Open Dissent (11 page)

Whatever can be gleaned from reviewing a rich list, whether it is national (Ireland or the UK), European or in a non-geographic category, there is sufficient evidence to suggest that employees of big institutions, unless privately owned by the founders, are unlikely to be on any rich list. So, where does most of the wealth go that is created by successful companies? To the shareholders, who are invariably large pension funds that redistribute these gains to their members. Shareholders want the leaders of companies to have that internal compass that directs their organisations to growth. Often senior business people can find it difficult to grasp the difference between their money and that of the shareholders. One might interpret the attitudes of some
business leaders as ‘What is good for me is good for my shareholders', which is, of course, putting the cart before the horse. As an employee, you are a servant of the shareholder and not the other way around.

There is a real case to be made for the right of people to desire to become rich. Using the instrument of leverage, whether in the property, stock or commodity markets, people sought to create personal wealth through investment over the past fifteen years. Blaming people for being ambitious or greedy is a waste of time and the cry for an egalitarian system is likely to fall on deaf ears. Our capitalist system may appear damaged but it is unlikely to be replaced. It will, however, be modified as the animal spirits of the market continue to be tamed somewhat by the regulators. Capitalism, like democracy, has its flaws. However, the critics of capitalism might discover that all other systems are worse.

During a time when shortages are prevalent in most areas of society, it is intriguing to browse through the lists of plenty. Understanding that the commercial retail distribution sector dominates the rich lists in Ireland, Europe and the US might help one in determining where to invest or begin a career. The property sector is represented principally by those activities where there are cash flows attached to the businesses with a strong likelihood of these flows remaining. The entertainment sector has a number of notables but only a handful of artists achieve status in financial as well as artistic terms. Oil and technology are two sectors
that have given rise to wealth for enterprising and innovative people.

In the end, the creation of personal wealth comes from innovation, energy, capital and a good business plan. Capital gains are recognised by the taxman as the necessary incentive for people to create wealth through risk taking, as the tax rates are structured to benefit the entrepreneur. Wealth creation requires commitment; there is no time for sleeping as trading in investments takes full-time attention. We should recognise and celebrate the success of individuals who have improved their lot in life through their focus and energy, and some good fortune. These people have contributed more than most to the tax take in this country, and the state's coffers require a lot more of them to reduce the fiscal deficit.

National economic recovery is about the creation of wealth. Confidence, trust and liquidity are the three main ingredients for success. As the downturn slowly levels out personal wealth across the country, we will need a new generation of wealth creators to come forward. It can be argued that the NAMA gamble is very much a shared risk with the taxpayer and, if successful, only has the potential to be credited with wealth recovery and not wealth creation. It could also be said that, if NAMA succeeds, it will be a feather in the Government's cap; if it fails, all of us will feel the effects.

There is no returning to normal. There will be a new normal which will come about by our acceptance of economic reality. Mindsets of entitlement and great expectations should be altered according to the new economic circumstances. Getting the nation to accept the cuts and losses over the next five years will be a stern test for the Government. The Government can only borrow so much and the tax take over the foreseeable future is unlikely to return to what it was at the peak of the boom.

When we talk about the weather in this country our choice of terminology always amuses me. We don't appear to have hurricanes or tornadoes but we do have storm force winds that are capable of taking the roofs off houses, preventing aircraft from taking off or landing, sinking ships or causing the devastation of centuries-old magnificent forests. Politically it is not a good thing to admit that you were in power when the greatest fall in economic terms was recorded. However, surely when we have experienced an 11.3 per cent fall in GDP in one year,
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which would be enough to make anyone depressed, it would be more
appropriate to label our circumstances as a depression rather than a ‘deep recession'. If silent dissent is the unwritten rule for boards, perhaps it has filtered into the political and media arena also. Facing up to reality might well make the electorate, the public service, the unions and the private sector come to grips with the severity of our problems. Recognising where we are and clearly defining where we wish to be within a specified time frame will give us all the sense of achievement we deserve when better times arrive. And they will arrive.

The following expression may well reflect an underlying ethos that prevails in our society: ‘It is better to do nothing at all than it is to make a mistake.' This attitude must be avoided at all costs. The economic engine of the country will be driven by risk takers in conjunction with the banks that will provide the much needed liquidity. It is important that we all appreciate the financial term ‘deleveraging'. This term, which is used extensively when referring to financial bubbles, is the signpost to recovery. Deleveraging is the process by which financial institutions, investors and home owners reduce the relative size of their assets and reduce their debts with the proceeds. The process involves an implied acceptable ratio of debt to the level of assets held.

Companies and banks often take on excessive amounts of debt to finance growth. However, this leverage substantially increases a firm's risk profile because, if the leverage does not foster growth as planned, the risk can become too much for the borrower to bear. When this occurs, all the
firm can do is deleverage by paying off debt. This deleveraging is viewed by savvy investors as a warning sign.

Deleveraging applies to individuals as well as to companies. The problems arise when households have to sell off assets at a loss to repay their outstanding debts. Individuals should be cautious to ensure that through this process they do not become bankrupt. Negative equity in a home can be dealt with if the owner has a cash flow, other assets and the ability to stay in their home or rent it at a viable amount to cover monthly repayments.

From a national perspective, the deleveraging process is essential to take the excess out of bubbles, but it is not a quick fix. Different sectors in the community, be they homeowners, banks, insurance companies, investors or the Government, have to absorb the losses associated with deleveraging as assets fall to their new market level. In the past, some big pension funds and insurance companies were so badly affected by property bubbles in the UK and US that it took between ten and fifteen years to create new interest in the property sector. The lesson is that it takes time to allow the effect of deleveraging to work its way through the system. A healthy property sector requires a confident and well-managed financial system.

Whatever the new normal will be, it is going to be influenced strongly by the global economy's growth rate. As an open economy, we are influenced by the exchange rates and growth in the principal markets of the UK, Europe and the US. Much hope will be placed in the export market to
pull us out of our demise, but we remain hostages to renewed growth in the US, the UK and Europe.

The first euro−US dollar exchange transaction was executed between National Australia Bank and Fairfax Publishing on 1 January 1999 in Sydney, Australia. The deal was transacted at €1:$1.1740. I was fortunate enough to make the first ever trade at 4.30 a.m. (Sydney time). It was a great occasion and was televised globally on Bloomberg TV from the trading floor of National Australia Bank. I was asked if the rate struck would be held for long or if there would there be a strengthening of the euro. My reply then, as it is now, was that I intentionally do not bet against the US dollar for any extended period of time. If one looks back at the price of that first trade and observes the volatility of these currencies over the past eleven years, it is remarkable to note how the swings have gone, with €1 trading at between US$1.59 and US$0.82 over the eleven-year period from 1999, giving a spread in excess of 80 per cent. The volatility has been enormous. Due to the sovereign debt crisis it appears that the exchange rate is moving back to the original level. The markets, as we all know, are as much an art as a science, and history has proven that what goes up in the foreign exchange markets invariably comes down.

Minister for Finance Brian Lenihan, in a paper given at the MacGill Summer School 2009, made the statement that there was only one possible path to recovery and there were three elements to it.
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First, we must have sustainable public finances; second, we must regain our competitiveness through boosting our employment and creating real
jobs; and, third, we must repair our banking system. If Ireland wants to pay its way in the world and get on as a country then all these elements must be addressed.

As we have managed to catch the wave of commercial and economic progress over the past forty years, the time and circumstances are opportune for a move towards the smart economy. The national competition for the best proposals to help turn around the economy and create jobs, ‘Your Country, Your Call', is taking this challenge on by providing an attractive platform for creative ideas to come forward. The winning schemes will receive capital for their national application. Building on the inherent technological skills of the Irish workforce, we can attract businesses from around the world while at the same time accommodating the entrepreneurial character who wishes to build internet-based activities from their home. Young people should be encouraged to venture out with their creative ideas and be assisted in raising capital through government- and bank-structured schemes. The tried and tested marketing programmes of the IDA and Enterprise Ireland have proven successful at attracting new businesses to Ireland with a high demand for the technically skilled. The skill base within these agencies is of the highest professional standard and has assisted many Irish companies with international growth aspirations to pursue them. The IDA and Enterprise Ireland have what is required to ignite the national recovery plan.

The principal element of a smart economy is an educated workforce. We continue to produce an abundance of
well-educated, intelligent, innovative technologists, engineers, doctors and so on, but the temptation to emigrate is enormous for these people. The number of skilled people seeking opportunities in the UK, Canada, the US and Australia is growing every month and, while not yet at the levels of the early 1970s or late 1980s, the trend is clear. Major organisations that do not consciously make the home alternative attractive for graduates are contributing to the current brain drain. It is a very complex set of circumstances but we must stretch to retain our best people and, if this is not viable, we should not lose contact with them. Those who go abroad do so to get experience and improve their skill bases and could return home to provide a valuable labour pool for the country in the future.

The losses financially and materially due to the crisis may well be offset by gains that are on a different scale. If, for whatever reason, we find ourselves with time on our hands, perhaps this is one of the positive side effects of the crisis. Time, during the halcyon days, was in short supply, whether it was for one's family or oneself. Perhaps the pressure brought about by economic stress in the household is in some way reduced by improved social relationships with family and friends. The virtue of caring is strongly linked to our heritage and cannot be described in financial terms, but it is an extremely strong currency that will outlast a euro in any denomination. Perhaps this quality will be the attraction for those Irish emigrants considering a return to Ireland.

Keeping in mind that we have many objectives in the recovery phase, not least of which is basic economic growth, the demand for an experienced and skilled workforce will be paramount in the creation of the next generation of sustainable businesses. We must become best in class at whatever sectors of this smart, knowledge-based society we choose to develop. As we have proven over the years, we can compete in many fields of endeavour but we must strive to become best of breed internationally.

As discussed in
Chapter 4
, individual and business wealth creation is key to our recovery. In order to produce the right conditions for this to happen, the Government and the banks should focus on three things: get people out of debt, get them investing and get them back in business.

Unfortunately, recent events make it seem that we will stretch as far as we can in order to save an entity that has created a national crisis but we are less able to accommodate the weaknesses of individuals and families. If the draconian measures that existed under the old regime, which the Caroline McCann case proved influential in changing, were applied against major debtors in the current crisis, the outcry for retribution would have been satisfied. However, this law would never have been applicable to the class of major borrower who could threaten banks with failure in the event of their default. Individuals and companies that have raised billions and now declare inability to repay can rightfully claim contributory negligence on the lenders' behalf and will possibly walk away leaving the taxpayer with the bill.

In the event someone leaves an organisation for any reason connected to alleged wrongdoing, the institution is recognised as the owner of all files and computers. Giving people months to depart reeks of weakness and indecision, which can easily play into the hands of offenders. A higher level of diligence must be required from the Director of Corporate Enforcement, and if the laws have to be changed so action can be taken, then so be it.