Eamon Gilmore (Dún Laoghaire, Labour)

We can all agree on a number of points in this debate. First, that there is a banking crisis, and that it needs to be addressed urgently. A modern economy needs a functioning banking system, and the large retail banks are part of the nervous system of the Irish economy. We need these banks in particular to be capable of normal lending – to families and businesses across the country. It is a simple point, but one of which we cannot lose sight. Business needs credit.

Everybody knows that a severe credit crunch is affecting small business in particular. According to the most recent statistics published by the Central Bank, the credit crunch got worse in the second quarter of this year. Lending to the non-property, non-financial sectors declined over the quarter by €3.3 billion, or 6.2%, with the largest falls in absolute terms being recorded by the manufacturing and wholesale-retail trade. The annual rate of change in credit to those sectors fell to minus 7.7%. Credit extended to those sectors has declined on a quarterly basis for three successive quarters, with the pace of decline increasing significantly during the second quarter of this year. These figures match the experience of the people to whom I speak around the country, despite the protestations of the banks and the Minister.

To deal with this credit crisis, we need to clean up the balance sheets of the banks, so as to restore confidence in them, and to ensure that they can resume normal lending. This process must focus in particular on the two large retail banks. Those two banks are deeply embedded in the Irish economy. They have been built up over decades and have a deep reach into the communities in which they function. They cannot be quickly replaced. They simply must be in a position to lend if the economy is to function.

The second reality that must be faced is that there are constraints on Government action, particularly in the form of the blanket guarantee. The Labour Party did not agree to that guarantee and we did not vote for it. However, it is in place, and it acts as a severe limitation on the options available to Government. From the minute the guarantee was put in place, the Irish taxpayer was always going to be lumbered with the bad loans in the banks, to a greater or lesser degree. The question with which we are now faced is how to deal with them. The balance sheets of the banks must be cleared up, so that lending can resume, or the economy will contract further. We will see more and more firms, and more and more jobs, that would otherwise be viable, go under from a want of credit.

Equally, as the world economy begins to recover, the absence of liquidity will restrict Ireland's capacity to share in that recovery. This must be done at the least cost to the taxpayer, but the Government has issued a blanket guarantee, meaning that the taxpayer is exposed. The question is how to limit the risk to taxpayers, while restoring the flow of credit to the economy. Essentially, there are two options available. The first is NAMA, the second is temporary nationalisation. Let us be clear. Neither of these is a good option – the crisis is too deep for that. Either approach will be costly, but one is manifestly better for the State than the other. Temporary nationalisation limits the risk to the taxpayer while NAMA increases that risk. NAMA is based on a deliberate policy of overpaying for the bad loans. Temporary nationalisation removes the risks involved in having to value the loans.

Fianna Fáil has been trying to persuade people that it does not matter how one deals with the banking crisis. In its version, the losses are the losses. That is simply not true. With the temporary nationalisation approach, there is no policy of deliberate overpayment, and the State stands to gain when the bank is sold again. With the NAMA approach, the taxpayer assumes an unacceptable risk. The Government knows all of this. The issue has been debated in great detail in the media, old and new. The overwhelming majority of independent economists, of all political viewpoints and none, is that temporary nationalisation is a better option. Yet the Government is choosing to push ahead with NAMA. It is impossible to avoid the conclusion that the Government is deliberately choosing to place the interests of banks above the interests of the taxpayer.

What we also see, right through this legislation is a determination to preserve the status quo– to protect the toxic triangle of developers, bankers and bad government that got us into this mess in the first place. We saw it in the case of Anglo Irish Bank, where the determination to avoid nationalisation led to the blanket guarantee and a subsequent nationalisation on the worst possible terms for the taxpayer. We see it in the determination that at all costs further nationalisation should be avoided, which is what is driving the determination to over-pay for bad loans. We see it in the refusal to shake up the boards of the banks and we see it in the extraordinary powers that the Government is assigning to itself in how NAMA will function.

We should probably not be surprised that we are being asked to bail out the banks and the property developers in this way. NAMA is simply another step in a long line of decisions that favoured property developers over many years. A recent study of the housing sector by the Jesuit Centre for Faith and Justice provides a picture of how housing policy has developed under this Government. It notes, for example, that between the mid-1970s and the mid-1990s, the price of housing in Ireland broadly tracked the cost of building a house. After the mid-1990s, however, there was a surge in the price of housing, which bore no relation to the cost of the relevant inputs. By 2007, house prices had risen by four times as much as building costs. The average price of a new house in Ireland increased by 344% between the mid-1990s to the peak of the bubble, rising from €73,000 to €323,000. In Dublin there was a 408% increase over the same period. Average second-hand house prices increased by 441%, and by 499% in Dublin. Needless to say, wages were not increasing by the same amounts. In fact, if new house prices had tracked the increase in earnings, that price of €323,000 in 2007 would only have been €124,000.

When an economy starts to boom, one can expect house prices to rise, but one might also expect the Government to do something about it. As long ago as 1999, the Labour Party was addressing housing policy in a comprehensive manner. In February 1999, the Labour Party established a commission, under Professor P. J. Drudy of Trinity College, to advise the party on a wide range of housing issues, including the crisis in affordability that was facing young couples. That report explicitly identified a number of factors that were leading to escalating house prices, including the lax lending policies of the banks, the impact of speculation on the housing market, and the effect of property based tax reliefs.

The report made a series of recommendations covering a wide range of housing policies but with a particular focus on affordability. Again and again during the past decade the Labour Party raised the question of spiralling house prices and it was ignored. In 2003, the Labour Party made a submission to the All-Party Committee on the Constitution making clear that, in its view, there was no constitutional impediment to the implementation of the Kenny proposals to control the price of building land. This was followed with a Bill to give effect to the Kenny formula which was again rejected by the Government.

For its part, the Government twisted and turned in every way possible to avoid confronting this issue. While it commissioned reports and promised action, that action either did not materialise or was, in some cases, reversed before it could have any impact. More and more housing was treated as an instrument of speculation and accumulation rather than as a basic human need. If one ever needed a more telling statistic in terms of how Fianna Fáil has deserted its roots in the past ten years, it is to be found in the figures on social housing. In the 1930s and 1940s, social housing accounted for 60% to 70% of all housing output. As late as 1985, the public sector was responsible for 27% of output. However, in the boom years of 1995 to 2006 this fell to 6%. Again and again we called for action but nothing was done. At the same time, Fianna Fáil blatantly flaunted its connections to property developers and speculators. Those lavish Fianna Fáil election campaigns, which took political spending in Ireland to new heights, had to be financed somehow. Frankly, Fianna Fáil did not care how any of this looked. Well, it looks pretty shabby now.

Meanwhile, all of this was having a damaging effect on our economy. As the construction bubble gained momentum more and more labour and resources were sucked in and became dependant on the construction sector. By early 2007, more than 20% of all male employment was in construction. As a result the competitiveness of the exporting economy was undermined. After 2000, Irish export performance began to flag. The export boom that Fianna Fáil inherited in 1997 petered out as the current account of the balance of payments turned negative.

It is natural for any people who have gained new wealth to want to spend it. It is entirely normal to expect consumption and housing output to grow in the wake of an export boom. However, the purpose of economic policy is not growth for its own sake but to provide more employment and higher standards of living. The people who were supposed to be in charge, the people whose duty it was to protect the economy were, at best, asleep at the wheel. Fianna Fáil was in charge. It was supposed to ask the right questions to ensure the banking system was properly regulated, to prevent the build up of risk in the banking system and it failed in that duty.

If one wants an example of how the system was asleep one need only look to Irish Nationwide Building Society. I know the main focus of attention today is on the large institutions but one has to ask how a small building society like Irish Nationwide Building Society acquired a commercial loan book of €8 billion. How was that allowed to happen? The pity of it is that action of any kind and at any stage would have at least lessened the impact of the banking crisis as it is being felt today. In a bubble of this kind the worst excesses often happen just before the crash. This commitment to the bubble economy has also been evident throughout the handling of the banking crisis. Through every U-turn and policy switch there has been a common theme: protect the banks and the bankers and avoid nationalisation.

We now know that on the night of the blanket guarantee, namely, 30 September 2008, the Department of Finance had prepared a Bill to nationalise Anglo Irish Bank and that the Government instead put in place a guarantee for the whole banking system, including Anglo Irish Bank which represents €28 billion of the toxic debt we must now take over. Anglo Irish Bank was kept alive for a further three months during which time significant bonuses were paid and it was January before the inevitable happened.

The structure of the guarantee was in itself inexplicable as it covered parts of the banks' capital. It has never been properly explained why dated subordinated debt was covered by the guarantee. Bonds that are supposed to be available to absorb losses in certain circumstances were guaranteed by Government. Why? No adequate explanation has ever been given and no concerted action has been taken to reform the banks. There have been some changes in senior management and at board level but change has been little and slow. Last week, The Irish Times published a profile of the boards of the six covered institutions. There have been significant changes at board level in Anglo Irish Bank and in Irish Nationwide Building Society but let us look at the boards of the other banks. Leaving aside the two public interest directors, nine of the ten people on the board of AIB, ten of 12 people on the board of Bank of Ireland, eight of the 11 people on the board of EBS and six of the eight people on the board of Irish Life & Permanent have been in place since before 2008. With all due respect to the individuals concerned, these boards have failed and the Government has done little or nothing to remove them. Firm action in this respect would have cost little and would have contributed to restoring confidence in the Irish economy and in Irish sovereign debt.

Even now, with all that we know, it is clear that lessons have not been learned. The NAMA Bill before the House is intended to protect the toxic triangle not break it up. Worse than that it will create an unhealthy alignment of interests for future Governments to contend with. From now on, whether implicitly or explicitly, every Government policy will be NAMA-proofed. Every measure proposed will be assessed on the criterion of what it will do to property prices and what impact it will have on NAMA. The State will have an enormous vested interest in restarting the property boom and in getting property prices back up as high as possible. In that sense, NAMA will have to be a self-fulfilling prophecy and everything possible will be done to ensure it succeeds. Anyone who doubts that this is so need only look at the governance structures within NAMA as proposed in this Bill.

The Bill vests in the Minister for Finance extraordinary powers and discretion in respect of decisions on how NAMA will operate. Section 9 states: "except where otherwise provided by this Act, NAMA is independent in the performance of its functions". However, there are many instances which are "otherwise provided for", thus it is not independent but must act at the direction of the Minister. It is important these are identified. Section 65, in respect of the Long Title, makes it clear that NAMA's function is to acquire "certain assets from certain persons to be designated by the Minister". It is also to "perform such other functions related to the management or realisation of bank assets that it has acquired, as are directed by the Minister". Under section 11, the Minster may confer on NAMA, by order, such additional functions as he or she thinks fit. The designation of "eligible bank assets" to be purchased by NAMA is a power vested in the Minister for Finance by section 67. Section 13 requires NAMA in the performance of its functions to "have regard to any guidelines issued by the Minister". Section 14 sets out the Minister's powers of direction including, "the Minister may give a direction in writing to NAMA concerning the achievement of the purpose of this Act".

There is one area where this ministerial discretion is particularly worrying, namely, the determination of acquisition values. Again, it is important to list the specifics. Under section 76, the Minister may make regulations to require NAMA to take into account the report of an expert concerning factors or matters relevant to the determination of the value of any property in question. Under section 77(1), the Minister decides the "adjustment factors" to be taken into account in determining the "long-term economic value" of bank assets. Under section 109, the Minister can appoint an expert reviewer and, under section 116, the valuation panel which in turn reviews the total portfolio acquisition value and then proceeds under section 121 to communicate its position not to NAMA but to the Minister.

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