When Nama buys the bad assets from the banks, it will pay them the long-term economic value.
Well, let me put it like this.
Let’s say my house would fetch €200,000 if I tried to sell it.
Now let’s say you’ve agreed to buy my house instead, for a lot more than anyone else will pay me. Let’s say you’ll give me €300,000 because you don’t want me to be short of money.
Aren’t you good?
You have no way of knowing what my house will be worth in ten years time but you’re guessing it might be worth €300,000, so that’s what you’ll give me out of the kindness of your heart.
Nothing in history gives you any reason to believe that the value of my house will increase, but you take a leap of faith anyway and you hand me the money. There ya go, Bock, old buddy!
Aren’t you very good?
€300,000 is a figure you made up, and you don’t know how you arrived at this guess. Neither does anyone else. You might be completely wrong about the future value but you’ll still give me the €300,000 now instead of the €200,000 it’s worth. You’ll never ask me to give back the €100,000, and furthermore, if my house turns out to be worthless when you try to sell it, you won’t ask for your money back. You’ll take the loss and I get to keep the money.
Isn’t that nice of you? Isn’t that good for me?
What a deal.
Here’s the worrying bit: this is exactly what Nama is going to do when it buys the banks’ bad assets, except it won’t be paying €300,000.
It will be paying €60 or €70 billion of your money to buy the banks’ assets at their Long-Term Economic Value instead of paying what they’re worth today.
Long-term Economic Value: what Nama thinks the assets will be worth a decade from now.
Tomorrow’s money today.
Your money, remember.
Isn’t it good?
Are you angry yet?