days. A busy liquidator friend told me of a call he made last week to a builder who owed a client €600,000.He called the builder and the conversation went like this:

Builder: ''Do you know where I am?"

Liquidator: ''No."

Builder: ''Dublin Airport on my way to Dubai to build."

Liquidator: ''What about the €600,000?"

Builder: ''You and your €600,000 can go **** off . . . now **** off."

This type of thing is happening every day; the lads simply don't have the cash.

The money is gone and they are not hanging around for the bailiffs. Is it any wonder that one of our reputable banks is offering us 6 per cent for our measly deposits? Cash is king and everyone wants it, no matter what price.

If you look a bit deeper, you see that now we have a chicken-and-egg scenario, where the bad debts on the banks' balance sheets are causing the banks to go into retrenchment mode. So they are lending less. But the less they lend, the more their builder-developer mates get into trouble because, the tighter the banks' lending regime, the lower the residential/ commercial demand.

If you look at the financial system as one large game, where the banks borrow from one source and lend to another, the dilemma becomes clear. If the banks can't borrow, they can't lend.

One way of looking at the 70 per cent fall in the share prices of Bank of Ireland and Anglo Irish or the 60 per cent fall in AIB is to regard these price falls as the markets' unwillingness to lend to the banks. They are simply too risky at these prices.

The system needs a net injection of cash, but there is no likely source for this, particularly as the banks' balance sheets are still jammed with useless rubbish, the bad loans of the boom. Unless the banks face the music and accept that they are not going to get paid back on many of these non-performing loans, no one will be prepared to lend to them. If no one lends to them, they make no loans and therefore, no profits. In the worst case scenario, they run out of cash.

This is a critical juncture for the Irish banking system. The top brass have to wake up to the reality that protecting developers is damaging the banks' credibility. Ultimately, the banks will have to cut the umbilical cord.

Every property boom/bust and recession is characterised by Icarus moments where the great and the good fly too close to the sun, their wings melt and they fall to earth. Just think of Alan Bond in Australia, Donald Trump in the US, Paul Reichman in London or Patrick Gallagher here in the 1980s. Inmost cases, the individuals recovered their fortunes in the next upswing.

This Greek drama is not unusual. What is odd is the number of Irish financial professionals who seem to be in denial about this or, worse still, the number who don't seem to understand what is happening or why. Many seem genuinely shocked and, if they are shocked, they are in no position to manage the situation. It is now dawning on the young stars of Dublin's banking community that there is more to finance than Ron Black's, a Prada suit, extra firm hair gel and an Audi TT.

However, the banks' choice is simple: it's either you or them. They have to realise that it's not going to get any better. The longer they protect their developers, the lower their share prices and the property market will go.

Why would anyone buy now in serious quantities when they realise that there is huge supply overhanging the market that has to be liquidated to pay bad debts? The longer the banks prevaricate, the further off any recovery.

If one bank were to bite the bullet now and put the assets of one of its bankrupt property oligarchs on the market, the cleansing period would begin. Yes, there would be huge falls in the price of sites, but that's the only way the market will clear - a child could understand this.

Some of our senior bankers fail to grasp this idea, but maybe that's one of the problems with ten years of cowboy capitalism: with all these nudges and winks, you forget how a real market works.

[Bogball XV]

I thought it was very telling that our idiot politicians decided to haul the bankers in front of them yesterday to question them about their current reluctance to lend, where were they 4/5 years ago when they could have taken banks to task over their lending policies?
Did they not know that the ECB said their job wasn't to micromanage individual economies and that individual govts should do that themselves? 
Or would it just not have been conducive to listen?

[Bogball XV]

LB re Japan:

By David McWilliams


Wednesday July 02 2008

This chart records the traumatic property experience of Japan. A monumental boom in the late 1980s and early 1990s reversed dramatically and house prices fell by 76.4pc from the peak.

This happened, not in a corrupt, tin-pot dictatorship, dependent on commodities for its sole exports, but in the world's most sophisticated economy, with the most dynamic financial sector and a history as the world's pre-eminent innovator.

Could it happen here? Will Irish house prices fall back to levels seen in 2000/2001 or even to levels seen last century? Will our house prices drop by 70pc before they stabilise? These numbers need to be considered because there are plenty of reasons to be fearful.

The similarities between both Ireland and Japan are striking; the main difference is that the Japanese controlled their own interest rates and thus were able to cut them to soften the blow. As EU inflation topped 4pc this week, it looks likely that we will be facing higher not lower rates for the foreseeable future. Not good.

One similarity is the capacity for self-delusion and failure to face up to the magnitude of our crisis. It was the same in Japan 20 years ago. I remember the Japanese mania even reached Irish shores in the grim late 1980s.

When I was in college, a particularly ambitious set of business students who used to wear suits to lectures (a true sign of recession) began taking private Japanese lessons. If you didn't have a grasp of Japanese, or at least a smattering, their view was you might as well quit now and not even bother turning up for final year interviews.

We sat there, petrified, as professor after professor told us about the threat of Japan to our careers (not that the class of 1988 appeared to have a particularly stellar future ahead of them in the first place).

Every airport waiting lounge was stuffed with hardback tomes heralding the rise and rise of Japan and no economics exam was complete without the question: "Explain the fundamental economic reasons behind Japanese world economic domination".

Japan of the late 1980s was experiencing a huge asset-price boom and stocks were going through the roof, allowing Japanese companies to buy trophy assets abroad such as the Rockefeller Centre and MGM.

Bulging Japanese banks dwarfed their European and US counterparts and threatened to dominate the City and Wall Street. Most spectacular of all was the Tokyo property market. In 1990, the land upon which the imperial palace in Tokyo was built was valued at more than the entire real estate of Canada, the second largest country in the world.

When I read the silly valuations in the 'Irish Times' property section, particularly the "Take 5 at €400,000" section, I am reminded of the Japanese Imperial Palace delusion. Clearly a two up, two down in Rialto is not worth the same as a seven-bedroomed house in the Dordogne. Now that prices are falling rapidly, the idea that pokey Irish houses are worth more than French chateaux will look increasingly daft.

The other problem for Ireland is the sheer extremity of the housing boom. Irish house prices have risen 380pc since 1996, compared with 260pc in the UK -- the next frothiest market. House prices fell in Germany and of course Japan in the same period. While in Switzerland -- Europe's technically most sophisticated economy -- house prices only rose by 5pc in the 12 years since 1996.

As a result of this binge, Ireland is the most indebted nation in Europe. Outstanding residential mortgage debt now amounts to 192pc of our total GNP! This is truly shocking and depressing when you consider that in Germany, outstanding mortgage debt only amounts to 3pc of GNP.

Even in the US -- where many disingenuous Irish commentators are suggesting this crisis originated -- outstanding mortgage debt only accounts for 44pc of GNP. We are way out of whack with the rest of the world and our dilemma is very much of our own making. Think about the chart again. Have a long look and consider that in the past 10 years residential loans per capita in Ireland increased by 552pc. This is miring us in an ocean of debt. We got into debt five times faster than the average profligate American and, extraordinarily, 50 times faster than the parsimonious Germans.

With our British neighbours, we managed to lose the run of ourselves completely. In the UK, where billions of Irish euros were spent in the past five years, there is carnage on the high street. According to the estate agents Allsops, the real weakness is being seen in the thousands of new docklands-style developments which mushroomed all over British cities.

Many of these investors were Irish and most apartments are now trading at a 30pc to 40pc discount to prices originally paid in 2005. The British have the comfort of a falling exchange rate determined in London, we on the other hand are stuck to the Germans.

This is why the personal debt comparisons with Germany are so instructive. The German has no property-related debt to speak of. This means that the average Gunter doesn't really mind if European interest rates rise, as it will make no difference at all to his budget at the end of the month.

In contrast, the average Paddy, who has seen his personal property indebtedness rise by over 500pc since the late 1990s, will be roasted by a rise in rates.

So will Irish house prices follow the Japanese model and fall by 70pc from the peak? Maybe. Who knows? However, the similarities are too striking to be ignored.

It is clear the Japanese market didn't freeze, as during the slump there were still distressed sellers and opportunistic buyers who thought they had bought at rock bottom, only to see prices fall again.

Overall, however, in the 13-year slump there was not one period of six months when any sustained rally was recorded.The lesson being, when things start falling, they drop like a stone.

Take a look at the chart again. Not a pretty sight.

Dmcwilliams@independent.ie

[lynchbhoy]

he talks about talking about japan but then doesnt..
the yen fell and their over spending on daft commodities killed them

unlike the Japs, at least our madness includes mostly overspending on bricks and mortar , a good investment even if overpriced, as eventually if the mortgages can be continually paid off, you WILL own it and WILL have equity in it (even if it is negative equity for the first number of years). the Japanese bought perishable goods and electronic gadgetry and have a kamikaze-like tendency for gambling.

We have the famine and land league to blame for our crazed hell bent desire to buy our own houses. While we still have jobs here, it will be ok. We will obv need to start to see that the sky is not falling down at the beginning of 2009. If people still are looking at their toes at that stage, then we will have problems.IMO it is avoidable, like before.

So what if we payed over the odds for our houses. We did, so we have to lump it. We can turn this around by paying the mortgage though , then in th elong rune, we dont have a problem. At least I dont see one.
So some have to endure a quiet monastic life like our parents did in the black old times of the 50's and 60's - if thats what it take, then we make our own beds....people of today had just beter realise they need to come down from this pseudo high life and back to reality. We will and can get through it.
imo

[Rossfan]

The whole recession thing will be one major shock to the Under 30s though . Especially those who wear sunglasses on their heads   
Us lads who saw the Eighties will survive as we will be well able to get by without the latest gadgets and will be quite happy tipping around in a 5 or 6 year old car.

[Bogball XV]

he talks about talking about japan but then doesnt..
the yen fell and their over spending on daft commodities killed them

unlike the Japs, at least our madness includes mostly overspending on bricks and mortar , a good investment even if overpriced, as eventually if the mortgages can be continually paid off, you WILL own it and WILL have equity in it (even if it is negative equity for the first number of years). the Japanese bought perishable goods and electronic gadgetry and have a kamikaze-like tendency for gambling.

We have the famine and land league to blame for our crazed hell bent desire to buy our own houses. While we still have jobs here, it will be ok. We will obv need to start to see that the sky is not falling down at the beginning of 2009. If people still are looking at their toes at that stage, then we will have problems.IMO it is avoidable, like before.

So what if we payed over the odds for our houses. We did, so we have to lump it. We can turn this around by paying the mortgage though , then in th elong rune, we dont have a problem. At least I dont see one.
So some have to endure a quiet monastic life like our parents did in the black old times of the 50's and 60's - if thats what it take, then we make our own beds....people of today had just beter realise they need to come down from this pseudo high life and back to reality. We will and can get through it.
imo

Couple of quick points (have to hit the local for a couple in a minute), firstly, if they were buying gadgets and so on, at least they made them, we on the other hand don't make many SUV's.   Re the paying off of mortgages taken out on overpriced houses, the vast majority are not in properties where that is feasable, most people buying in the past 5/6 years bought 'to get on the ladder' they bought something that would in no way be suitable to their evolving life, but then they didn't buy to live in it long term, now when they have to move on, what can they do?  Take a 50K loss?  Where does that leave them?  Stay in their 2 bed apartment (with one kid and no storage) in Ongar whilst working in the city centre?  Let's hope that job is secure anyway.
Finally, you mentioned how we have bought property being a good investment etc, but that was precisely what the japanese did, they bought property everywhere, that's why they have these generational mortgages, because banks dreamt them up so that they could keep on lending more and more, why do you think the average irish mortgage went from 25 yrs to 35 yrs?  Our banks were doing the same, now, must go, i'm parched!

[muppet]

We have the famine and land league to blame for our crazed hell bent desire to buy our own houses.

Jaysus Lynchboy I'm sure you didn't mean it but that statement is ludicrous in isolation. Look to the causes of the mass deaths of the famine or the reasons that lead to the formation of the Land League rather than blaming innocent victims or those who peacefully fought their corner to own their own land.

To blame both of those and not even refer to centuries of occupation, plantation and pillage as possible factors is absurd.

[lynchbhoy]

Couple of quick points (have to hit the local for a couple in a minute), firstly, if they were buying gadgets and so on, at least they made them, we on the other hand don't make many SUV's.   Re the paying off of mortgages taken out on overpriced houses, the vast majority are not in properties where that is feasable, most people buying in the past 5/6 years bought 'to get on the ladder' they bought something that would in no way be suitable to their evolving life, but then they didn't buy to live in it long term, now when they have to move on, what can they do?  Take a 50K loss?  Where does that leave them?  Stay in their 2 bed apartment (with one kid and no storage) in Ongar whilst working in the city centre?  Let's hope that job is secure anyway.
Finally, you mentioned how we have bought property being a good investment etc, but that was precisely what the japanese did, they bought property everywhere, that's why they have these generational mortgages, because banks dreamt them up so that they could keep on lending more and more, why do you think the average irish mortgage went from 25 yrs to 35 yrs?  Our banks were doing the same, now, must go, i'm parched!

the gadgets they bought were not just the useful ones like cars etc , but idiotic ones like games and any 'western stuff' that could be imported as being 'like the americans' was a mad over indulgent fad.

The reason why the Japanese are now back ont eh brink of being in the financial game again is because these massive mortgages have started to come near their lifecycle's end and they can now look beyond this again. Hopefully for them this time they will be more cautions.

Anyone looking for investment is now looking at japan, as pretty much everything, companies and property are vastly undervalued.

Our mortgages may need to go from 35yrs to 40-50yrs to emulate the japanese mortgages and stave off foreclosure.
If these houses etc are not big enough for 'families' well the answer is that they have no option.
Sell at a huge loss, move abroad and rent it out and remain paying the mortgage or stay put and bring themselves and any kids up there.
sure how could they afford to have kids if they cant afford the mortgage?
Common sense imo - it wont apply to everyine, but we are both talking about worst case scenarios here I think..

[lynchbhoy]

We have the famine and land league to blame for our crazed hell bent desire to buy our own houses.

Jaysus Lynchboy I'm sure you didn't mean it but that statement is ludicrous in isolation. Look to the causes of the mass deaths of the famine or the reasons that lead to the formation of the Land League rather than blaming innocent victims or those who peacefully fought their corner to own their own land.

To blame both of those and not even refer to centuries of occupation, plantation and pillage as possible factors is absurd.

did your folks not keep at you to 'buy a house' from an early age?
Mine did and more or less everyone I know (that I have asked or that it has come up in conversation) had it drilled into them to 'buy a house' as soon as they started working.
'Rent is dead money', 'buy a house' etc etc

that, imo is a leftover mindset from the famine/landleague era that has been passed down to even the current generation, I thought this was fairly accepted in society that this is true?
I certainly have seen/heard it being attributed to the reason why Ireland has the highest % ownership of their own houses in the world.

I dont think that statement is ridiculous.

That I have heard it from my own family, that many of my friends have and the % house ownership would seem to hold up this 'argument' ?

I didnt mention occupation/pillage and plantation as factors but if I am correct then I would have done so, as they are contributory factors but much of the same thing.

[Billys Boots]

he talks about talking about japan but then doesnt..

God forbid any facts would scupper his next 'theory', though I believe his premise that we will suffer for our investment in 'bricks-and-mortar' is worrying.

[Abble]

we all know we're heading for a recession. whats annoying me is the media coverage of it.

bad news everytime you open a paper or look at the news. the thing is you just know they are slowly building up for the headlines of the century "RECESSION - IT'S HERE" !! across the front of every paper and news programme going. every man, woman and child knows we've been verging on this recession since about september of last year.

i think the sooner they just come out with it that we're in recession the better...the sooner any sort of a recovery can then start.

[thejuice]

When does a Recession officially start?

[maddog]

When does a Recession officially start?

I think its 2 quarters in a row of negative growth or something like that.