Is it time for wage increases?

[TheBigShort]

Prices change all the time! Granted in the case of LUAS I haven't seen them come down, but lots of other businesses raise and reduce their costs continually.

Yes of course, but I was thinking in the mind of prices in the round, the general cost of living. For sure we can all take advantage of two-for-one offer in the supermarket, but have you ever noticed that no matter how many offers there are, that your grocery bill stays within a certain range? Ditto your phone, internet, insurance, TV, etc.
Notably it is (nearly) always at the behest of the business owner to dictate the price on offer. When was the last time you filled up a shopping trolley of €100 and offered to pay say, €90?
On the otherhand, im getting my chimney sweeped soon and I have three quotes of €40, €50 and €80. But as I only get a chimney sweep once every few years, the price range is negligible in calculating the cost of living.
So, in conjunction with the main point of this topic, Ireland's inflation rate (CSO) is hovering around negative territory for sometime and the ECB is trying to stoke inflation through money printing.
I would argue, a capital spending program that stoked employment and wage increases as the preferred method.

 

[TheBigShort]

Of course the greed and stupidity of the people who did the borrowing is just as big a factor.

This is where I would differ. Whilst I accept everyone has a responsibility in how much they borrow, there can be no equalizing of the blame between borrower and lender.
The reality is that most borrowers borrowed on the basis of need to finance a the cost of a purchase (that is, they didn't borrow €50,000 to buy a €25,000 car, they borrowed €25,000). Most borrowers only borrow money at irregular intervals (in the case of borrowings for a home, probably only once or twice in a lifetime). And in most cases, borrowers dont pretend to have expertise in financial matters, both locally and globally.

On the otherhand, a bank, will lend day in, day out, multiple times, throughout the year to thousands of borrowers. The bank will not be overly concerned about what the money is for, but more on the probability of it being repaid with interest. And the bank will deduce this probability on the basis of its financial 'expertise'.
To me, its like going to a restaurant for a meal and getting food poison and then being told that I am equally to blame for the food poisoning.
Of course we are all human and mistakes can be made, but if the restaurant can show it took the required measures in sourcing food, in matters of food handling and hygiene, then it should be able to insure against such instances.
However, if short cuts are taken, if food is sourced that cannot be traced, if hygiene standards are poor, then the restaurant is wholly responsible for the poisoning. But either way, the customer should not have blame attributed to them.
This applies to the banks too. In the end, no-one can borrow too much and ridiculous amounts of money from a bank, without the agreement of the banks financial 'expertise'.

 

[Firefly]

The reality is that most borrowers borrowed on the basis of need to finance a the cost of a purchase (that is, they didn't borrow €50,000 to buy a €25,000 car, they borrowed €25,000). Most borrowers only borrow money at irregular intervals (in the case of borrowings for a home, probably only once or twice in a lifetime). And in most cases, borrowers dont pretend to have expertise in financial matters, both locally and globally.

On the otherhand, a bank, will lend day in, day out, multiple times, throughout the year to thousands of borrowers. The bank will not be overly concerned about what the money is for, but more on the probability of it being repaid with interest. And the bank will deduce this probability on the basis of its financial 'expertise'.

Put a mark on the wall, I agree with all of this! Just to add - people of course need to take personal responsibility and therefore not borrow too much - I remember being offered approx 120k more than I "needed" but didn't all of a sudden go out looking for a more expensive house. Likewise, the bank should be making sure it gets it's money back. Just like someone knocking on my door looking for a lend of 10e the onus is on me to determine if I will get the tenner back.

The problem (and we're way off-point) is that we have all picked up the mess!

 

[Firefly]

Yes of course, but I was thinking in the mind of prices in the round, the general cost of living. For sure we can all take advantage of two-for-one offer in the supermarket, but have you ever noticed that no matter how many offers there are, that your grocery bill stays within a certain range? Ditto your phone, internet, insurance, TV, etc.
Notably it is (nearly) always at the behest of the business owner to dictate the price on offer. When was the last time you filled up a shopping trolley of €100 and offered to pay say, €90?
On the otherhand, im getting my chimney sweeped soon and I have three quotes of €40, €50 and €80. But as I only get a chimney sweep once every few years, the price range is negligible in calculating the cost of living.

You are correct to be fair, however those businesses you mentioned operate in a market with only a few competitors and they are also operating in the types of industries that have massive barriers to entry due to costs. As such they can enjoy high prices and we can only enjoy paying them. Looking at your quotes for the chimney sweepers you can see how things operate when there is more competition - assuming they have the same competence, you can save half the cost through shopping around. In the same way, companies shop around when hiring someone.

I would argue, a capital spending program that stoked employment and wage increases as the preferred method.

I would too prefer to go down this route, more so for providing work than to increase wages mind, however we can't do this as we have borrowed too much and are still running a deficit. It's kinda like seeing all those cheap houses in 2011 but there was no credit available to buy them!

 

[Gerard123]

Financial collapse caused by utter incompetence by the people running our banks and the people running the Central Bank, Financial Regulator and the Department of Finance. Greed in only a problem when it trumps competence and rational behavior. Of course the greed and stupidity of the people who did the borrowing is just as big a factor. We are after all grown-up's and therefore responsible for our own decisions.

The rest of the collapse was caused by a narrowing of our tax base until only the top 20% of earners made any meaningful contribution through income tax, a massive increase in the size and pay rates of the state sector, a massive increase in the size of our welfare payments and a massive increase in the amount of money we wasted, sorry, spent, on Health (mainly in the form of pay increases). That bit had nothing to do with greedy capitalism and lots to do with the greed and selfishness of lots and lots of other people.

The latter is by far the biggest factor in our current woes and yet it is that which the be-whiskered brothers now wish to replicate.

Fantastic, couldn't have said it better.

Whilst I accept everyone has a responsibility in how much they borrow, there can be no equalizing of the blame between borrower and lender.
The reality is that most borrowers borrowed on the basis of need to finance a the cost of a purchase (that is, they didn't borrow €50,000 to buy a €25,000 car, they borrowed €25,000). Most borrowers only borrow money at irregular intervals (in the case of borrowings for a home, probably only once or twice in a lifetime). And in most cases, borrowers don't pretend to have expertise in financial matters, both locally and globally.

Said borrowers who should have borrowed, and could only afford, 25 grand to buy a car, saw their neighbour with a fancier car costing 50 grand and borrowed 50 grand. Banks fault for giving it but the borrowers fault for wanting and obtaining it. In terms of apportioning the blame its impossible to generalise, as it depends on specific facts and circumstances of each borrower. I would have no hesitation in saying that it is my view most borrowers are culpable to a good or great degree for their predicament, sad and all that their current circumstances are with hindsight.

To me, its like going to a restaurant for a meal and getting food poison and then being told that I am equally to blame for the food poisoning.

I have seen analogies but this one takes the biscuit (or the entire restaurant meal!!). To continue with it, what happens if the customer bought a tin of rat poison and left it in the restaurant kitchen or at the table, perhaps opened? If the restaurants supervision or standards were not up to scratch and the tin was not observed or removed, is the restaurant fully responsible with no responsibility on the customers part? Saying that the customer had no hand, act or part and that it is entirely someone else's fault? Come on please.

Of course we are all human and mistakes can be made

Agree with that!

 

[Gerry Canning]

Gerard 123,
In (fluffy) times Joe Soap was prodded into excessive debt , Joe was culpable , but the lender a Regulated Professional was in too many cases (as a Regulated Professional )guilty of gross miss-selling.
What other industry would be permitted to hood wink people the way banks did?
If a car dealer sold you a patently ludicrous car , should you on taking his advice be forced to pay all?

 

[T McGibney]

Gerard 123,
In (fluffy) times Joe Soap was prodded into excessive debt , Joe was culpable , but the lender a Regulated Professional was in too many cases (as a Regulated Professional )guilty of gross miss-selling.
What other industry would be permitted to hood wink people the way banks did?
If a car dealer sold you a patently ludicrous car , should you on taking his advice be forced to pay all?

This is revisionism of the highest order.

A customer of good standing with a decent but unspectacular business came in to me about 10/12 years ago and told he was shutting his business as he wanted to build a housing estate in a small rural village. He needed projections done to support an application for a hefty bank loan.

I told him I would be happy to oblige but when I pointed out that the projections would need to incorporate the financial risks that he would face as a newbie property developer, and provide for contingencies for these risks, he went off and I never saw him again. He presumably got his projections together elsewhere as he got his plans off the ground and built the estate only to lose everything as when the crash came he had most of his properties unsold. I heard later that ended up without a cent to his name.

I don't buy the theory that this man, and others like him, were duped by banks or anyone else. They took big gambles which stood to make them fortunes had they paid off, and lose them fortunes if they didn't. And in many cases they didn't mind disregarding the advice of their own professional advisors to get what they wanted either. So how can they now claim that they relied for advice on bank salesmen who were never in the professional advice business in the first instance?

And yes, if I walk into a car dealership and buy a fancy car having drawn down an unsustainable loan to pay for it, of course I have to pay for the car. And if I take away the car without having paid for it, I can expect a call from the cops.

 

[Gerard123]

Gerard 123,
In (fluffy) times Joe Soap was prodded into excessive debt , Joe was culpable , but the lender a Regulated Professional was in too many cases (as a Regulated Professional )guilty of gross miss-selling.

Thank you. Joe was culpable. I agree. I also agree that the Banks were guilty of lots of things.

If a car dealer sold you a patently ludicrous car , should you on taking his advice be forced to pay all?

Of course you should pay, that's a ridiculous question. He's not giving you advice, he's selling you a car. Should the tax payer bail the car dealer out if the customer cannot pay? If you didn't pay the car should/would be seized, and action taken to recover debt.

I too can provide examples of people who dismissed any mention of risks or caution, disregarded advice, sought out someone else to rubber stamp their wishes. No sympathy for them, greed and reckless!!

While my sympathy for Banks is on the very low side, trust me I have taken one to the FSO and it is now with the CB, I do not accept many of the one sided and distorted views provided. Its not simply good vs evil scenario. Individuals had personal responsibility for their action, greed took over many, etc.

 

[PMU]

In the context of general economic theory, wage increases are inflationary. .

No. If the supply of good and services increases to match the increase in wages (i.e. money in circulation) there is no need for inflation to increase.

Central banks around the world are trying to stoke inflation. .

No. Central banks typically have price stability targets, i.e. inflation at no more than 2%. This is is not the same as saying that banks are deliberately trying to increase prices.

Their primary tool is QE which is failing. .

On balance it's been a great success, or at least using QE to generate money to allow central banks to carry out asset purchases has been successful, and by and large has not caused inflation.

It is only creating greater divides between rich and poor.

No. If a business can now borrow or borrow more because of QE both employees, who stand to gain from increased economic opportunity, benefit, and also the unemployed, who stand to gain from greater job opportunities, benefit.

This is why property prices are rising in affluent areas of capital cities around the world, but elsewhere they are stagnant. .

I doubt this is correct. This happens only of banks fuel a property boom; but they are not doing this, or at least not in Ireland due to the Central Banks quantitative restrictions on mortgage lending. The UK also has various restrictions in place.

This is why debt burdens are increasing not reducing as all money issued today is on the basis of a loan taken out rather than the value of productivity..

At least in IE, debt burdens are decreasing. We had a debate on this here: http://www.askaboutmoney.com/threads/how-much-do-irish-households-owe-in-total.200063/#post-1483336.

The quickest and fairest way to stoke inflation into developed economies is through increased wages. This will stoke inflation, increase savings and reduce debt burden..

Actually it's through printing money, where the economy is already running at capacity and cannot produce enough goods and services to soak up the increase in money supply. It's also a disaster, and you only have to look at the US Confederate States; Weimar Germany and Allende's Chile to see what inflation does. Simply put, it destroys societies.

But it will also mean a massive transfer of capital to labour. Something that right wing free market worshipping monetarists cannot countenance right now.

I don't think it's just “right wing free market worshipping monetarists”. It's most central banks. If a worker saves part of his or her wages, that becomes 'capital'. But CBs want people to spend to generate economic activity. That's why you've got low or negative interest rates. To encourage you to spend, and not build up capital.

 

[TheBigShort]

Banks fault for giving it but the borrowers fault for wanting and obtaining it.

What is wrong in wanting something, or anything, for that matter?

To continue with it, what happens if the customer bought a tin of rat poison and left it in the restaurant kitchen or at the table, perhaps opened? If the restaurants supervision or standards were not up to scratch and the tin was not observed or removed, is the restaurant fully responsible with no responsibility on the customers part?

Aside from the bizarre circumstance of a customer bringing rat poison to a restaurant!?!?
The answer would be no, of course the restaurant would not be responsible for a deliberate act of sabotage.

The restaurant would be responsible if it knowingly sourced food from an untraceable source, if it knowingly breached hygiene standards, if it knowingly sold food that was out of date.
In such circumstances the customer cannot be blamed. In similar circumstances, the banks, in their capacity as licensed financial traders, in their capacity as 'expert' financiers, the question of whether or not they knowingly issued loans that they knew were financially unsound and unsustainable needs to be asked.

 

[TheBigShort]

No. If the supply of good and services increases to match the increase in wages (i.e. money in circulation) there is no need for inflation to increase.

True, but the money supply is being increased without a corresponding increase in wages or corresponding supply of goods and services. That is the problem.

No. Central banks typically have price stability targets, i.e. inflation at no more than 2%. This is is not the same as saying that banks are deliberately trying to increase prices.

http://www.bloomberg.com/news/artic...redibility-at-stake-in-hitting-inflation-goal

On balance it's been a great success, or at least using QE to generate money to allow central banks to carry out asset purchases has been successful, and by and large has not caused inflation.

https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html

"The expanded asset purchase program....under which private and public sector securities are purchased to address the risks of too prolonged a period of low inflation"

Sounds like stoking inflation to me.

No. If a business can now borrow or borrow more because of QE both employees, who stand to gain from increased economic opportunity, benefit, and also the unemployed, who stand to gain from greater job opportunities, benefit.

I agree, and if private sector businesses are borrowing that would explain the falling unemployment rate. But it needs to be sustained, and government spending can assist greatly in that. However, governments are restricted by fiscal compacts. Instead there is a high level of corporate borrowing to fuelling stock prices and driving down bond yields.

doubt this is correct. This happens only of banks fuel a property boom; but they are not doing this, or at least not in Ireland due to the Central Banks quantitative restrictions on mortgage lending. The UK also has various restrictions in place.

http://www.irishtimes.com/business/...sparities-in-dublin-property-prices-1.2799666

House prices in more 'desirable' areas have been rising for the last 18 months at a pace that is completely out of kilter with more 'common' areas.
There is something rotten again in the property market.

Actually it's through printing money, where the economy is already running at capacity and cannot produce enough goods and services to soak up the increase in money supply. It's also a disaster, and you only have to look at the US Confederate States; Weimar Germany and Allende's Chile to see what inflation does. Simply put, it destroys societies.

I agree.

don't think it's just “right wing free market worshipping monetarists”. It's most central banks. If a worker saves part of his or her wages, that becomes 'capital'. But CBs want people to spend to generate economic activity. That's why you've got low or negative interest rates. To encourage you to spend, and not build up capital.

The problem here is that despite the ECB money printing, or QE, larger and larger amounts of workers in Europe cannot even save money for it to be considered as capital. If you have no savings, you have no capital, if you have no capital, then you dont have a capitalist market economy.

 

[TheBigShort]

Individuals had personal responsibility for their action, greed took over many, etc.

Of course greed took over many. Nobody is suggesting that greed is not an inherent human trait.
But how does my greed make a bank hand over large sums of money in financially unsound and unsustainable transactions?
Are we to believe that now that banks are resorting to stricter lending practices that it is because there arent any greedy people anymore?

I cant believe that people are still so blind to the corrupt nature of the banking system.
I posted this yesterday, relating to an on going banking inquiry in the US for Wells Fargo.
If people want to see the true nature of banking in the developed world, the first 8 minutes of this clip will reveal so much.

https://youtu.be/xJhkX74D10M

 

[TheBigShort]

I don't buy the theory that this man, and others like him, were duped by banks or anyone else. They took big gambles which stood to make them fortunes had they paid off, and lose them fortunes if they didn't.

Of course we can all point to individuals that lost the run of themselves and took huge gambles, but in general terms, how many of us tried to build housing estates? How many of us tried to redevelop top end sites like Ballsbridge by borrowing millions? Or tried to buy a bank like Anglo by borrowing billions?
At most I know a few friends who bought second properties, and in the main, they are still doing ok for themselves with the rental income.

In real terms most people kept to within buying the house, replacing the car and perhaps holidays in more exotic locations. For sure, people over extended themselves in that regard also, but if you worked in Dublin for example, then it is only reasonable to try find somewhere to live in Dublin. If a bank tells you that it can offer you a mortgage of €x amount over what you thought you could afford, you could assume that they believe you are credit worthy. You could assume that they know more about finance than you do. You could assume that they know more about national and international economic trends than you do.
You could assume this on the basis that they deal with mortgage loans and repayments day in, day out while joe soap only does the deal once or twice in a lifetime.

 

[Gerard123]

In real terms most people kept to within buying the house, replacing the car and perhaps holidays in more exotic locations. For sure, people over extended themselves in that regard also, but if you worked in Dublin for example, then it is only reasonable to try find somewhere to live in Dublin. If a bank tells you that it can offer you a mortgage of €x amount over what you thought you could afford, you could assume that they believe you are credit worthy. You could assume that they know more about finance than you do. You could assume that they know more about national and international economic trends than you do.
You could assume this on the basis that they deal with mortgage loans and repayments day in, day out while joe soap only does the deal once or twice in a lifetime.

Agree with most of above. People who did the above are not in trouble (some exceptions unfortunately if they lost their job for example). Some people may have over extended themselves as you point out.

However, why would you think that if you know that you could afford to pay X, and the Bank tells you can pay X + more, that you believe the bank? And to justify it by saying that they know more about finances than you. They may well know about finances, but really do they know about your finances better than you? Delusional to then believe the bank and blame them for your woes, unless you really wanted the higher borrowing!! (I might trust a second hand car dealer but I will still take a car for a test drive.)

Absolutely agree banks were reckless in lending the higher number, no doubt about that, but individuals have responsibility to, so its not black and white. Its just a cop out to blame the banks all the time, and excuse reckless individual behaviours, when your own information tells you otherwise.

 

[Purple]

Agree with most of above. People who did the above are not in trouble (some exceptions unfortunately if they lost their job for example). Some people may have over extended themselves as you point out.

However, why would you think that if you know that you could afford to pay X, and the Bank tells you can pay X + more, that you believe the bank? And to justify it by saying that they know more about finances than you. They may well know about finances, but really do they know about your finances better than you? Delusional to then believe the bank and blame them for your woes, unless you really wanted the higher borrowing!! (I might trust a second hand car dealer but I will still take a car for a test drive.)

Absolutely agree banks were reckless in lending the higher number, no doubt about that, but individuals have responsibility to, so its not black and white. Its just a cop out to blame the banks all the time, and excuse reckless individual behaviours, when your own information tells you otherwise.

Gerard, on the surface of it adults should be responsible for their own actions. Without really digging down into things it is understandable to think that people making life changing financial decisions should do their homework and not we swayed by a bank employee pushing a larger loan than they actually need. What you are forgetting is that people aren’t actually ever responsibly for their own actions;


If they borrow too much that’s the fault of the lender.

If they run up a massive credit card bill that’s the fault of the credit card company.

If they drink too much that’s the fault of the pubs and drinks companies.

If they smoke it’s the fault of the tobacco companies.

If they are fat it is the fault of the fast food companies.

If they fall over a crack in the footpath that tens of thousands of other people can walk along without falling it’s the fault of the local council.

Etc. etc.


That’s where you are making your mistake; nothing is ever the fault of the “victim”, not as long as they are part of that 90% of the population which can be described as “vulnerable”. That group also contains the 50% of people who make up “the most vulnerable in society”.

 

[TheBigShort]

However, why would you think that if you know that you could afford to pay X, and the Bank tells you can pay X + more, that you believe the bank? And to justify it by saying that they know more about finances than you.

Absolutely agree banks were reckless in lending the higher number, no doubt about that, but individuals have responsibility to, so its not black and white

Im trying to look at things in the round, rather than individual cases. Im not denying some individuals over extended themselves, that much is clear. But an individual cannot countenance for the actions of thousands of others who are over extending themselves. On the other hand, a bank, with its employees of economists, accountants etc, carrying high salaries on the basis of their expertise in finance, on the basis of having the most up-to-date information available to them, on the basis that they are in the business of buying and selling money - must have known the wreckless nature of their actions on a national, if not, international scale. To equate Joe Public who bought the holiday apartment in Budapest only for it never to be built, with a bank is simply ludicrous. Week after week, the newspaper property, the bank forecasts all peddled the good times that would never end. Its not hard to see how some got caught up in the hysteria - typical of bubble mania as has been repeated throughout financial history.
Or to put it another for each individual that borrowed wrecklessly there was a bank on the other side of the equation. Chances are most people if financial trouble have one or two, maybe three non performing loans. The bank has tens of thousands of non-performing loans. Who is more wreckless? Really?

 

[TheBigShort]

it is understandable to think that people making life changing financial decisions should do their homework

This, I assume applies to both sides of the equation? Both borrower and lender?

and not we swayed by a bank employee pushing a larger loan than they actually need.

Its called Sales, an industry in itself, the power to persuade a customer to depart with more money than they initially intended.
Last time I bought a car I was persuaded to have in-built camera for reversing and parking cost €1,500!
Until my wife pointed out that I already know how to reverse park without a camera!

If they borrow too much that’s the fault of the lender.

You see, this is where a proper discussion begins to fall down. With throwaway remarks best fit for a tabloid column.
People who did borrow too much are taking responsibility. They are losing their homes, they have lost jobs, and in tragic circumstances, some see no way out and commit suicide.
On the other hand those who lent too much...what responsibility have they faced up too?

If they drink too much that’s the fault of the pubs and drinks companies.

Never, in my life, have I ever heard anyone blame the pub or drinks companies for a hangover! Other than in jest, it just doesn't happen.

If they smoke it’s the fault of the tobacco companies.

See above

they are fat it is the fault of the fast food companies.

Wrong again.

That’s where you are making your mistake; nothing is ever the fault of the “victim”, not as long as they are part of that 90% of the population which can be described as “vulnerable”. That group also contains the 50% of people who make up “the most vulnerable in society”.

More make it up as you go along stuff.

 

[Purple]

The boards of all the banks have changed. Ironically they are not really the people to blame. That dubious honour falls to the senior managers who didn’t lose their jobs. You’ll get no argument from me that they should have been out the door but your contention that borrowers are not responsible for the loans took out because the bank “sold them” the loan is nonsense.


When you bought your car should you have been able to use it for years without paying for it because you were convinced to buy a reversing camera? That’s what’s happening with homes; people who haven’t paid their mortgage for years are still living in the homes they don’t own and many people think that’s fine; the state should either pay their mortgage for them or give them a house. It would be funny if it wasn’t so serious.

 

[TheBigShort]

but your contention that borrowers are not responsible for the loans took out because the bank “sold them” the loan is nonsense.

When did I contend that people are not responsible for their own loans?

When you bought your car should you have been able to use it for years without paying for it because you were convinced to buy a reversing camera? That’s what’s happening with homes; people who haven’t paid their mortgage for years are still living in the homes they don’t own and many people think that’s fine; the state should either pay their mortgage for them or give them a house. It would be funny if it wasn’t so serious.

People who haven't paid their mortgage for years is probably due to them not having an income to use to pay it, and you are the first person I heard that thinks that "many people think thats fine". I dont know who those people are that you are talking about but I know that a lot of people in this situation find themselves under severe strain and pressure, leading to mental illness, family breakdown and worse. Nothing fine about that at all.

 

[T McGibney]

Of course we can all point to individuals that lost the run of themselves and took huge gambles, but in general terms, how many of us tried to build housing estates?

More than you think. Over a decade a business contact told me in confidence that an AIB branch in a certain small country town had over a dozen property developer borrowers owing that bank branch more than €10m each. That was €120m-odd borrowed in one of the two banks in a town of a few thousand people. He theorised that if this was being replicated nationwide (which indeed it was), there must be hundreds if not thousands of people who between them had borrowed billions, and he predicted a bank crash. He wasn't far wrong.

The idea that massive borrowings were confined to a small golden circle is attractive, but has no basis in reality.