The Long Con
Read more about: Economy, Fianna Fail, Fine Gael, Labour Party, Progressive Democrats 
In main ways it might be to Fianna Fail’s and the PD’s advantage to lose the next election. There is a saying about economics “Don’t do what the banks say to do, do what they do”. With that in mind when I heard that AIB and Bank of Ireland were selling there buildings. I got to say I got a bit worried. The reason being that the banks now think that it is time to sell their buildings it must mean that they think the housing market is at its peak. Also a recent OECD report thinks that too. Which can only mean one thing the market is going to go down, bringing many people with them and possibly bringing the next government party down with it.
When he won the American presidential election in 1992 Bill Clinton’s catch phrase was “It is the economy stupid!” meaning that the only thing that really mattered in the election was the economy. People care about equality, and infrastructure and the like, but only when their pockets are safe. In Ireland now in many ways economic stability is taken as a given that the country is going to boom like the Duracell Bunny “On and On and On” but that is hardly going to be the cas
So what happens when the property boom goes. Leading to many people in the construction industry out of work. Leading to a knock on effect in the government finances and thus government spending. What happens when the ECB continuing interest rate rises result in people struggling with their mortgages. What happens if the price of fuel increases, hitting the pockets of the people. Now most of these factors are beyond the control of the government. Like the recent statutory rape crisis there is not much the government can do about things like the ECB and oil but like the statutory rape crisis the people will blame the government and the parties that are in government will take a massive hit.
The government is going to fight the next election on the basis that they are the best pilots of the economy but now that people seem to take the boom for granted that issue is unlikely to see many people rally to the government. But what happens if this collapse happens with FG/Lab in power. Suddenly FF and the PD’s prophesying doom under the rainbow will seem like sage like advice. Indeed many might see FG/Lab is totally inept at running the economy. Leading to a case where the 2002 election might seem like a great number of seats. With the electorate flooding to FF/PD/Sinn Fein in the hope of finding the perceived economic wisdom that gave rise to the Celtic Tiger.
Another aspect of the downturn in the property market would be the drop in stamp duty. A drop in tax usually requires a drop in government spending. Something that FG might accept but Labour would not. If this happens prepare to see the coalition fall apart with either an early election or FF leading a minority government.
That kind of economic collapse could destroy the publics confidence in FG and Labour. The drop does not even need to be that great. Just a enough for the average person to feel less well off. Indeed those parties might never recover leading to a rise in for all the parties not in the rainbow. There is often talk of Fianna Fail ready to play the long game. Maybe this is the game. Maybe they see the writing on the wall for the economy and think that it is better that anyone but them, take the fall and will be glad to lose the election in 2007 because it would mean winning the next few.
And yes the title did come from an episode of Lost.
A friend of mine who knows these kinds of things tells me that we have another 18 months or so before the downturn really sets in; he figures it won’t be really bad, but that the levels of disposable income seen at present won’t be around any more (as he put it, we won’t be seeing kids getting rented limo’s for their confirmation; if that’s the worse of it I say 18 months is too long a wait!).
On the housing market he says that it’s probably going to level but it wno’t really drop all that much, but we could benefit (in the long term) from a short, sharp shock… something that probably won’t happen.
Finally I asked him if the Government could do anything to avoid the downturn and his answer was yes, but it would ruin them… I then pointed out how sweet a deal it would be for FF/PD if they lost the next election, and FG/Lab got in just in time to see the economy drop (but not enough to save it)… his answer was that the Irish economy has done so well in spite of the Irish Government, not because of it.
Overall stamp duty levels could remain the same if we were building more units at a lower rate of duty. Fact is too much of the housing build has been of the holiday, 2nd home variety and not enough in the areas of peak demand. The other factor is the SSIA provision which won’t be there next year and which the government had to allow for which would mean some more wiggle room even with the drop off in income from the property sector.
It would make absolute sense for the FF/PD coalition to lose the next election and let an alternative government to pick up the pieces of their maladministarion. It happened in the past, in 1977 following the abolition of domestic rates & the mess that ensued.
However, it would be difficult for Bertie to surrender. His greed & ambition makes him blind to everything except winning.
So I can’t imagine him seeing the obvious. He would be unemployable in the real world – except perhaps in some capacity in his beloved Trade Unions.
And it is only fair that he remains in office – to clear up the mess created by his incompetence & the waste created by his FF colleagues, notably Martin Cullen.
Simon mentions AIB selling their HQ and the liquidation of Irish shares viz. CRH – & the Banks with high exposure to the Construction & development sectors – Anglo Irish in particular.
On May 12th I mentioned that I felt that we were entering a plateau, following the release of the inflation rate of 3.8%, and that there would be a correction that would lead to a correction, if not a recession, in 2008. It now seems that the correction is already happening.
Cian asked upon what grounds I based my prediction that a “tipping point” had arrived.
I could only reply that I was guessing.
However, all around there was evidence that a process of liquidation was in train. Now, one has only to review the Property Advertisements in the newspapers to see how many highly-priced houses are being auctioned.
And the withdrawal rate is significantly higher. In the last week of May 2006, 53% of the 79 properties for sale by auction were withdrawn. In the same period in 2005, 27% of the 66 properties behaved in similar fashion.
This sends out a very clear message to me.
People with accumulated profits in their properties are liquidating.
As is AIB.
Already, interest rates in the US are 7% and they are struggling to correct their economy.
European investors are selling Irish shares, not just the banks & construction shares, but also mining & exploration stocks. Bear traders are adding to the sell off, hoping to buy back cheaply and make a turn. Options have moved to “put” across the boards.
If there is a perception abroad that the ISEQ is over priced, then the government; the construction industry; estate agents; the legal profession & the various commission agents who are “puffing” the amrket and who prosper as long as house prices remain inflated are living in a fool’s paradise.
The bullish statements that they are putting out are irresponsible and soon it will all end in tears, with house prices falling by 15 %; unsaleable motor cars & SUVs clogging up traders lots and the Banks making huge provisons for Bad Debts.
But it will be Sean & Nuala Citizen that will be left in tears, picking up the pieces – not Bertie; not the fat-cat barristers & solicitors; not the greedy estate agents & the dishonest chairmen of the banks.
Maybe I’m wrong. I hope so.