Notes on the Front

There are three golden rules of governance:

1. You do not delegate the resolution of a problem to the party that caused the problem
2. You do not delegate the resolution of a problem to the party that benefits from the problem
3. You do not delegate the resolution of a problem to a party that would incur costs in resolving the problem

Yes, we are talking about the mortgage tracker scandal. 

In conventional theory a firm seeks to protect their brand which is, after all, an asset.  However, this theory can break down in certain circumstances; for example, in monopoly conditions where the firm has captive customers.

Our banks present another circumstance.  After all, when you have firms that plunged a whole nation into a property crash (after milking the property boom), causing massive unemployment, emigration and misery; and then received massive bail-outs from the same people that they immiserated; and then, returning to profit, uses the past losses they created to free themselves from tax for years to come – after all that, what’s a little messing around with a relative handful of households. Brand is a distraction. 

The banks only acted after people took them to court and testified in front of parliamentary committees; after the story was broadcasted round-the-clock on every news and current affairs programme and filled acres of newspaper print; after policy-makers and regulatory agencies became actively and aggressively engaged.  In short, it took a national and popular effort to force the banks to act properly.  Is this the future of Irish banking?

But better to light a couple of candles than curse the darkness.  The first candle is to ensure that households in this scandal are fully and fairly compensated.  And here we have a problem –how do households know if full and fair compensation has occurred? 

When households face powerful interests (and financial capital is pretty powerful) they are doing some from a massively disadvantaged position.  Such firms can bring enormous resources to bear.  One need only think of Montgomery Burns door-stepping his employees with a gaggle of lawyers.    Then there’s access to information – what’s called information asymmetry.  This is where one side to a contract has more information than the other side – another manifestation of the unequal power-relationship.

Then there’s an issue of time.  People have jobs, families, a life – and cannot devote full-time resources to resolving their dispute with a more powerful party.  And going to court is not an option for resource-constrained households – that is, most.  After a while they become exhausted and accept a resolution that may not be fully fair or equitable just to get on with their lives.  Powerful bodies like banks have whole departments whose job is devoted to bargaining these issues.  They don’t become exhausted; it’s their livelihood. 

What people need is an institution that can even-up the skewered power-relationship – an institution they have confidence in.  This is about more than just regulatory agencies.  Some have questioned whether there was regulatory failure in the case of the tracker-mortgages, citing the Central Bank.  I wouldn’t call it failure so much as regulatory lag.  Public agencies have to chase businesses – just look at revenue agencies throughout the world trying to catch up with the latest multi-national tax avoidance dodge.  And sometimes this takes time; hence, lag.

What people need is a tribunal of last resort – one that they can appeal to and which can issue a binding ruling on both parties.  This is where the state can step in – even on an ad hoc basis.

To ensure that people receive full and fair compensation in the tracker-mortgage scandal, the Oireachtas should immediately establish an arbitration body to which people can appeal to if they feel they haven’t received proper treatment.  This should apply to people who have already accepted the banks’ offer because we don’t know if they accepted because it was a fair deal or if, worn down, they just wanted an end to the ordeal and just took what was on offer.

This not only provides a safety net for people.  It would also strengthen their position in negotiations.  After all, if the bank doesn’t play fair, people can appeal.  It may not create a completely level power-pitch, but it would help.

There is an infrastructure that can be quickly adapted to set up this process – the Insolvency Agency and Personal Insolvency Practitioners (though the Insolvency Agency has, too, complained about the lack of engagement from the banks).  The big difference is that this would be an arbitration body, not a negotiating one.  Anyone ruling would be final and would take in the nominal loss to the household but also pain and sufferance. Compensation should be broad taking in all the financial and personal grief people had to put up with.

That’s the first candle.  There’s another, bigger, more transformational candle we can light – and that is for the state to actively enter into the financial market.  That is the subject for a subsequent blog.