'Transport der Freudenmädchen zur Polizeiwache' Image via Wikipedia
NAMA explained ….
It is the month of August, a resort town sits next to the shores of a lake. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.
Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to pick one.
The hotel proprietor takes the 100 Euro note and runs to pay is debt to the butcher. The Butcher takes the 100 Euro note, and runs to pay his debt to the pig raiser. The pig raiser takes the 100 Euro note, and runs to pay his debt to the supplier of his feed and fuel. The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town’s prostitute that in these hard times, gave her “services” on credit. The hooker runs to the hotel, and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.
The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything. At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.
No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism .
And that is, essentially how NAMA will work.
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Joe
October 2, 2009
There is a flaw in the argument – the hotel proprietor actually has 0 net debt. He owes €100 to the butcher but he is owed €100 by the prostitute. That is how the whole town has 0 net debt.
At no point is any of the debt worth less than the original value. This is not the case with NAMA as some of the loans will never be repaid and we the taxpayers are gambling on the property market by buying the debts, even at a 30% discount.
We also will have to pay interest on the bonds issued to buy the debts – there is a definite cost to the operation. There is a definite risk regarding the value of the debts with both a profit or loss being possible.
theangryhedgehog
October 6, 2009
See this is why I should include a proviso that I dislike maths or something. However what this story is supposed to do is show how debt ridden, society actually is and how much the flow of credit affects all aspects of daily lives. Despite the hotel proprietor having 0 net debt, the prostitute cannot afford to pay the hotel until such time as she is paid for her services and so it works back however many steps to the point where everybody is in debt, but nobody can afford to release any money to pay anybody because they do not have any until the hotel proprietor “borrows” the €100 from the tourist and the cycle begins.
I agree in this case, the debt is not worth less than the original value, i.e. €100 = €100 = €100 so thus if it is the case that some loans are discounted at 30% it would be €100 = €70. However such an argument ignores the fact that the loans were probably over-valued in the first place – in this case I am going to argue that the prostitute and the hotel proprietor were over valued because I can and most hotels/prostitutes are over-valued anyway. (EDIT: Not that I have any idea how much a prostitute costs currently or in the past).
NAMA does in fact suck. I concur. It is a big big big risk. I concur. Nobody will state otherwise. However the recovery of the Irish economy depends as much on the Lisbon Treaty passing, as it does on market sentiment regarding the state of the Irish banking sector. We have to get rid of the “bad” toxic loans from their Loan Sheets in order to get credit flowing again, though this will I imagine be somewhat slower than the last decade. Scorched hands and all that. I don’t think nationalising them, even temporarily is appropriate, despite the knowledge that we, the Irish State, would by proxy finally own the former Parliament building in College Green. I think it could do more harm than good ultimately and we would still have the problems of the “bad” loans to contend with.
So that is my tuppence worth.
Tomboktu
October 6, 2009
I am so glad Joe stepped in to correct the big error in your version of what NAMA does.