Jill Kerby

Is the Great Recession really over in the US, France and Germany?

 

Last week at a seminar in Dublin hosted by the on-line bank RaboDirect to launch three new ‘sustainable’ energy, water and climate funds, I felt obliged to pour a little cold water on the proceedings.

 

President Obama and Ben Bernanke, the head of the US Federal Reserve, certainly seem to think the recession is over, though Mr Bernanke, who was speaking on the day of the first anniversary of the Lehman Bros collapse, cautioned that it was going to be a slow recovery.  

 

The Zurich-based Sustainable Asset Management (SAM) managers who were laying their wares before the RaboDirect audience last week didn’t have any particular views about the merits of the end of the recession, but they certainly believe their funds will be beneficiaries if there is a pick-up in industrial production and especially the capital financing that was very short on the ground last year. 

 

With unemployment still rising in all three countries as well as budget deficits, it strikes me that what is behind the recovery has more to do with the billions that’s  been poured into the financial, construction and motor sectors than because consumers earnings are going up or that they feel confident to start spending again.  

 

Stock market performance is no reflection of the reality of ordinary people’s lives, and this rally is no exception. 

 

That said, there are plenty of people with cash in RaboBank who are wondering what to do with their money and are eager for glimmers of hope.  These energy, water and climate funds have produced impressive performance track records since they were launched (SAM itself has specialised in these sectors since 1995, long before ‘green’ investing became fashionable) and there’s no question that the demand for clean, accessible water and energy is genuine. 

 

The end of the Great Recession is certainly good news for existing SAM investors but I think I might just stay on the sidelines for a little while longer.   However sustainable these funds may be over the longer term, there seems to be a growing number of sceptics – like me - who don’t share President Obama and Mr Bernanke’s confidence in the sustainability of this seven month stock market rally.  

 

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The Comptroller and Auditor General was very unfair to single out MABS, the money advice and budgeting service for inefficiency in his annual report.  He accused them of only dealing with two cases a week for their €16.2 million annual budget. 

 

In fact, MABS advisors each take on at least two ‘new’ clients every week in addition to all the active files already on their desks. Last year, 16,600 people sought help from MABS; that figure is already up 30% this year with only 19 more advisors on the payroll of 252, and not all of those new posts are full-time. 

 

The Auditor General rightly points out that there isn’t sufficient date about how quickly cases are cleared or their outcome, but that’s an administration issue for the Department of Social and Family Affairs to address.   

 

To suggest that each of the 271 MABS advisors – there are also 500 volunteers - are slacking on the job is a misrepresentation of one public service that has genuinely been paying its way for the past 17 years. 

 

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Does anyone in the credit union movement know exactly how much it cost to send 80 Irish delegates to the World Council of Credit Unions’ annual congress in Barcelona this summer?  I’m just wondering because I’ve just read a report about the event in the latest edition of the League of Credit Union’s magazine ‘Focus’ and it doesn’t mention the cost either.   Assuming that all the accompanying spouses paid their own way, even a bill of €2,000 per delegate, or €160,000 seems a little excessive given the financial difficulties being experienced by so many Irish credit unions. 

 

According to the 2008 Registrar for the Credit Union’s report, 133 of the 419 CUs had high enough levels of arrears or rescheduled loans to trigger investigations last year, a process that is on-going.  Nearly one in four were instructed to stop advancing any new loans for periods “in excess of five years” until they return to compliance with the limits set out in the [Credit Union] Act.  Only about half of credit unions paid dividends in 2008, a situation I’m told that hasn’t improved this year, and 76 were told to reduce their dividends once their books were examined. 

 

 

As the travel expense records of our TDs and pubic servants now show, there’s a propensity in this country for some people in positions of trust to think nothing of spending money that isn’t theirs on foreign junkets that don’t really contribute a whole lot to the betterment of their department, agency or constituents. 

 

I’m sure all credit union members would love to see a comprehensive list of advancements and good practices that the League members brought home and implemented after last year’s international congress in Hong Kong and the one in Barcelona.   One can only imagine the credit management skills delegates will pick up in 2010 in Las Vegas. 

 

But perhaps before the travel budgets are agreed for next year, they might want to read another article in the latest Focus magazine by Mandy Johnson, the former government press secretary who is now the League’s new head of communications, management and public relations. She notes that “we still have a significant number of credit unions…who are not yet using e-mail” and continue to conduct all communications with the League “in hard copy”. 

 

Apart from being very convenient for booking cheap airline tickets, perhaps Ms Johnson will let the members know that joining the internet is also a remarkably cost efficient way to keep in touch with worldwide credit union developments. 

 

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The saga of the ISTC bond sale to retail investors just won’t go away.  Last week, the Financial Regulator fined a Kilkenny financial services provider €12,000 for not keeping proper records regarding his sale of these bonds. But over the past two years, the controversial repackaging and marketing of the ISTC bond by Friends First and its subsequent sale by brokers to retail investors – who lost €43 million when ISTC went into examinership back in 2007 – is still featuring in complaints to the Office of the Financial Ombudsman. 

 

 

There have been various private settlements between clients and the brokers who sold them the Friends First ‘Creative Bond’ and the ‘Creative Step-Up’ investment product, others have been adjudicated on by the Ombudsman.

 

 

And this is where it gets even murkier:  there are now at least two documented cases where the Ombudsman has found in favour of the investor complainant and recommended compensation be paid by the broker who missold the Friends First product, but where the brokers now claim they are unable to pay up, because their own indemnity insurance provider to honour their claim on the grounds that the original produce supplier – ISTC, had gone bust. 

 

 

Both the Department of Finance and the Regulator are aware of this problem.  The question now is, what happens when private indemnity insurance fails?  Does the complainant have to pursue the sales intermediary – by law the only party they are able to pursue and not the product manufacturers - all over again at their own expense through the Courts?  

 

Where’s the justice in that when the Office of the Ombudsman was specifically created to avoid such huge costs to ordinary people who have been financially disadvantaged by the actions of powerful financial institutions, including their mostly-commission paid intermediaries? 

 

 

The Regulator began investigating the ISTC retail bonds last year and the recent case in Kilkenny is just one part of the ongoing operation. Far more significant is the dangerous precedent that might be set if the Regulator does not come up with some method of protecting consumers who have received a favourable financial judgment in such a case.  

 

 

I’m not suggesting for a moment that the exchequer should pick up the tab where the sales agent or even the product producer who has been instructed to pay compensation pleads inability to pay, for whatever reason. 

 

 

At the very least it should be setting up a victim compensation protection scheme, funded by the industry itself, so that whatever happens to the financial circumstances of the industry players, it isn’t the consumer that gets shafted – again. 

 

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Would a UK-style IVA – an individual voluntary agreement for debtors – sort out the growing personal insolvency problem in this country?

 

 

The Greens seem to think so and they’ve convinced their Fianna Fail colleagues to sign up to the idea too in the new Programme for Government.  

 

 

I’m not so sure.  IVAs are a more formal, but still private settling up process between debtors and creditors than the entirely informal (as in, no involvement of the Courts) way it is currently done in this country. Some accountants and insolvency practitioners (who could benefit financially from the more formal IVA) say the IVA is more accountable and provides a fairer outcome for all creditors than the current Irish system, which incidentally, is often brokered by officials from MABS, the free, state run money advice and budgeting service.  Both systems are certainly better than the expensive and inflexible Irish bankruptcy system that has been also been in need of reform and is rarely invoked. 

 

 

If I’m lukewarm about the Green’s proposal for an Irish IVA it’s because aside from introducing formal charges where there have been none, the Greens seem to think it might be the way to address the great wave of mortgage-induced insolvency that is happening. 

 

 

Whatever about allowing unsecured debts to be satisfactorily written down or written off, the IVA process in the UK doesn’t usually deal with secured mortgage debt in the same way as it does unsecured debts like car loans, utility and credit card bills or alimony payments. The debtor seldom gets to walk away from their obligations. 

 

 

No, given how property debt and negative equity is at the heart of our national indebtness, we’re going to have to come up with something more than an IVA process. And we should do it soon. 

 

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Professor Terrence McDonough of NUI Galway is reported as saying that we need a ‘good’ bank to replace the ‘bad’ bank, Nama.  Lots of economists also attending the TASC economic conference last week agreed with him, so here’s a tip on where to find one: the transition year students who’ve accepted AIB’s 2009 ‘Build a Bank Challenge’. 

 

Every year for the last eight years bright, honest, enthusiastic, hardworking, trustworthy young people in secondary schools all over the country set up and run their own bank after being trained (albeit by AIB) not only in money management skills, but “teamwork, customer service and marketing and sales.”  

 

 I’m told that since the programme started, there’s never been a defaulting customer or a case of payment arrears; the young bankers have never issued themselves with director loans, falsified their accounts or even deceived their regulator (again, AIB). They even report…fully accountable profits.

 

With a record like that, forget Nama.  They should replace the ECB.

 

 

 

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The average American adult has 13 plastic money cards in their wallet.  We Irish typically have two or three – an ATM, and/or a Laser card and a credit card. 

 

David McWilliams briefly addressed this abundance plastic in the first episode of his new programme “Addicted to Money”. He noted how easy it’s been to access credit over the past 20 years, but how much easier again it has been to build up a level of credit card debt that, along with foreclosed mortgages, could still destabilise the banking sector. 

 

As the latest Central Bank statistics shows, Irish credit card holders have been trying to wean themselves off their credit habit. Compared to July 2008, shoppers have spent €175.6 million less this past July, a downward trend that began with the financial meltdown last autumn.  However, the figures also show a nominal rise in spending compared to last spring and no matter how much extra people seem to be increasing their monthly repayments, the nation’s total outstanding credit card balance since 2008 remains stuck at about €3 billion. 

 

Falling net incomes and rising interest rates, especially on cash withdrawals, isn’t helping, of course, but anyone who is dragging behind them a limpet mine of credit card debt may need to take more drastic measures. 

 

Aside from cutting up the cards, you need to shift this most toxic of leveraged debt to a lower cost personal or credit card loan.  If the bank or credit union isn’t an option, maybe a kindly family member, who’s only earning 2.5% on their savings will take a chance and lend the money at a nice steady 5%. Cancelling the satellite TV contract might be worth doing before you’re forced to sell your car.  

 

As discretionary spending gets thinner on the ground, the greater the distance we should put between ourselves and those thin rectangles of plastic. 

 

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I’m resisting the urge to celebrate the latest surge in the price of gold.  For one thing, the $1,044 an ounce price it reached while I was writing this might have fallen by $30 or $40 dollars by the time you read this.  

 

No one can accurately predict where gold is heading, or the wider asset markets with which gold has moved in tandem lately. Gold, like other commodities, shares and even residential property (in the US and UK) has been affected by the huge amount of government stimulus money that has propped up industries that were too big to fail, like the banks and motor trade.  If the price of gold falls along with the markets – as many commentators predict they will - it should be a buy signal to anyone who doesn’t hold some gold in their pension or in a wider investment portfolio. 

 

Mind you, last week’s price jump was an interesting development in that it was based on speculation in the London Independent that a number of oil trading middle eastern governments, along with the Chinese, Russians, Iranians and French, were plotting to replace the dollar with a new basket of currencies and gold as the preferred oil currency. 

 

They all denied it, but much of this year’s upward price ticks have been attributed to the Chinese government’s growing purchases of physical gold. Recently, the Hong Kong government shifted its gold out of storage in London to a specially built mint near Hong Kong airport; the price jumped the day that was announced too. 

 

The Chinese know that the higher price isn’t really about gold, whose enduring value is not disputed. It’s about the constant devaluation of a piece of paper with ‘dollar’ printed on it. 

 

And if you take a longer term view of your finances like I do, you’ll know the euro isn’t really much better.  

 

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The new Fair Deal for nursing home residents has come too late for my widowed mother-in-law, who spent nearly four years in residential care before she died in 2007. We were very lucky that her excellent care – at a cost of over €50,000 was easily met out of a combination of her pension income and her capital - the bubble-induced proceeds of the sale of her modest home in Cabra.  

 

However, had Fair Deal been around then, the real beneficiaries of the scheme (assuming the fees didn’t suddenly rise) would have been her heirs, who would have inherited an additional €85,000 more than they did receive from her remaining estate. And all because the required contribution – from her income every year and 5% worth of her other asset for a maximum of three years – would have been less than the true market value of her care for those four years. 

 

Fair Deal will be very welcome for those elderly people on their families who do not have sufficient income or resources and who had little choice in the choice of the highest quality care home. 

 

But is Fair Deal …a fair deal for the taxpayer?  With property and share values deflating but medical inflation rising and the state’s weekly borrowing requirement now over €440 million a week, how sustainable is a scheme that limits the state’s clawback to a maximum of 15% of non-income assets, regardless of the market value of those assets?

 

Is this why the Fair Deal FAQ (see www.dohc.ie/issues/fair_deal/faq.pdf?direct=1 ) notes: “While it is hoped that there would be sufficient funding to support everyone, there may be situations where a person’s name must go onto a waiting list until funding becomes available. If this is the case the HSE will notify you when it writes to advise you whether you are eligible for State.”

 

You might want a plan B in place, just in case. 

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The first year of the two year 100% guarantee for all deposits in the six Irish banks has just passed. Now anyone who is thinking of leaving their life savings in any of the Irish banks for a fixed period of a year or longer, may want to give some thought as to whether such a commitment is a good idea, especially if it’s your life savings you’re trying to secure. 

 

No one knows how the deposit guarantee will pan out  - the Minister for Finance certainly isn’t saying, given how sensitive the market is now that he’s committed us, via Nama, to bailing out the builders’ and banks. 

 

Will the 100% guarantee on all Irish institutional deposits be extended, or will it revert to the €100,000 guarantee that applies to the likes of Ulster Bank and First Active, Bank of Scotland and Halifax, ACC Bank, NIB, the credit unions?  Could the government reduce the guarantee back to the original €20,000 that applied for so many years?  The latter is unlikely, if only because most other EU deposit guarantees have also been increased in the past year.

 

With bad debts continuing to rise and no certainty over the success of Nama in freeing up lending anytime soon, and every indication that savings rates are more likely to fall than rise over the short term, this is a real dilemma for anyone who needs to maximise their return. 

 

Perhaps the best advice is the same advice this columned suggested a year ago:  don’t leave all your money in any single institution and give as much thought to the return of your money as a return on your money. 

 

The most solvent deposit banks – like Dutch-owned RaboDirect, the UK Leeds and Nationwide building societies, Postbank (which is half owned by Fortis Luxembourg) and the Danish owned NIB, don’t offer the highest interest rates, but those they do offer they can stand over without resorting to bail-outs from their respective governments. 

 

Contrast this with the likes of Anglo Irish Bank and the Irish Nationwide, that offer the highest fixed rates. The only reason these zombies do so – with the approval of the Department of Finance and the Central Bank – is to prevent depositors from fleeing and the banks having to be closed. 

 

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Last week Rossa White of Davy Stockbrokers pointed to the 1.6% increase in US house prices in July as another piece of evidence that the US economy is now out of recession and that its only a matter of time – say, the first quarter of next year - before we follow them back into the land of growth and recovery. 

 

I think he’s just ‘talking up his book’. 

 

Here, the latest figures from Permanent TSB/ESRI house price index tell a very different story about the value of our largest individual assets, our homes, and so do ESRI economists whose record on tea leaf reading has been somewhat better than the wishful thinking of stockbrokers and bank economists, whose employers have one mandate – to sell us financial products that pay them – not us - the highest returns. 

 

The pool of Irish house sales has turned into a puddle, so the PTSB/ESRI monthly survey isn’t as reliable as it may have once been, but nevertheless, the trend is obvious: house prices in August were down -1.5% after a -1.1% fall in July. In June, prices fell by -1.5%; in May by -1.3%.  April was the worst month this year with a -1.9% drop.  In March, prices fell by -1.0%; in February by just -0.8% and by -1.4% in January.  Cumulatively there has been a drop of 10.5% this year to date, with four months to go.  A 14%-15% fall for 2009 doesn’t look at all far fetched. 

 

Given how huge our property bubble was, compared to America’s, a 15% drop this year may not be the end of the fall – the ESRI doesn’t think so, nor does the likes of UCD economist Morgan Kelly who has been the most accurate forecaster of them all;  he’s standing by his original prediction that prices could fall by 75%-80% from their peak before they hit bottom.  Now that even the Minister for Finance accepts that prices are probably down about 50% from the 2007 peak, we’ve some way to go yet. 

What is rarely mentioned by any of the advocates of the view that the US is out of recession, is that the positive house prices are mostly a consequence investors hoovering up – and bidding up – thousands of foreclosed properties that have hit rock bottom plus an $8,000 government tax credit for first time buyers.  Meanwhile, the rate of foreclosures is actually increasing in the US, not diminishing as thousands of mortgage rates reset upwards and unemployment keeps edging up.

 

We’ll see the Irish property market pick up again when the dole queus wind down, the banks start lending again, the five year inventory of unsold and empty properties begins to cleared. 

 

Now if only the crystal ball gazers would give it a rest. 

 

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I was enjoying Rome’s extended summer last week, so missed the furore created by arts luvvies Colm Toibin and Anne Enright protesting that their much-cherished tax exemption may get the axe courtesy of Colm McCarthy.

 

I’ve never understood why taxpayers – including master craftsmen like woodworkers, painters or plasterers whose earnings are not tax exempt – should subsidise someone who writes a novel or paints a portrait.  Such a special status doesn’t apply in Italy, where The Economist recently noted that 60% of the world’s artistic heritage is preserved. 

 

There, struggling artists do what they’ve always done if they are hard up : they find themselves a benefactor, where possible, or more likely, a 21st century equivalent – an agent and publicist who can secure them a decent cash advance. 

 

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I understand that author Colm Toibin was all over the radio regaling us all about the economic contribution that the arts makes to Ireland and ended up with a contemptuous sneer “Who ever heard of an Austrian artist?”.  The I read about Booker-winning author Anne Enright telling us how the tax exemption was one of the most important things in her writing life and how “there was a considerable amount of starving in the garret that went on.”

 

Whatever McCarthy ahs to say about merging various arts institutions,I’m absolutely at one with him on getting rid of the artists tax exemption in its entirety, and not the fiddling around that happened in 2006 when the annual tax-free threshold was capped at €250,000.

 

At its simplest, there is absolutely equity or justice in artists earning substantial sums of money getting away with paying no tax because Charlie Haughey decided all those years ago that an “artist” earning €50,000 is somehow more worthwhile than a carpenter earning €50,000 or dare I say it a journalist earning €50,000.  And if struggling artists don’t earn a lot of money then they’re going to be outside the tax net anyway so all this nonsense about struggling in a garret is only so much self-serving nonsense.

 

I only hope that the Minister for Finance has the gumption to ignore the rantings from the luvvie and puts the likes of Colm Toibin, Anne Enright, Bill Whelan and the rest of the luvvies on exactly the same tax status that the rest of us have to endure.

 

 

 

 

 

 

 

 

 

 

 

 

“Out in the plains of Wyoming, you own a very large horse operation,” reports our currency man Bill Jenkins, keeping with the theme. “Let me tell you all about it…

“The Bureau of Land Management, in its infinite wisdom, looked at a herd of wild mustangs and decided that they could no longer fend for themselves or find their own food. That perhaps the food was scarcer than it had been, and this could lead to detrimental results for the horses.

“And so, employing pickup trucks and helicopters (we’ve come a long way from the Ponderosa), they rounded up these majestic beasts into a huge pen. And when I say huge, I mean the government has currently collected 33,000 horses. Again, in its infinite wisdom, it has provided birth equine control (at no cost to the horses). In addition, it is doing DNA testing to identify the horses individually. (Again, at no cost to the horses.)

“They are housed and fed at a cost so far this year of $35 million. That’s right -- 35 MILLION dollars, paid by you. But you can go adopt one if you like. You’ve paid for it. All you have to do is get there; I guess you could ride your horse home.”

Heh, the BLM just announced today the last adoption event. On Sept. 26, it’ll auction off 57 Pryor Mountain horses. Bidding starts at $125 a pop.

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The first thing that struck me after reading great chunks of the Commission on Taxation report is how out of date it is; the country the report refers to doesn’t seem anything like the 2009 one in which so many Irish people are now struggling to live decent, productive lives.  

 

You certainly wouldn’t get the impression from this report that the Commissioners were aware that the Irish economy had a massive stroke a year ago and has been on life support ever since, hooked up to a permanent drip of foreign borrowings. 

 

Much as there is merit in the idea of taxing capital assets instead of labour or financial transactions (like stamp duty on property) and in cutting out the great clutter of reliefs and allowances that were introduced piece-meal over several decades, exactly who do they think will be paying these new capital or consumption taxes, like the carbon tax or water charges?  

 

By upholding the extreme ‘progressive’ nature of taxation in this country, until the cadaver on the table shows some real signs of life, there are probably going to be more householders, for example, who will be exempt from the proposed €1.23 billion annual property tax:  the poor, the elderly poor, first time buyers who’ve already paid a mountain of stamp duty and the unemployment. 

 

The same sense of the unreal pervades their suggestion that hundreds of millions will be raised by taxing child benefit payments or with the introduction of the carbon tax.  Didn’t anyone, even a year into their task, observe how the patient they were commanded to treat was already a goner?  Clearly it didn’t dawn on any of them that they’d have been doing us all a greater service by putting a pillow over its face that to continue to proceed with such an irrelevant course of treatment.  It certainly would have been a cheaper outcome than the irrelevant 600 page diagnosis they delivered last week. 

 

Tax reform is going to be crucial if we are to get out of this economic depression it is the recommendations of the McCarthy, An Bord Snip report on which minds should be concentrating.  Unlike that one, this report is 

wishy-washy and non-committal. They suggest we return to a more complicated three layer income tax rate system, but don’t suggest what is the new rate or rates.  I found it hugely annoying that the actual tax rates we are paying – well in excess of 25% and 51% when the income and health levies and higher PRSI rates and ceiling change is taken into account – are not really acknowledged in the report. They kept using the 20% and 41% standard and marginal tax rates as their benchmarks. If only. 

 

 

Regarding the detested health levies, which have been doubled, the Commission notes that they “should be abolished and integrated into the income tax system when fiscal conditions improve sufficiently to allow a transition to the new structure.”  Surely you either abolish them, or you integrate them, but not both? And with fiscal conditions still dis-improving, surely now is the time to remove these anti-labour levies, not when condition improve…whenever that is. 

 

 

Even the Commission’s key pension recommendations – to lower tax relief on contributions and to bring in an SSIA type pension funding scheme might, someday, boost coverage among the lower paid.  But it also probably means lower pension incomes for middle and higher earners and a longer term lower tax take for the exchequer. 

 

Until the €23 billion spending deficit is tackled and 440,000 unemployed people get back to work, this report is a non-runner.  Ordinary working people – especially those with dependent children, grossly inflated mortgages and falling incomes - simply don’t have an additional €3,000 or €4,000 a year to hand over to this wasteful government. 

 

I wonder how much this report has cost us.  Too much I’d suggest in terms of its relevance to an economy that is unrecognizable from 18 months ago. 

 

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Last Saturday, I bought a car, a nice, shiny ’07 Nissan Almera that looks brand new and has very low mileage.  I keep buying Nissans for the same reason that I shop at Lidl:  good quality, reasonable prices and I don’t have to mull over endless other choices of cars (or tinned tomatoes). 

 

But that isn’t why I bought a ‘new’ car right now.  Like most people reading this, I have sharply curtailed my discretionary spending this year.  We dine out less; I buy fewer clothes and shoes (alas) on a whim and my credit card mostly stays in my wallet. 

 

I bought this car because the old one was nearly nine years old and while the engine would have kept running for a few more years, it was beginning to have minor ailments that were going to start costing me money. Body-wise, rather like its driver, the Almera had certainly seen better days. 

 

With such amazing bargains in the forecourts, it is a good time to replace the car.  And since I tend to drive my cars pretty much into the ground, I’m counting on this one to run for at least another six or seven years as well.  

 

“Why didn’t you wait for a scrappage scheme,” a friend asked.  Well, mainly because like the roll-out of electric cars as the flip side of the abolishment of vehicle registration tax, as outlined in the Commission on Taxation report, car scrappage is aspirational, not realisable.   

 

The biggest gainer from any car scrappage scheme here is going to be the foreign motor manufacturers, not Irish workers or the environment, and frankly, electric cars will only happen here when cheap plentiful electricity becomes available in this country along with indestructible, curb-side plug in stations on every street in every village, town and city. 

 

Nah, I can’t see that happening anytime soon either; in any it’s just an aspiritional It’s all very environmentally correct to think that we’ll all be driving VRT-free electric cars in the near future – even the Taxation Commissioners noted it as an aspiration, along with a car scrappage scheme to encourage such purchases – I really didn’t feel like waiting until both the car and I are ready for retirement before we generate enough cheap electricity for that to happen.  

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As usual, the people of Ireland, at least those of us lucky enough to be still working, continue to do the right thing as the Great Recession deepens.   

According to the latest Central Bank monthly statistics, we are now paying off our credit cards faster than we are spending on them. We’re also doing our bit to recapitalize the banks with real money and not with borrowings from the ECB. Last July, overnight or demand deposits rose by another €555 million while three month notice accounts rose by €633 million. 

We’re just as wary about taking on mortgage debt as the banks are to lend it to us in this falling housing market. The annual rate of increase in outstanding residential mortgages in July was just +1.3%, says the bank; by the end of this year it expects we will be actually paying off the nation’s collective mortgage bill, not adding to it. 

This is bad, bad news for the property developers and builders, architects and lawyers, estate agents and granite topped kitchen fitters who relied on a steady stream of mortgage borrowers for their livelihoods during the bubble years, but it’s a perfect reflection of how depressed is the real economy. 

It’s also a point that is being overlooked in the endless debate over the merits of Nama or the other good bank/bad bank ‘solutions’. 

The argument seems to be – but who really knows - that the banks must be recapitalized, no matter what the cost, in order that businesses and individuals can return to the old formula of borrowing and spending, so that our economy can ‘recover’, and grow again. 

They’re the experts, of course, but it seems to me that this is just more bubble blather.  

Our current enthusiasm to repay of our personal debts and rebuild our savings funds proves that a lot of us now realise that all that foolish borrowing and spending has actually left us a lot poorer, not richer, than we were before those mad, boom years. 

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‘Buyer Beware’ should be stamped all over one of the VHIs newest products, First Plan Extra. 

For the first time, say private health insurance brokers, a health insurer is putting restrictions on where certain common surgical procedures – like hip replacements or cataract surgery, can be undertaken and how much they will pay towards the cost.  The fear is that customers who buy this plan, because it is cheaper, may not realise that it comes with unusual restrictions that could result in them waiting longer for treatment and paying far more too. 

First Plan Extra costs €690 a year, at least €200 cheaper than other popular VHI plans in the same range, such as Plan B Options, Plan B, and Plan B Excess.  It generally advertises the same access to public and private hospital accommodation as these other plans, except for certain surgery - any joint replacement surgery, such as common hip replacements and any eye surgery, including for cataracts will not be performed in public hospitals. For those private hospitals where the surgery is conducted, only 35% of the cost will be covered by VHI.  These are treatments mostly common to older patients and members, of which VHI, the state owned insurer has the greatest number, a throwback to being the only provider until 1996. 

Specialist health insurance brokers say this restriction is a dangerous precedent in a market that is already stuffed full of complicated plans and policies that consumers already find difficult to compare for cost or quality.

They also say this new policy doesn’t clearly define or highlight the ne w restrictions and that buyers may not realise that they could end up both paying for and waiting much longer for specified hip, knee, shoulder joint replacement and major eye procedures if treatment is only available in a restricted number of hospitals. 

By then it could be too late to switch to another plan.

This certainly looks like a matter for the industry regular, the HIA. If VHI, the biggest insurer, owned by the state, thinks it’s acceptable to start targeting ‘loss making’ treatments like hip replacements, what’s to stop them – or any other insurer – from extending these restrictions to other types of surgery or treatment.  

So much - again - for the spirit of community rating which is already being whittled away by the introduction of so many plans in which the benefits are clearly aimed at specific age groups.  

For the moment, the price of this product is still too high for it to attract that many new customers, says Dermot Goode of www.insurancesavings.ie, who offers a fee based comparison service and Aongus Loughlin of Watson Wyatt Health, who advises corporate clients on their health care plans. 

They both site a number of Quinn Healthcare and Hibernian Vivas Health products that are either cheaper, or only a few euro dearer than this one, and which provide the same or better benefits without any restrictions.

The state owned insurer is losing money and members and has again missed its latest EU deadline for complying with solvency reserve requirement: that gap is now reckoned at €100 million.  

Nor is this the first cost cutting measure the VHI has brought in this year – they slashed benefits from their Life Stage plans this past summer and have chopped and changed their family plans and child premiums, amid considerably confusion, say the brokers. 

But what is truly extraordinary is that despite being the sole beneficiary of the new €150 adult and €60 per child insurance levy – a subsidy from every other health insurance member in the country – the VHI still feels compelled to target this vulnerable age group.

Do yourself a favour.  Check out the competition. 

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The investment club I’ve belonged to for the last couple of years suffered the same fate as most of the rest of the investing community a year ago: we were caught, deer-like, in the headlights of the juggernaut that crashed through global stock markets.  Because we were invested almost entirely in Irish shares, (the consensus being that we should buy what we know - ha!) we lost 69% of our original stake. 

 

The poor little ISEQ hasn’t recovered as well from its beating as other, bigger markets since the rally began in March, but our portfolio value is now down just 49% and I think it might be time to bail out, lick my wounds and accept that investment clubs are a perfectly good way to socialize, but not to make money. 

 

Luckily, we all knew the risks and only made modest monthly contributions we could afford to lose and agree that it’s been a valuable and humbling learning experience. 

 

We even did the right thing and changed tactics last February, using an investment formula recommended by a stock market guru, Rory Gillen of investlikethebest.com, which has certainly been more successful than our earlier, sporadic, stock picking. 

 

But I’m cutting my losses because I don’t share the view that this rally is sustainable: there’s no body of evidence to suggest that this so-called green shoots recovery is based on anything other than artificial stimulus from governments and central banks and massive corporate cost cutting.

 

 

I haven’t given up on investing though:  for what it’s worth, this year’s pension fund contribution is going into include index-linked bonds and natural resources and gold funds.  

 

 

Gold may not have yet made that enormous price leap that goldbugs keep predicting, but it has spent most of this year hovering in a price band that has averaged at about €940 an ounce for 2009.  So long as the US keeps accumulating as much debt as it does, and we keep thinking the US is somehow going to help us get us out of our depression, I’m going to keep buying the yellow metal – one of the only investments I’ve made in recent years that hasn’t just kept it’s value, but produced a genuine profit. 

 

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For some reason, the National Consumer Agency keeps paying for studies and surveys that simply confirm what is already pretty much known – that it pays to shop around and switch to better value products and services.

 

Top of the switch list last year (last year?) are mobile phone contracts, says the NCA.  And this is news?  Or even useful news?  You can’t open a newspaper, magazine, tune into a TV or radio station or go onto the internet or social network site and not come across some mobile phone or broadband company offering savings if you switch to their service.  I’m still trying to work out how to stop these companies accessing my mobile phone to lay out their competing wares.

 

Ditto for electricity supply and car insurance and groceries and all sorts of other stuff. 

 

A far more useful exercise than hiring Amarach consultants to discover that people who shop around for mobile phone contracts can expect to reduce their bill, would be for members of the CAI staff to conduct a secret shopper survey, right now, on how the two main banks are interpreting their side of the lending deal they made in exchange for our pension savings.

 

It seems that despite getting €7 billion worth of bailout money care of the National Pension Reserve Fund, AIB and Bank of Ireland – “the only two lenders in town” according to mortgage brokers – are not even giving loans to people with steady jobs, good credit records and equity in their homes.

 

One such reader complained recently that when he did inquire about switching his PTSB variable rate mortgage to an AIB fixed rate loan, which he believes will be cheaper over the duration of his loan term, the AIB official suggested that he wasn’t the ‘category’ of customer they were looking for, “whatever that means. Weeks have passed and I’m still waiting for the branch loan committee to say yes or no.” 

 

I know it’s the summer, a tough time to generate a meaty story, even for a group of civil servants who’ve been earmarked by An Bord Snip for merger with the Competition Authority, but I don’t think I’ve ever heard a peep from the National Consumer Agency about mortgage switching, good or bad or indifferent.  

 

If an historic survey about the merits of product switching is the best the NCA can come up with, that merger really can’t happen soon enough. 

 

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I take a great interest in American financial news because what happens in America eventually happens here. 

 

Interesting then that the US Social Security Administration, the agency that administers the payment of the US state pension, announced last week that it is to freeze the size of social security payments to 50 million recipients until 2012

on the grounds that the cost of living has fallen. 

 

The Americans haven’t frozen their state pension since 1975 when automatic cost of living increases were first introduced; commentators say the SSA hasn’t ruled out an outright reduction. 

 

Like here, deflation is taking its toll on consumer prices;  the US action falls just short of the recent An Bord Snip’s recommendation that all Irish social welfare benefits, including the state pension, be cut by 5%.  It could make an interesting precedent for the Minister for Finance to cite if he leaves pension payments where they are now, in his December budget.   

 

 

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The latest report from Daft.ie shows that rents have fallen nationally by 17% over the past year with the average monthly rent now just €800, and €1,000 a month in Dublin.  Good news for renters, but not for landlords and buy-to-let investors who will be disappointed to also see that the number of rental properties to rent on Daft.ie reached hit 23,400 on August 1st, three times the seasonal average and up from 6,200 properties on August 1st, 2007.

 

The Daft statistics are just one piece of the wider picture of empty or unsold properties in the Irish market.  Last weekend another newspaper quoted the ratings agency, Standard and Poors, as estimating that the excess housing stock in Ireland had now reached 250,000.  With just 7,400 first time buyers and investors taking out mortgages in the first half of this year (according to the Irish Banking Federation), at that rate of purchase it’s going to take nearly 17 years to clear this inventory. 

 

Meanwhile, the housing charity Focus Ireland insist that the real number of homeless households around the country is 3,499, and not 1,394 as the Department of the Environment claims.  This figure, of course, doesn’t include homeless individuals or the thousands of other families and individuals already living in crowded or unsuitable public accommodation who are waiting for housing transfers.   All these people would certainly put good use to some of this unsold or unrented inventory. 

 

Perhaps someone needs to revisit the suggestion I made nearly three years ago in this column after the 2006 Census highlighted the huge stock of vacant houses. I pointed out that we should do the same as the UK, where local authorities have the ability under the Empty Dwelling Management Orders (Edmo) legislation to take over and rent out homes that have been standing empty for more than six months. The owner is given the chance to voluntarily rent out or sell the property themselves, but if they decline the Edmo is enacted and they are given a market rent by the local authority which proceeds to house a client on their housing waiting list.

Not every empty house planted in a piece of boggy land by tax-driven builders and speculator/owners would be suitable for Irish homeless families. But there must be thousands of locations in urban and rural areas that would be a sight more appropriate than the bed and breakfast accommodation into which so many parents and children are placed. 

Normally, I wouldn’t be in favour of the government interfering in anyone’s private property rights; but we haven’t lived in a ‘normal’ property owning community for decades.   The size of the housing stock was artificially pumped up by the government and subsided by those people who couldn’t afford to jump on the property gravy train:  many of them remained inadequately housed or on local authority housing lists during the Celtic Tiger boom years. 

Falling rents should help local authorities reduce their waiting lists, but the vast, idle, housing stock, funded by billions of euro in tax allowances and reliefs will remain a visual testament to the waste of national resources until it is cleared. 

That these properties only attract a token €200 property tax (from this month), and may not be subject to the higher residential property tax next year that the Commission on Taxation is understood to have recommended, -just adds further insult to injury.

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The government keeps bleating on about the falling cost of living, and how the higher levies and taxes have been offset by mortgage savings, cheaper clothing and footwear, food and alcohol.  

That’s all very well  - if you have a mortgage and like to drink -  but it won’t come as any surprise to find that the National Competitive Council has upheld what the rest of us knew already:  the cost of three important state-provided services, health insurance, education and public transport are up 13.2% this year.  Other non-pay costs such as utility prices and professional fees also compare poorly with other EU, says the NCC, and even the price of credit – if you can get it – costs more here than in our European countries. 

The gist of the NCC’s report is that the government should be tackling the cost problems of their own creation as a matter of urgency.  They’re right of course, especially given the disproportionate effect that even very small increases in mortgage rates will have on already heavily indebted, and increasingly, unemployed households.  

 

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Construction workers beware.  The number of employers who are stealing your pension contributions continues to grow. 

Last June, when the Pensions Board launched it’s 2008 annual report, it revealed that it was pursuing about 200 mainly construction companies for not passing on the contributions – stealing, in other words – that were made by their workers into the Construction Workers Pensions Scheme. 

That number is now up to 270, say the Pensions Board chief executive, Brendan Kennedy.  Every new case the Board uncovers – often because the company has gone bust - is reported to the scheme trustees, the Pensions Ombudsman, the Office of the Director of Corporate Enforcement and the Garda Fraud Squad.

 

Sadly, the workers are often the last one’s to find out, and there is no guarantee that all their lost contributions will be recovered.   A quick phone call (01-496 6611) with the scheme trustees to ensure that all contributions have been made on your behalf would be a small cost well spent. 

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I expect there will be more than just 19 temporary staff hired at Mabs before this Great Recession ends.  With 10,000 new cases presenting in the first half of the year alone, the 53 money and budget service offices are seriously overstretched, with long delays in the queues of people seeking assistance. 

 

 

Aside from the sheer volume of demand for the service, which is entirely funded by the state, the Mabs model is a transparent and trustworthy one.  Which is more than one can say about the growing commercial and private debt advice industry, represented often by underemployed mortgage and life assurance brokers whose own businesses are suffering badly from the collapse of the property market and the sharp fall off in the sale of investment products.

 

Many of these debt councilors, as they call themselves, are now advertising their services to anyone who can pay them an initial consultation fee of as much as €500, and are willing to forego a percentage of the total debt settlement figure – typically 15% - once a new payment schedule is agreed with their creditors.

 

 

At best, they will help the debtor get a workable deal in place that reschedules their mortgage, car, credit card and other personal loans.  But I’ve also heard about clients handing their paycheques and any other monthly income over to the debt advisor who takes it upon himself to pay all their bills on their behalf, for a fee, of course. 

 

 

There are legitimate budget planning firms that facilitate bill paying and some brokers might say they are providing similar bespoke arrangements, but these single operators don’t  work under any code of practice and are pretty much free to make up the rules as they go along.  If other reports are correct about how unregulated moneylenders are now getting into the budget and bill payment business, then some of the most vulnerable people may be handing over their weekly social welfare payments to these vultures to keep other vultures at bay. 

 

 

Despite the recruitment ban, the Minister for Social and Family Affairs Mrs Hanafin, has moved pretty quickly to address Mabs’ need for more advisors but perhaps it’s now the turn of the Financial Regulator and the National Consumer Agency to look at the operation of a new, unregulated industry that looks like it might have rich pickings for years to come.  

 

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‘Cash for Clunkers’ is the American version of the car scrappage schemes that are now operating or are being considered in at least 12 European countries that, unlike here, actually make cars.

 

Last week a friend of mine, just back from a holiday in America, waxed eloquently about how her brother was turning in an old model SUV he bought many years ago for a newer version that has already been hugely discounted by his local Ford dealer.  This $4 billion scheme has been so successful, that it’s already run out of money and will be extended at a cost of another $2 billion. 

 

Since my friend’s brother’s new purchase achieves at least 10 miles per gallon more than his old one – the minimum extra mileage requirement to qualify for he subsidy is just 4mpg - he will get a credit voucher of $4,500 from the US government. The original criteria was that the new vehicle had to achieve at least 32 mpg with the minimum to be replaced at 20mpg, but this was watered down by the motoring industry lobby.

 

Now his perfectly good ‘gas guzzler’, that could probably have been driven by him or someone else for many more years, will be replaced with another, newer gas guzzler, whose manufacturing carbon footprint probably exceeds the cost of running the old one into the ground. 

 

My friend, who could afford a new car if she wanted one, wishes she could have replaced her old car via such a scheme here, which the government – for once – had the good sense to reject on the grounds that we have no manufacturing jobs at stake. 

 

Scrappage schemes may clear out inventory, but they don’t create sustainable new production or employment.  If they did, motor manufacturers wouldn’t still be saying that they may need more state bailouts to remain in business until global economic conditions improve. 

 

Mainly they incentivise buyers – like my friend and her brother - to bring forward spending that they would probably have undertaken at a future date anyway, but at the added expense of permanently rendering down a car that could be driven for many more years or could be a resource for another buyer who couldn’t afford any new car.  What a waste. 

 

Still grieving for the new car that was not to be, I mentioned to my friend that there is a huge, mostly unoccupied new housing estate near her rural home.  I asked her whether she would support the idea of the Irish taxpayer stimulating the struggling construction industry by giving her a cash subsidy to level her lovely old, higher carbon emitting, house in order to buy one of those empty properties.

 

 

“Don’t be ridiculous,” she said.

 

I rest my case. 

 

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Apologies to the reader who last week asked about the deposit guarantee under which Ulster Bank operates.  Here in the Republic, the Royal Bank of Scotland owned Ulster Bank and First Active, which are regulated by the Irish Financial Regulator come under the €100,000 deposit guarantee scheme. You can check exactly which scheme your financial institution falls under by checkout out the ‘Compensation and Guarantee Scheme’ link at www.itsyourmoney.ie 

 

 

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I’m increasingly concerned about the number of people I’m meeting these days who are being taken in by the stock market rally of the last six months. Or, rather, by press reports of the rally.  Do we never learn?

 

As this rally has shown, last March was the lowest point for nearly all global stock markets and the traders and speculators who got in early and picked up battered financial, construction related shares and oil and other commodities have made big profits.   

Amateur investors need to see the rally in full flight before they feel confident enough to get – and angry enough with themselves for not acting sooner – before they plunge into the market. Usually that’s when it’s too late and the traders, who see the plebs hammering at the door, start moving towards the exit, pocketing their profits. 

 

I have no idea if the markets are going to keep rising or not.  No one does.  But I do know that the kind of buying we’ve seen, especially of financial, construction-related and some retail shares – makes absolutely no sense given how the banking sector is still a basket-case and lending has effectively ground to a halt. Unemployment is also still rising; house prices are still falling and repossessions are soaring. Commercial property is going into melt-down and government deficits and national debts are ballooning. Consumers have stopped spending. 

 

This looks like a recipe for lower, not higher corporate earnings, share prices and dividends. 

 

The mistake I made was not heeding my own advice in May of 2008:  I didn’t sell and go away, but that was because the bulk of my savings is tied up in long term pension funds. Last year, it never dawned on me until it was too late that the financial and credit crisis could have such a devastating effect on my 20 years worth of carefully diversified pension assets.  I genuinely thought I’d been clever by-passing Irish shares or getting weighed down in financial stocks. 

 

Since I think this Great Recession is still in its early stages and there’s a lot more downside risk than ‘green shoots recovery’, I’m checking out low-cost, index-linked bond funds and big defensive stocks that still pay dividends and are, I can only hope, unlikely to disappear altogether between now and when I can afford to retire. 

 

And while pension tax relief is still with us, I suggest you get moving on making your 2009 pension contributions as soon as possible:  one bet I am taking is that retirement funding is going to get a lot more expensive after the Commission on Taxation’s report is published in September.  

 

And I wouldn’t put it past this government to not just cut the level of tax relief on both contributions and the matured fund, but to implement those changes before the October 31st pension deadline. 

 

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Savings rates are up everywhere – at least among people who still have a job - and no more so than here where the fear of unemployment, falling house prices, rising taxes and fewer public services – has raised the national savings rate to a reported 12%. 

 

That may not last.  The latest Postbank quarterly savings index throws up an interesting statistic: nearly half (45%) of those surveyedbelieve they will have to dip into their savings within the next few months as their incomes come under more pressure.  With the retail banks now reducing their deposit rates and at least half of all credit unions failing to pay any dividend this year, there certainly isn’t much financial incentive to keep saving at these levels even if the reasons for doing so – like retirement and children’s education - increase. 

 

Meanwhile, Bank of Ireland suggeststhat the cost of educating a child from primary to college level is now €70,000 – and that doesn’t include paying any private secondary or third level fees.  

 

The bank notes in a report they compiled with the parent’s website, www.Schooldays.ie that you might just about cover the cost of educating one child up to secondary level if you saved all your child benefit payments, plus another €150 a month but only if their education investment plan, “which is not guaranteed” returns a steady, net 6% per annum. 

 

Who comes up with this stuff?  

 

This useless plan charges a 5% bid offer spread, a 1.5% annual management fee and a 28% exit tax. Avoid at all costs. 

 

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It’s weirdly heartening to find out that we are not the only eejits in the world who deliberately set out to fleece both visitors and locals for all sorts of goods and services. 

 

According to Visa’s Europe Suitcase Index, which prices a basket of popular holiday items around the world, the Bulgarians are even worse than we are for ripping off holidaymakers. Singled out in five of nine categories, why else would they charge a whopping €28 for a pair of designer flip-flops, €30 for a beach towel or even €5.35 for a can of deodorant?  

 

Mind you, the last place you want to be without your iPod 8GB Nanoor a Kodak C1013 camera this summer is the Caribbean:  compared to the €139.99 and €99 respectively that they will cost here (they’re even cheaper in the US and Czech Republic), expect to fork out a whopping €490 and €477 to the pirates that are clearly still running those sun-blessed islands. 

 

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