THE TRICKLE UP EFFECT
Two incidents took place in the last week that say more about the old boy's network in Ireland than the feeble mutterings about a just society coming from Fine Gael.
Setanta Insurance, a Maltese-registered company, which sold insurance policies exclusively in Ireland before it collapsed in 2014, left claims, estimated to be around €90m with the number of claimants estimated at 1,750. The Motor Insurers' Bureau of Ireland took a case against the State to avoid having to pick up the tab. The ordinary citizen who is forced to take out compulsory insurance on their vans & cars, got a nasty surprise this year when premiums shot up. My own broker explained that it was in anticipation of their having to fork out for Setanta. But no! The Supreme Court has decided that the ordinary citizen must pay for the ninety-million mess left by that Insurance Company collapse.
Also, the longest-running criminal trial in the history of the State officially came to an end last week with the ahem, not-guilty party walking away free and the innocent citizens will be picking up the legal costs for that debacle too, which are staggering. Former Anglo Irish Bank chief Seán FitzPatrick was the poster-boy of the wealthy classes during the Celtic Tiger years. His little Anglo Irish Bank found a rich vein of funds in German Banks and began to borrow like there was no tomorrow. He then slung the funds around Dublin at builders, developers and property speculators with the net effect that house prices zoomed up for the ordinary citizen. Despite handling billions of euros, Seanie ran the place like a small business, making all the decisions himself.
It was reckless banking to say the least and when it came home to roost, Seanie pulled off questionable stunts to hide the extent of the fatal damage he'd done to Anglo. Tricks like, one day before an AGM he got another bank to transfer four billion onto Anglo's books to make the end of year bottom line look good. When that AGM ended of course, the money was transferred back. If you are interested, you can read one take on it from the Examiner.
Anyway, after the trial, Michael Martin said, “The State’s capacity to investigate serious white-collar crime has been shown to be inept, negligible wasteful and virtually redundant,” Responding, Taoiseach Enda Kenny evidenced his visible annoyance at the failed case and said he agreed with Mr Martin’s comments. What is stark though, is the mealy-mouthed words in the absence of firm action on behalf of the citizens. Like the big boys in Setanta, the big Seanie Fitz. gets to walk free and all of the rest of us pay for his mess.
This Neo-Liberal form of economics peddles the myth of what they like to call, the "Trickle-down effect." The supposedly intuitive argument is that the rich guy spends money and everyone around him benefits miraculously. This plank of modern economic thinking is balderdash. The rich guy hordes wealth whereas it is the poor who spend everything they have, (just to survive). Indeed because of years of flawed economics we have had a trickle up effect. The rich are getting richer and the poor are getting poorer. I subscribe to the old saying, Remember the golden rule, those with the gold make the rules." They rig the system through influence and bribery to ensure the laws and rules are written for their benefit.
The trickle up effect has been going on in the developed world since the fifties but has accelerated greatly since the turn of the century. While real wages and salaries have fallen steadily, the value of the actual money earned has also fallen. Quantitive easing, or the printing of money, has de-valued our currencies to a point where it is impossible to say for sure what the real value of a dollar or euro is. It is possible to say for certain though that money, as in cash, does not go as far as it used to. But when it trickles up en-masses, that doesn't matter to the truly wealthy because money makes money. The more you have of it the more of it you will get.
Modern Ireland is a classic example of this. Take the bank crash nine years ago and the attendant property crash. Those involved in the bidding wars to buy a home at that time were unintentionally driving prices up. They had an urgent and immediate need to put a roof over their heads. The wealthy had plush homes and had no such requirement. But they also had access to millions of euros so that when the property market crashed, they could afford to move in and cash in on the misery of others, thus realizing even more profits for themselves. This was refined even further when NAMA began selling off job lots to vulture funds, investing in what they called, "The three year cycle." Basically, they bought big swathes of property cheap from NAMA with a view to sitting on it for three years and dumping it back on the market then to earn upwards of 100 per cent profits. Tales of people still in their negative equity homes offering to continue paying their mortgages but being denied that by the lending banks are everywhere.
In the real world then, a young couple paid €400,000 for their dream home on 2006/2007. The bank agreed their loan on the basis that the bank could re-possess that €400,000 property for default on payment. But a couple of years later in a crashed property market, the young couple's dream home had a value of €200,000 and although they were faithfully paying off the mortgage as per their agreement, the bank wanted them out because the asset had halved in value. That is the first piece of immorality in the equation. Let's say the bank succeeds and the young couple are made homeless, what happens then? Well, the bank sells for what it can get in a depressed market, perhaps at €160,000 from a rich bloke who can easily afford it. On the bank's computer, the couple spent two years paying their mortgage on the interest only. This is where is gets totally immoral.
Using a compound interest calculator online, I calculated interest over a typical thirty-year mortgage at the average rate of four per cent per annum. Are you sitting down? The day that young couple signed for that mortgage at their bank, they agreed to pay back the capital sum of £400,00 plus interest of €1,325,399 over thirty years. If you don't believe me then try it yourself. But I have a couple of observations about the deal. If that young couple actually had €1,325,399 of their own money on that fateful day, they could have bought three of those houses. They could have lived in one of them and rented out the other two, earning enough to quit work and live the easy life. The rich bloke who ultimately picked up their dream home for a song after they'd been fucked out of it, probably considers €1,325,399 as pocket-money. Then there are the perspectives from both sides after the mortgage was signed. Let's explore that.
The young couple may have gone for a drink to celebrate their new home that fateful day. They would have discussed the monthly repayments they agreed to and calculated that with both of them working, they could afford it. But what of the bank? How would they have recorded the transaction? In the years running up to the crash, every one of our banks were recording record profits and the mortgage of our young couple was in that somewhere. The question is where? Well, here's how it works in the bank. To get the couple to sign the bank had to 'bring €400,000 into existence.' It was conjured into life by a computer keyboard and added, in theory, to the bank account of the couple. In return, the bank got the title deeds, valued at €400,00 as an asset, they got a legally binding contract which guaranteed the couple would pay them that €400,000 over thirty years, but even better, they got an agreement for a further €1,325,399 from the couple. In theory then, the bank had just agreed to get €2,125,399 in return for a few keyboard strokes they are licensed to make by us, the citizens. So technically they just made over two million in profit from that poor couple and the only question that remains is how they reported this profit to their shareholders? Does that full amount hit the balance sheet straight away? It is not such a mad question you know and it would account for the crazy years of profit declarations from that source.
But back to the now homeless couple. The bank would have advised them that they, (the bank), got €160,000 for their home in a depressed market meaning that €240,000, (plus interest), is still outstanding to them and they have every intention of collecting it. Meanwhile the rest of us are looking at an overall national debt of €204 billion we are told we all owe and at least €64 billion of that was given to the banks so that they could continue to operate and persecute people like our young couple. The trickle down effect would explain this by telling us that we all benefit from a strong banking system.
It is utterly and totally WRONG by any measure.