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The following is the truth as it appears in the Sports section of the Irish Times.

“The work was simple. I used to go around the small towns and villages and these estates going up left, right and centre. Cootehall! Tulsk! Frenchpark! Where were all the people going to come from? I remember saying to someone around 2004: ‘this thing is going to fu**ing blow up sometime. But hopefully not in the next 12 years and we will get a good touch out of it’. – Shane Curran, Veteran GAA goalkeeper quoted in The Irish Times Oct. 4th 2014 http://www.irishtimes.com/sport/gaelic-games/gaelic-football/colourful-nonconformist-shane-curran-always-ready-to-think-outside-the-box-1.1951420

This man like thousands of others is not stupid. He could see the evidence of the property scam all around him and he knew damn well that it would end badly. He discussed it with lots of other people who like him were perfectly capable of interpreting the evidence that was all around them. However, most commentators these days would have us believe that Shane Curran was remarkably perceptive and almost alone in reading the signs.

Why is this lie so frequently promulgated? Well, it’s like this. Unless the majority is prepared to believe the lie, a large number of people face a fall. The truth is that a person would have to be monumentally stupid or to have been willfully blind to have failed to see what Shane saw. The next question may be shocking but it needs to be faced. What jobs in Ireland are suited to the monumentally stupid or the willfully blind?

The answer of course is few, if any. Certainly stupidity on this scale should rule out journalism, broadcast presenter, teaching and certainly employment in any part of banking or financial services. Our problem is that those proven to be too stupid are still in place.

See also:
https://colummccaffery.wordpress.com/2013/05/12/they-are-known-to-be-useless-and-they-are-all-still-there-a-reminder-from-eddie-hobbs/
https://colummccaffery.wordpress.com/2010/11/24/time-for-a-clear-out-who-misled-and-who-remained-silent-as-a-completely-irish-made-fiasco-developed/

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Let’s be clear. This was an Irish scam. Lending companies had access to lots of relatively cheap “international” money. This was “imported” and lent to the relatively poor so that extraordinary property prices could be paid to the rich.

In terms of page-one economics the price of a house was determined by whatever people were prepared to pay. The graph shows that income and costs increased steadily but house prices took off on a bewildering upward trajectory.
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From Michael Taft’s Notes from the Front. http://notesonthefront.typepad.com/politicaleconomy/2013/06/the-hulk-says-crush-household-debt.html

Traditional lending conventions linking income with loan size were dropped in order to maximise borrowing and this made large payments to the rich chancers possible ( https://colummccaffery.wordpress.com/2012/05/27/if-the-banks-and-building-societies-were-giving-crazy-loans-which-could-not-be-repayed-by-how-much-should-we-penalise-both-their-and-their-customers-foolishness/” ). The scam was greased by making some people desperate (“You need to get on the property ladder.”) and by convincing others that they too could be successful speculators (“It’s a no brainer; property prices don’t fall in Ireland.”).

The interesting question is this: How did so many people fall for the scam? Firstly, it needs to be emphasised that not everyone fell for it. Secondly, while citizens correctly expect those of their fellow citizens who are paid to think, manage and comment to warn them of scams, they were sorely let down. I’ve argued elsewhere that these well-paid failures who did not speak out time and again either because they were too stupid to see the scam or so lacking in integrity that they abandoned their jobs to hide within the scam, should now be moved to jobs more suited to their shortcomings. In short a significant portion (perhaps a majority) of Ireland’s professional elite has been exposed as thick or turpid or both. ( https://colummccaffery.wordpress.com/2013/05/12/they-are-known-to-be-useless-and-they-are-all-still-there-a-reminder-from-eddie-hobbs/” )

It is, however, a mistake to view all of the victims of the scam as blameless. No matter how many times managers and media encourage a person to be foolish there remains a personal obligation to be prudent. Of course there are times when a scam is so well done that little or no blame can attach to the victim but that is not the case in relation to the Irish lending scam. Despite the elite chatter and media torrent in support of foolishness, ordinary conversations about the dangers were commonplace and there were many warning voices which could have been heeded. Moreover, as the scam developed there was increasing concrete evidence in plain sight sufficient to warn all but the wilfully blind or the addicted risk-taker.

Young people are particularly vulnerable to scams and are often preyed upon. The property scam was no exception. The pressure to “get on the property ladder” was relentless and in a just world a nasty fate would await anyone who dispensed this advice – especially when it was dispensed as it became more and more clear that the end was approaching.

Mature victims drawn into a reckless gamble were less vulnerable and their fellow citizens should be less forgiving of their stupidity and/or avarice.

The argument that the victims should be bailed out for reasons different to those offered for baling out the banks is untenable. There was no moral or legal reason for baling out banks. Leaving aside young people and cases where no blame could attach, there is no moral or legal reason to bail out victims of the scam either. However, a functioning liberal economy or the view that these people in aggregate qualify as “too big to fail” may be very good reasons why careful, thinking citizens will have to bail out these people as well as the banks.

Before Ireland began the property scam the lending policy of building societies protected both the borrower and the building society from folly.

Some time ago I wrote here (https://colummccaffery.wordpress.com/2010/06/11/house-prices-available-mortgages/) about the “traditional” mathematical formula used by building societies to link the size of a loan to the borrower’s ability to pay. This formula [(Annual salary A X2.5) + Annual salary B = 75% of the value of the house.] was used in my piece to calculate the sensible price of housing as opposed to the market value of  housing. The latter is determined by whatever the purchaser is prepared to pay and was grossly inflated when banks and building societies abandoned the socially responsible and commercially viable formula and made crazy loans available.

This brings me to the point of this piece. The conventional formula could now be used to differentiate between sensible businesslike lending and foolish behaviour.

When a foolish loan was agreed, there were of course two parties to the foolishness: the lender and the borrower.  It is certainly true that borrowers behaved foolishly. They too could see that repayments – even if everything remained fine for them on the income front – were incompatible with comfortable living. They were, however, driven to excess by fear of rising prices and constant media and family advice to “get on the property ladder” at all costs. In short, they are responsible for their actions and they will pay for their foolishness for a very long time.

The lender is responsible too. The lender is responsible for knowingly and foolishly lending more than could be repaid while living reasonably well. The lender tempted and lured the foolish borrower.

Look at it this way. Reasonable living dictates that mortgage repayments do not constitute a crippling outflow of money each week or month. If a building society or bank lured a borrower to the extent that he/she abandoned common sense and borrowed far too much, the lender should be penalised by the amount of the excess. The excess can be calculated by reference to the pre-madness policy, i.e. by using the “traditional” formula.

Let’s turn to the question of money.  Let’s consider a well off couple both with good jobs seeking a mortgage at the height of the scam:  One has an income of, say, €40k p.a. and the other has an income of, say, €30k p.a. Let’s refer to the first as A and the second as B. Now remember that traditional formula: (Annual salary A X2.5) + Annual salary B = 75% of the value of the house.

Right let’s apply figures: (40k X 2.5) + 30 = 130k

What this indicates is that at the time the loan was agreed, any bank or building society which lent in excess of €130k to a couple with a combined income of €70k p.a. was behaving foolishly and could not possibly have expected the loan to be repaid. That they were aware of what they were doing is evidenced by the existence of the earlier prudent lending policy expressed in the “traditional” formula.

If we are talking about debt forgiveness or write-downs of mortgages, a sensible approach would be to go back to the loan application, look at the stated income/s and calculate the maximum loan that a sane, commercially minded lender would have advanced. It is now a matter of striking the value of the mortgage debt down to this figure. It could then be increased by, say, 10% in order to penalise the stupidity of the borrower.

None of this takes account of how the lenders will cope with the reduced value of the loans on their books. This, however, is true of any measure of debt reduction. What the proposal here does do is root a system of debt forgiveness/reduction in a clear and previously existing policy which worked for years and whose purpose was to protect the lender and the borrower from greedy madness.