September 28, 2008

State guarantees can avert depression

Posted in Banks · 132 comments ·

Our political leaders must make the right decisions in the budget or face economic chaos.

At today’s cabinet meeting on the budget, the government must start to face up to the crunch decisions it must make.

Ministers face the most important financial choice taken in the past three decades. If they make the right one, our financial institutions and our economic reputation will be greatly enhanced. If they make the wrong one, there is likely to be pressure on the Irish banks, leading to chaos and, ultimately, political instability.

The discussions on the shape of the October budget are one thing. But the crux of the issue facing us is in the financial sector; it is that our banks have run out of money. This is how my dad would explain what, in financial markets, is grandiosely termed a ‘liquidity problem’.

In addition, there is no point pretending that this problem is limited to ‘weaker’ banks. All Irish banks are in the same boat – the only difference is how critically they are affected.

If the banks go, our economy goes too. All banking systems act like the heart of the economy. Without a strong banking system that pumps credit into every nook and cranny of the economy, activity dries up and the country dives deeper into recession. Recessions lead to depressions when banks are not able to lend and customers and businesses are not able to borrow.

Therefore, it is crucial that the government take the right decision now. Events of the past few days imply that there is no model we can import from anywhere else to help us. The rest of the world is suffering the same plight. Large banks are going under by the day. Thus, if we wait, we will simply suffer more.

We need to come up with an Irish solution to our specific problem – because no one has the antidote to the contagion that is spreading through the global financial markets.

While, in the longer term, Irish banks have bad debts/asset problems due to excessive lending to property, the problem that will drive them to the wall is short-term liquidity. This is what the state must rectify. We have seen from the US that the policymakers are making it up on the fly, hoping that by buying up toxic assets (bad debts), they can insulate the system and buy time.

However, as we can see from the rolling bankruptcies, this is not working – or, at least, only partially so. The challenge for Ireland is to come up with our own rescue model and then export it, rather than wait for some manna to arrive from heaven to solve our banking dilemma.

The only option is to guarantee 100 per cent of all depositors/creditors in the Irish banking system. This guarantee does not extend to shareholders who will have to live with the losses they have suffered. However, it applies to everyone else.

If the minister does this, he will not only staunch any funds outflow, he will show leadership and be seen as someone who is coming up with a solution that can be copied all over the world.

Ireland in the past has done things that no other country has done, to great effect. Think of the zero tax rate on exporters in the 1970s and the 12.5 per cent tax rate on multinationals now.

These were solo initiatives – we didn’t wait for them to work in other countries, and they worked perfectly well here. This proves that we can think for ourselves. Once more, and possibly even more crucially, we need to think for ourselves now. Furthermore, the state could charge the banks a 0.25 per cent fee for the guarantee, thus making about €1.5 billion per year in revenue (0.25 per cent of €500 billion).

If we take second-hand, discredited ideas from abroad, such as a toxic fund or, worse still, nationalising a bank, we will fail. If we fail, our banking system will be imperilled and a generation of Irish people will suffer. A failed banking system is equivalent to a failed state, and Ireland will become an international pariah. No politician can or should survive such a mistake.

The reason nationalising a bank will fail is that it will alert investors – those of us at home and foreigners who are crucial to the banking system – that the Irish banking system is in tatters.

The question then becomes, ‘who’s next?’ This will lead to contagion, and the system unravels.

There is another reason for not nationalising, and it is taxpayers’ money. Once you start using taxpayers’ money, you have to be careful. The lesson from the US in the past week is that using taxpayers’ money is unsuccessful and deeply unfair.

The beauty of guaranteeing deposits is that you use no money – not a penny. Instead, the government is using its sovereign credit as the country with Europe’s lowest debt/GDP level to restore confidence in the system. The civil service view appears to be that such a guarantee would subject Ireland to the risk that people withdraw money, disbelieving the state.

But this would not happen. Some €350 billion of the total €500 billion is held by Irish people, so we won’t move our cash. In addition, the €150 billion owned by foreigners would simply become like an Irish government paper.

The Irish bond market has never been in such demand, and so would this guarantee scheme.

In fact, it is highly likely that money would flow into the Irish banking system from abroad to avail of the guarantee. If you doubt that, look at Northern Rock, which is now receiving deposits from Irish people who are taking their money out of Irish banks.

Why? Because the British government is guaranteeing all Northern Rock’s deposits. Precisely the same would happen here.

Because the international financial system is in tatters, only the government can restore faith. No banks, no fancy footwork from financial whizz kids, no clever use of the bond markets can restore confidence. The market is suffocating and needs clear air passages. This means clear, unambiguous leadership and simple straightforward solutions.

This is the stuff of politics and the type of decision that most politicians would love to be in a position to take. Lenihan should regard the crisis in the banks as an opportunity, not a threat.

Last week he went some of the way. In its press release, the state implicitly guaranteed all deposits when the minister said: ‘‘The government is committed to the stability of our financial system, so that money placed with any Irish credit institution would not be at risk.

‘‘The Irish government wants to protect the whole financial system, secure its stability and ensure that all deposits in Irish financial institutions are safe.”

The key here is ‘‘all deposits’’. If an Irish institution went bust, would depositors with more than €100,000 have the right to hold the government to its ‘‘all deposits’’ description in this press release?

If the crisis leads to any loss of deposits, you can bet the courts will be full of cases against the state.

The minister should simply state explicitly that the deposits are guaranteed and clear up any confusion.

Unfortunately, he is being advised by merchant bankers on the one hand, who are just interested in fees and don’t give a fiddlers about Ireland, and civil servants on the other, who can’t see that nationalising a bank is the biggest policy reversal since TK Whitaker.

He needs to be brave and visionary and see through the limitations of his advisers. Equally, the careers of everyone around that cabinet table will be blighted if the banks go under as a result of any nationalisation plans.

They have collective responsibility. The decisions facing the cabinet are the most momentous any government has had to make in this country for many years. The right one for Ireland is a 100 per cent guarantee of all deposits.

Let’s hope, for all our sakes, that wisdom prevails. The alternative – influenced by vested interests and incomplete advice – is too awful to contemplate. The choice is between a recession, which is already here, and a depression, which might be around the corner. It couldn’t be more simple or more stark.

  1. Greetings!

    You are absolutely right, David, and I congratulate you on your clear vision. As many who follow economics and politics in this country know, you have been right with your analysis and predictions for a long time.
    There are not many who share such an impeccable track record.
    I am in no position to give Brian Lenihan any advise, but if I were, I would tell him to make you an adviser for his department and the government. Ireland would benefit greatly from your clarity of analysis and courage to speak the truth. Keep up the good work! We all need you.

    • Aidan

      I think this is the most ridiculous bail-out/rescue plan we have seen to date. We have effectively allowed the 6 institutions the ability to issue debt guarenteed by the state i.e. the equivalant to gilts, treausuries etc. This gives Irish institutions access to cheap credit in a challenged market and hence access to increased profits. What does the state get in return? Nothing. How are we going to fund this? We are the only country in the EU with a contracting GDP and we have pledged 3.5 times our current GDP to protect shareholders/speculator in Irish banking. What affect will this have on the Irish states credit? We are going into a recession where we will need to increase our debt and all this has done is make it more expensive for the Irish state to finance that debt.
      We are unfortunately living in an equivalent oligarch. The rich get protected and the unfortunate PAYE workers carry the cost. Does the State have any idea what is on these banks balance sheets?

    • Kevin

      Deco – what planet are you on? What exactly do your rantings have to do with this article/ current situation. can you save your anti-legal system rantings for somewhere else. Its is not a conspiracy that many politicians come from the legal profession, there is a natural fit between the LEGAL profession and the EXECUTIVE (lawmakers).

      Garry – again, what planet are you on? obviously not this one, since you think we should be sending people to outer space. Maybe the moon is the next foreign property hotspot and we should get in there first?

    • Armchair opinionist

      Give me a break! Capitalism is on its knees. And so, in response, the greedy free marketeers, who have engineered their own downfall, have turned to the government to bail them out. Oh dear…what have done. We can now expect devastating cutbacks in the next budget. The health, education and housing sectors will be sliced and diced. But who cares, the ministers are nice and comfortable, the banks are even better and we voted for this. Turkeys at Christmas. |I guess, I’ll just have to knuckle down, baton down the hatches and continue to struggle with my huge mortgage and childcare costs. If things get that bad … there’s always suicide.

  2. Deco

    The real danger is that Lenihan, will not be able to make up his own mind on what to do for the long term benefit of the economy. Ho spent all his life in the realms of Law, and seems rather McCain-like in economic matters. The problem is that he needs advisors for every area of economics and finances. If this government were really serious about the nations finances, they would appoint somebody who knows something about finances in charge. We need somebody in charge of the Finance Ministry who knows how to cut costs and who knows how to sustain private sector investment. Not somebody who needs to be advised on the matter. The current situation is rather absurd.

    David is right. We need to think outside the box on this issue. But maybe the best approach would be for the government to dictate terms first. This means that the banks and building societies must cut out the liberal lending rules and the NINJA type mentality to mortgages. I suspect that the Taoiseach (another lawyer) seems overly determined to implement a policy hat will hold up the government’s tax take. The attempt to use the (indebted) local authorities to go into the mortgage business again is an example.This was tried in a previous economic recession when central government mismanage the economy (1974-1987). It will of course take the houses off the banks books and place them in the books of local authorities. It is a bailout, with vote buying thrown in. It is also an attempt to con people into thinking that the housing market is picking up. It is a short term stunt. No local authority is in a position to sustain this unsustainable economic system – which David described in the ‘monkey business’ article. It was spot on.

    Current government policy is completely missing the point. The old trick of artificially inflating consumer confidence to get people to take on more debt and stimulate more economic activity (Reaganomics) is no longer working. And it is only creating bigger problems for the future. Reaganomics has been found out – and it has been a delusion.

    Yes, in the immediate term a gaurantee on deposits is required. It will balance the banks and keep banks from running into a cash flow trap. But something is also needed to ensure that the people who hold their mortgages can keep paying them. And this means making the entire economy more efficient, so that the cost of living is contained. This means we need to bring down the structural elements that act as drivers of the Irish inflation rate. These are also the things that annoy people the most. These are also the factors that are key points of concern for voters. To do this competition policy would have to be implemented.
    Take for example insurance. Five years ago Insuarance in Ireland was the most overpriced in Europe. We even had insurance companies increasing their rates on the pretext that they were hit by the tragedy of September 11, 2001. At this point public opinion was seething-much like it is today concerning the M50 or the HSE. But the beneficiaries all seemed to be content that it was business as usual. The sheep were being fleeced, and this seemed set to continue.
    The several factors combined to change this. First a lobby group from the small business sector emerged to lobby for reduced compensation rates for personal injuries. Interestingly enough this lobby group discovered that the biggest beneficiaries were not the compensation characters. No the main beneficiaries were the legal profession. It seemed that the entire system was devised (on the advice of the legal profession) to ensure that the fees earned were maximised by the entire profession. This lobby group then got support in the key policy changer in Ireland – the IDA. The IDA can tell ministers to change government policy with one phone call, on the pretext that jobs are at stake. And every government minister wants to be at the next IDA job announcement !! Then this lobby group elected a member of the PDs as spokesman. This exploited the factor of the tail wagging the dog in government. Suddenly the group had access to the Tanaiste.
    Naturally the legal profession were outraged. They were organized as a body to set the rates and justify this in the media. They operated as a “Self Regulating Industry”. But they lost the media battle. They settled down and decided not to keep the battle up, in case the publicity spread to other areas of the regulatory framework in Ireland. Afterall they had other laying hens to hide. The compensation culture which was a real boon to the Irish legal profession dried up.
    Immediately insurance companies noticed that their costs went down. At this point they could have settled for healthy margins. But then they started to compete with each other. Public opinion had changed as a result of the publicity and the history of overchargin and people became much more liable to shop around. This was an opportunity for the smaller insurance companies. FBD gor very aggressive in motor insurance, persistently undercutting all the others. This had a substantial effect on rates, and market share. Then Sean Quinn’s insurance group decided to get aggressive also, but in all areas. BUPA got competitive with the VHI. And there was a lot of talk of another health insurance company getting involved – though that took time to transpire. The larger more established names got concerned. They returned fire. Suddenly they were all competing in all segments. And today you have competition in insurance. And it is better for the balance sheets of all citizens. In effect a system of economic rent was dismantled and the market was re-regulated in favour of the ordinary people.

    There is a ‘danger’ that this might happen in the residential property market. If it did happen, then state finances would suffer. And the government would have to work hard either at reducing spending or convincing us to vote for them after they raise taxes. The easy alternative is to play tricks to up property market confidence. Unfortunately this is exactly what they seem to be doing. The local authority as Freddie Mac is exactly this. If they let house prices collapse then the lower income groups would have housing, and they would be able to afford it. Middle class discernment, senior government ministers, banks, property developers, auctioneers and public sector employees are all determined that it will not happen. Watch as these sectoral groups fight market fundamentals.

    • David G

      well d one David. you have hit the nail on the head. Northern Rock cannot cope with the influx of requests for applications to place deposits with them. The GAURANTEE would be easy to implement and would probably make us the safest economy on the planet. Northern Rock is probably the best funded bank in the world right now.

  3. Garry

    Yes above all else we need to be brave enough to think for ourselves.

    But first we need to hear from the government what they see the problem is. Do they agree “its short-term liquidity.” I’m worried they see the problem “as no first time buyers are taking out 40 year mortgages for some developers 500k apartments”. That is an entirely different if somewhat related issue.

    When the problem is agreed it can be addressed, but within some general principles, like who pays, who is protected, who isn’t.. Your approach has possibilities, but I would like to see some stick in there. Not to be used to beat banks with today, but to hold over them…. to ensure they work to fix their mid/longer term problems so the risk is reduced as time goes by. Basically, In return they get their finances in order or if they don’t it costs them real money.

    We have some advantages, and we need to use every one of them
    1) Were too small to save the world, or indeed bring down the global system, so we can do our own thing.
    2) We don’t have to go first; we get to see what is happening stateside.
    3) We are part of a much bigger currency so we don’t have to worry about what our actions will do to the Euro.

  4. Diarmuid

    Sorry, but I just don’t see a full deposit guarantee as being the pill to cure all our ills. The €100k scheme covers 90% of depositors and will prevent a run on a bank so that risk has been taken out of the equation. The reasoning for a full guarantee seems to be that it will attract foreign capital…. to the first country in Europe to enter a recession and the one most at risk of a depression? a country with the biggest housing bubble and one of the smallest indigenous industrial bases? with a guarantee from a government that is about to smash through the EU borrowing limits? I don’t think there will be many Germans or Swiss lining up to take that offer! And the UK already have a government guarantee in Northern Rock so they won’t be looking here either.

    Plus, I don’t see how this solves the problem of our housing bubble (no tinkering will stop the need for them to fall significantly further to get back to the long term trend of rising at the level of inflation*) or the departure of US multinationals from our high-cost economy. We need to face the fact that our economy is bombing and that we are better off having a quick forest fire and starting to plan our recovery rather than talking about avoiding the inevitable.

    A question: is the current recession a blip, or was the celtic tiger a blip in the long-term trend of a resource-poor economy with few indigenous industries or entrepreneurs?


  5. Woodsey


    Where does an Irish government, already €7 billion in the red (and rising?) get the funds to ‘guarantee’ €500 billion of our disappearing capital?

    These ‘guarantees’ schemes were always intended to cover the possibility of a single financial entity going bust. They cannot, nor will they, guarantee the whole of the Irish financial system.

    It is clear that the Irish financial system is presently unable to do any of its previously ‘substantial’ business and that it has been unable to do so since last August, twelve months. It is nursing substantial losses and, whilst all appears smooth on the surface, this is not the same financial system that we dealt with last year. This one is teetering on the very edge of bankruptcy.

    There is, therefore, very little point in describing holders of worthless paper as ‘banks’, in the monetary and reliable sense in which that word is normally understood.

    As taxation is the principle source of government funding to repay the €500 billion guarantee and, as the taxpayers money is all in these ‘banks’, wherefore now when the Armageddon hits?

  6. Malcolm McClure

    David said: “The beauty of guaranteeing deposits is that you use no money – not a penny. Instead, the government is using its sovereign credit as the country with Europe’s lowest (after Luxembourg) debt/GDP level to restore confidence in the system.”
    Irelands GDP in 2007 was about €130 billion, of which construction accounted for about €30 billion. Using an income of 100 to guarantee 600 is rather like a Toyota Prius with a half-flat battery offering to tow a Scania Artic broken down at the roadside. Therefore I agree with Woodsey that it is quite unrealistic to expect the government to guarantee all bank deposits, of whatever size.
    Instead they should not only go ahead with their €184 billion infrastructure plan but double it, putting people back to work, just as Rooseveldt did in the 1930s.
    This is no time to lose our nerve; offering measures like bank deposit guarantees will only exacerbate people’s mounting paranoia about their banks, which, as you say, play an indispensible role in modern society.

    • Woodsey


      Thanks for the vote of confidence and I love the analogy of the half-dead Prius trying to tow out the Scania artic. Nice one!

      Not as happy with the infrastructure spend, though. Understand your logic but there’s a natural boom-bust cycle to be worked through. Spending your way out of a recession is just the opposite of trying to prevent the bubble from bursting. Both are like trying to stop the tide and the government today appears to be €10.5 billion (not €7 billion!) in the red. So it is forced to cut the infrastructure spend and a lot else besides, in the hope that Ireland Inc., can survive

      It’s this very survival which is presently in question. This is a slow train crash which doesn’t have any historical precedent. Don’t confuse the government’s budget efforts with the present position of Ireland’s financial institutions. We’re all dependent on the ‘banks’, including the government and it’s the ‘banks’ that appear to be broke.

  7. Deco

    The problem with an infrastructure spend in this country is that it eventually ends up being a constituency slush fund. A bit like the way the National Lottery ended up paying for golf courses. Before we sign up for any more infrastructure spends, we need to introduce far more openness, accountability and transparency into the entire process. I cannot see this happening. I think that we need to start thinking in terms of sweat instead of other people’s money. Unfortunately the main commentators, from the media and the bank economists seem to have ideas in respect of what to do with other people’s money, and especially the money the PAYE taxpayer will be earning in five, ten fifteen years time. These assumptions are absolute nonsense.

    We got out of the 1970s-1980s recession because we got the country working again. After spending 15 years trying one program or another, and each failed. Eventually people took things into their own hands, dropped their delusions and started to work. I don’t see anybody in the mainstream media contemplating this. Probably because it would damage unnecessary consumption. Instead the entire even is being covered by the mainstream media as a big piece of sur-real drama, a kind of a supersized soap opera that cannot be switched off, the ultimate reality TV show. This after the last ten years of ‘game-show’ TV coverage.

    Our mesmerised consumption and excesses are now up for negotiation. For the Irish mindset, a big challenge is about to emrge especially with respect to how we perform our work, and how we save money. For the Irish consumer, cold turkey time is coming up very quickly. Watch the various sectoral interests try and manipulate the market to sustain their claim of entitlement to the Irish way of life. It seems that a lot of people in this country want to have a great lifestyle, without having to work hard enough to deserve it. This is carried by the workers in the traded competitive private sector, who bring money and material into the economy. The danger is that the costs of operating the likes Dell or Intel here are getting too high. We need to do whatever is necessary to resolve this. If we can do that, then the national income stream will pay off the mortgages and keep the debts afloat. Otherwise we are in for a serious financial crisis. Fact is that a large proportion of the Irish population will be paying mortgages for two more decades. And this has to be sustained. Unlike before we cannot weasel out of the problem by means of inflation.

    When this realization hits the Irish psyche then we will see a very different mindset in this country. Far more sober and far more intellectually honest than the current mindset. As long as the current mindset persists, the problem will only get worse. The drama generated by the media will then become irrelevant to the people. In a consumerist, high shock advertising society, it is the media’s worst nightmare. Because then they will take a pay cut.

  8. John H

    @Malcolm Mc Clure I agree that that the government should put the time effort into developing the national infrastructure

    Last year I was at a conference where I heard about the English Building Schools for the Future

    in essence
    “Building Schools for the Future (BSF) is the biggest-ever school buildings investment programme. The aim is to rebuild or renew nearly every secondary school in England

    Building Schools for the Future (BSF) represents a new approach to capital investment. It is bringing together significant investment in buildings and in ICT (Information and Communications Technology) over the coming years to support the Government’s educational reform agenda.

    The Government is committed to devolve significant funds – about £3 billion in 2005-06 – to local authorities (LAs) and schools to spend on maintaining and improving their school buildings. But it also wants to promote a step-change in the quality of provision. That is the focus of Building Schools for the Future (BSF).

    BSF – worth £2.2 billion in its first year (2005-6) – aims to ensure that secondary pupils learn in 21st-century facilities. Investment will be rolled out to every part of England over 15 waves, subject to future public spending decisions”.

    the comparision is scary “In addition, schools receive direct capital funding (‘devolved formula capital’) to use for their own individual priorities. In 2007-08, a typical primary school will receive £34 000 and a typical secondary school £113 000 a year to spend on buildings or ICT – a total of around £1 billion across England.” I dont have figures for what Primary School would get but it is sure as hell not coming near €50000 in 2007/8 either for buildings or ICT.

    If FF want to save their builder friends, sit down with them and say what price could you renovate all schools and hold a dutch auction to get the lowest price.

    David you talked to IPPN this year, if you were talking to them again, rebuling all substandard primary schools should be on the agenda.

  9. Garry

    The US are voting to spend another $700,000,000,000.00 on their bailout and nobody will be able to actually hold or touch what it will buy, though the spend may or may not be sufficient or necessary.. It wont give us a new energy technology, put a man on Mars/start a space colony, educate a generation, create a new invention or food source that we can look back at with awe some day.

    It will be trousered by bankers in places like the IFSC.

    This weekend while we in the west are busy bs’ing about the ‘value chain’ and the knowledge economy, giving the next generations taxes to scum in suits, the Chinese just did their first spacewalk.

    Knowledge economy me a***!

  10. Ava

    The problems with the proposed solution are two fold: first, guaranteeing all deposits would continue to give the banks carte blanche to write whatever type of risky loans they want – using depositors’ money – which is exactly what got us into the mess in the first place.

    Secondly, it is contrary to EU state aid rules for a government to give that type of helping hand to a particular sector. The EU looks carefully at investor compensation schemes, and a guarantee is within this category. The European Commission would simply not allow this type of state aid and it is not realistic to suggest that other European governments would countenance state aid where the consequences might be outflows from one member state to another.

    Finally, I wonder whether is is correct for David to say that a guarantee costs the State nothing. Surely, he is not suggesting that the guarantee would be off balance sheet.

  11. Stephen Kenny

    Surely, the problem with guaranteeing all deposits in private banks, is that it would effectively force the banks to take ever greater risks with the money? Distorting a market in this way, will cause distortions elsewhere.
    It seems to me that the financial model that we’ve all been living under for the past couple of decades, is knackered. It has proven itself to be simply wrong. It relies on unsustainable, ever increasing, leverage, be it banks, hedge funds, people & houses, ‘high yield’ (aka ‘junk’) bonds and M&A, etc. Wherever you look, you see cleverer and cleverer ways of increasing debt
    It seems to me that guaranteeing all deposits would significantly increase the likelihood of banks failing, for much the same reasons that the investment banks had to take ever greater risks (e.g. hedge funds) to maintain their profit margins, resulting, inevitably, in their collapse.
    The US, Ireland, UK, and Spain have borrowed an eye-watering amount of money, borrowing more isn’t going to solve the problem, and when it comes down to it, a bank deposit is simply a bank borrowing money from an investor.

  12. Lorcan Roche Kelly

    David > All banking systems act like the heart of the economy.

    Maybe they are more like the food providers for the economy. We have become used to them dishing up large portions (of credit) to all and sundry. Unfortunately some of what they have been serving us has turned out to be junkfood.

    Your solution presumes that the problems can be solved, or at least alleviated, by a return of confidence to (and in) the banking sector. While I agree that confidence in the banking sector is very important, I also think that the government probably only has one chance to inject that confidence into the market.

    So it comes down to a matter of timing. Is now the right time? I don’t think so, for several reasons.

    Firstly, the recovery can’t start until the underlying problems have run their course. Until property prices return to ‘fair value’ banks are going to continue to be under pressure. The importance of property prices cannot be overstated in this crisis, BoI for example have a loan book of €144 billion of which €102 billion is property (figures from BoI). With prices likely to continue ‘dislocating’ for some time to come, banks will not be lending money to anybody until they know what their balance sheets are going to look like after this crisis. Confidence is wasted on them at the moment.

    Secondly, the banking system needs to be more closely regulated, and probably changed. Currently the banks are in a double bind of their own making. Of the €102 Billion of property loans on BoI’s books at the moment €65billion is residential mortagage debt, and €37billion is property development. So they are double exposed to property. The pay for the houses to be built and pay for them to be bought. Basically, they have been leveraging themselves. This ridiculous situation exacerbates their problems now that they have been caught short by falling prices. Regulation should be introduced to seperate residential mortgage lenders from commercial property lenders.

    Thirdly, the Joe Duffy factor aside, I do not believe that there is going to be a ‘run’ on a bank in the short term. A bank ‘run’ is usually caused by a public perception that a particular bank is on the verge of collapse. Currently it would be hard to pick a bank that is sufficiently weak (or strong) in the Irish market that would cause people to want to start moving their money around. The entire sector is in trouble, it’s a very democatic crisis. (I have used BoI figures in this post because I had the exact numbers to hand. AIB is in the same boat.)

    David > Our political leaders must make the right decisions in the budget or face economic chaos.

    Economic chaos is on our doorstep. The decisions made, and the timing of them, will be the difference between of medium term crisis (eg the 5 year Savings and Loan Crisis) and a long term crisis (eg the 15 year japanese banking crisis).

  13. MK

    Hi David,

    David > State guarantees can avert depression
    You’ve written about this before where a 100% deposit guarantee is a potential remedy to some of our woes, but I think you are barking up the wrong tree on this occasion.

    It wont solve a thing. A deposit guarantee is a type of insurance. Any government that provides it, has the banks put in a percentage of their deposits to fund any bad bank. Its like that travel company insurance. It can only have limited funds. Like the travel co insurance, it provides a level of comfort to the customers, an implicit level of trust and can prevent a negative-spiral and detrimental run on a bank. 100k covers a lot of that trust. Anything more than that, 200k, 300k, 500k brings benefits of diminishing returns. Banks can still have problems regardless of the guarantee. And people use it for its interest rates, not because it has a guarantee.

    > there is likely to be pressure on the Irish banks, leading to chaos and, ultimately, political instability.

    Pressure on Irish banks should not lead to political instability. They are not linked.

    > the only difference is how critically they are affected.
    But this is key, the amount is crucial. Yes, we know there are bad loans out there, but how bad is what will affect banks. And that is as yet unknown. For example, I heard a US Realtor speaking on Bloomberg or someplace saying that she has a foreclosed 3-bed apt that wasn’t selling at 1,000 USD. Yes, one thousand! It will be boarded up, stripped and then vandalised like 1,000’s of others. We have not reached those levels of crystallised loss of asset value yet. And far from it. The US is having a Force-5 hurricane, which has been driven, by lets face, call a spade a spade, stupidity and greed on a systemic scale. The Fed and Greenspan, some sage, plus others are culpable. We meanwhile have only a light summer breeze in comparison, so far.

    > If the banks go, our economy goes too. All banking systems act like the heart of the economy. Without a strong banking system that pumps credit into every nook and cranny of the economy, activity dries up and the country dives deeper into recession.

    If Banks go, our economy does NOT go. Banks have come and gone throughout the ages, ever since equivalent money-lenders were operating on the streets of Rome 1000’s of years ago. Bad behaviour, management, execution HAS to result in failure, which can result in the bank being nationalised, assets sold and/or bankruptcy. Jobs lost, yes, and why not if they are built on the back of a ponzi scheme. It makes no more sense to prop up the credit givers (banks) as it does the credit users (property developers). I don’t think you are in favour of the latter so you shouldn’t be in favour of the former. Yes, there may be pain. But like lancing a boil, it can be the best way of dealing with some ailments.

    I have no problem with a state bailing out a bank as long as they do it on favourable terms for the country. ie: they get the bank at firesale prices and there can be some mid-term/long-term upside. I’m not sure if the Fortis save is like that though. Time will tell.

    Also note that there are plenty of strong banks in Europe so far not affected. Rabobank. BNP Paribas. No doubt a German bank and the two big Spanish behemoths, BBVA and BSCH. Don’t fret David, there will be banks with us for a long time to come. Yes, we do need credit, to oil our economy, but its just a case of how that credit is provided, how much and to whom. We’ve had a party, many binged to excess, the providers, the users. Let them have the hangover rather than trying to spread it around to everybody else. True, the bar may be closed for all of us and the place will be a mess for a while. But we will survive and get on with things. People still breath, live, eat, consume. “Oh yeah, life goes on, long after the thrill of living is gone.”

    > the problem that will drive them to the wall is short-term liquidity

    If banks cant get by due to a lack of yet more credit, well more fool them in their business model. Their business model is broken. In other lines of business its called over-tading. Where a business relies on something which if removed the business falls apart. Its not as if there is a lack of customers out there. A systemic correction in business models in this case, and most notably in inter-bank loans. There are also theories that there shouldnt be interbank loans in the first place.

    Stephen Kenny > It seems to me that the financial model that we’ve all been living under for the past couple of decades

    I agree with this Stephen and with all of your comments. Also yours Lorcan Roche Kelly and several of the others.

    As for Wall St, more like Wall-E (wally) St.


  14. Philip

    The guaranteeing of deposits is a good short term play. But, if you can have depositors rush in so easily, they can rush out just as quickly. The medium to longer term issues in the next couple of years, there will be at least 3 major requirements

    Reliable and sustainable food sources
    Reliable and systainable energy sources
    A cheap to run and use reliable transport/ logistics system

    By the above, I do not mean the brokerage of these services. I mean businesses (local or foreign) who can provide the above with minimum import requirements.

    People who are making this stuff here should be encouraged. 0% tax. and minimal economic rent. Middle men etc (you will need solicitors, consultants, regulators etc) should be very carefully chosen and only be allowed to operate on an open book basis with a preagreed margin – total transparency.

    If people loosing their jobs can be directed into the above areas as startups/forming coops etc and facilitated by a fair system where they can have a fair income, you are sowing the seeds for stability and long term sustainability.

    In terms of infrastructure, I actually think we have enough of it – and before you beat me up – I just want to say that we are again mimicking our energy intensive neighbours by having too many motorways at the expense of railways.

    Yes, by all means guarantee deposits (if you can)…bear in mind though, we are entering a period of severe cost push inflation on the basics and it will be every nation for itself. Your new currency will be sustainability.

  15. Deco

    MK. This is a deveraging event. This happens when the financial institutions are overleveraged. In this case the most vulnerable financial are the most aggressive,with the most liberal lending policies, and the best incentive scheme for getting their staff to approve risky mortgages. Basically the banks competed with each other and some went harder than others. In fact the banks, a cynic might even argue that the bankers behaved like socialist politicians, in promising to solve all societies problems using other people’s money. And of course in the process this changed the market dynamic, by putting a floor in the property market. Now this has been proven to be a bad allocation of resources. The NINJA mortgage takers are defaulting on their mortgages and this is creating a massive supply increase in the market. The market floor created by low interest rates was only going to be a temporary event in any case. This is because it created conditions that were unsustainable in the long term. But in the moments of euphoria, nobody thought that this was the case. Everybody assumed that ‘house prices would go up forever’. This is a case of ignoring conventional wisdom accumulated as a result of previous property booms. The blame for this rests squarely with the people who benefited from the property boom. Politicians benefited from the increased tax take, with more money to throw around to buy votes. Politicians of all ideological outlook have benefited and promoted this euphoria. Public sector unions lobbied to get as much of this tax take as possible – with a long list of spurious reasons provided – best described under the ‘ATM’ strategy of teachers boss Joe O’Toole. Auctioneers and developers clearly benefitted and seem to be getting a lot of the spite, as a result of the hangover – a bit like a woman who hung on to a drunk man and removed him of his wallet, credit card, house keys and money. And the bank employees on bonuses benefited. But this is not a sustainable situation.

    In addition to all of this there is enornmous pressure from Asia with regard to incomes in the West, through competition / globalisation. This is deflationary on wages. There is also a deflationary impact from the deleveraging process.
    And there is now enormous pressure on the resource supply system – which is inflationary. In addition the massive liquidity injections are also very inflationary – as observed by the monetary growth in Middle Eastern countries which use the US dollar as their reserve currency. The participants in the property market are getting sandwiched between these two forces, and simply are finding it increasingly difficult to pay for property. The net effect of these two forces will be that the credit crisis enters one vicious episode after another, in a continuing cycle. Anybody who says that they know when it will end is being extremely assumptive.

    MK – The Spanish banking system is only solvent based on the fact that the ECB are supplying billions of Euros in liquidity in exchange for bonds which are of questionable value. This was only ever meant to be a short term liquidity injection. And the ECB now wants to get out of this, because it is not a solution of even medium term sustainability. The problem is that if the ECB do not get out, then the entire Euro project is being discreditted. There is political pressure on the ECB to not withdraw also.

  16. MK

    > The Spanish banking system is only solvent based on the fact that the ECB are supplying billions of Euros in liquidity

    Hands up, I havent analysed the situation of the big two Spanish banks in detail so I have no feeling of their precariousness or otherwise. Value wise (marcap), for now, they are still large even with today’s post-Fortis/B&B/Hypo-triggered share price drops. But I do know that the Spanish property market and ancillary activities is going through a huge crash, much bigger than ours has been to date. Whether one or both banks will have to go or be bailed out remains to be seen.

    > But in the moments of euphoria, nobody thought that this was the case. Everybody assumed that ‘house prices would go up forever’.

    Erm, no, not everybody. David for one, although in David’s case he was perhaps ‘crying wolf’ on it very early on. I, and I’m no doubt many on here, often spoke to people through 2005, 2006, 2007 that the property frenzy was a frenzy and could not be sustained but most people were too busy making money off it and joining in. I was asked to get involved in a Bulgarian project but I declined. Just as well I went with my hunch on that one.

    There were no curbs being put in place in our system as the number of places built reached levels nominally the same as the UK! It was obvious to the blind man as they say that we were caught in the up-leg of a likely bubble. I’d say there was probably at least 25% of the population that thought it was nuts but I have no hard data, thats just anecdotal. Sometimes majority systems do not work!

    I remember probably around 2007 a friend sent me an email outlining how to flip a property and how it was a no-brainer. Turn 10k to 20k. I remember replying that property could go down and should at these levels but the reply was that it wasnt going to happen.It was a bit like the 1930′s US stock market crash, where the shoeshine boy was tipping stocks to buy.


  17. Lorcan Roche Kelly

    Banks have been falling like skittles this morning. ‘Subprime’ was the word of the year for 2007, anybody want to bet against ‘bailout’ being the word of the year for 2008?

    Philip > we are entering a period of severe cost push inflation on the basics and it will be every nation for itself.

    Inflation has been rising quite rapidly for the past year, and due to the credit-crisis distraction little has been done, or said about it. We even got a new word earlier this year (stagflation) to make inflation seem less worrying.

    There is a chance that the ‘powers that be’ see inflation as their quite saviour in this crisis. Rampant inflation (+20%) saved the british economy from the worst effects of the banking crisis in the early 1970s and there are perhaps some that see this kind of debt destruction as a way out of the current malaise. I hope I’m just being paranoid.

    There was a bank bailout this morning that had my alarm bells ringing. The Dutch/Belgian/Luxemburg bailout of Fortis is very different to the American and Uk ones due to the scale of it. Fortis bank needed a transnational bailout because of it’s size. Which makes me wonder are if two main Irish banks, rather than being ‘too big fail’ might be ‘too big to save’.

    US GDP (I’m using 2007 world bank figure here) was $13.8 Trillion, so a $1.1 trillion bailout accounts for less than 10% of GDP.
    Ireland’s GDP (again 2007 WB) was $245 billion. AIB and BOI have outstanding loan books of ~€200billion. That’s $287billion at today’s rates. Can we afford to save them? Maybe. Can we afford the risk? Definately not.

  18. Stephen Kenny

    Are we all just getting just a little too obsessed about banks? We ask bankers “What’ll happen if a load of banks go broke” and they answer “the world will end” or something similar. If you asked some senior HSE manager what would happen if we got rid of 50% of HSE staff, they’d probably react in the same way.
    It rings of the student union “all or nothing” argument: you criticise a law, and the response is “”if we had no laws, society would fall apart, so this law is good”.
    There’re good banks, banks that haven’t lent recklessly, and there are bad banks. If we let the bad banks keep going, via a bailout, the most likely result sems to me that they’ll become even worse, even more reckless. It’s the same people, same culture, same pay structures, so we should expect the same results.
    In the US, I understand the political importance of Goldman Sachs, Morgan Stanley, JP Morgan, and so on, but they’re failed banks. They are also unnecessary banks,
    Letting depositors lose their savings is a bad idea, from a macro point of view, as it’ll put a crowbar through the retail economy, but keeping bad, failed, banks alive, seems like the height of stupidity, not to say maladministration

    • Martha

      @Stephen Kenny: ”if we had no laws, society would fall apart, so this law is good”.

      As Maggie Thatcher said “There is no such thing as Society” – which there isn’t, when a society is in the control of raving lunatics whose greed can never be satiated!

      The laws in such a country are made by those same insatiable greedy lunatics. Why would I, or any other sane person, obey the laws of this land when they are designed to keep us (the plain people of Ireland) enslaved to them that control this country? This is the reason why, I am not a Catholic, for example, even though I was born and raised in Holy Catholic Ireland!

  19. paddy cullen

    could be an apt time to revive the Leviathan as forum to discuss whats going on @ the mo

  20. Philip

    @Stephen Kenny> Totally agree. We are playing number games and it’s consuming itself. The banks are terminally damaged and these bailouts are like trying to resusitate someone pronounced dead. A time comes when you have to bury this and move on. Nobody is thinking outside the box.

    @Lorcan> Increased inflation would decrease the real value of outstanding debt. The snag is that it assumes we are generating the wealth (thro goods and services) which are appreciating. And therein lies the conundrum….if the banks stop, the money stops flowing and businesses stop trading as they can only complete the one side of the transaction. They can deliver, but there is nothing in return.

    So, thinking outside the box and conundrums aside, what can we do? I suppose the only option is to ensure that businesses keep going and people’s savings are intact. We need some information system to allow trading of some class of credit information. If the banks in their current guise are clobbered, then what? David states the need to implement a local workaround. Guaranteeing the savings is a good initial ploy…but what else can we do to give us the necessary thinking time to get out of this mess?

    My view is that businesses need to keep going on some basis of a credit or transaction management scheme – govermental IoUs?? run from solid banks like credit unions etc. This would also be the basis for getting focus on food and energy resources. Securitisation based on future energy and food output should be a very saleable. Swapping property for government bonds could be an approach that would a) allow people to keep homes and b) allow government to make money from this afterwards c) wean banks off property forever.

    The first commercial wave energy system has been activated…lets build on it…asap before them bonds evaporate. Our sovereignty is really what we can do. Demonstrating “can do” in this regard, puts the real trusted value behind it.

    Right now, things are happening “out there” very fast indeed. Maybe events will overtake us and Oct2nd will be a day when it’s all purely academic.

  21. B

    What I find galling is that the experts who “got into property” are now still giving advice.

    I got spooked when the bank wanted to give me money back in ’99. I could have made a heap of cash if I had gone with the flow. But the trouble is that once you’re in you’re in.

    Like a frog being slowly boiled you won’t want to get out until its too late and you get scalded.

  22. Longlivetherepublics

    philip>So, thinking outside the box and conundrums aside, what can we do? I suppose the only option is to ensure that businesses keep going and people’s savings are intact. We need some information system to allow trading of some class of credit information. If the banks in their current guise are clobbered, then what? David states the need to implement a local workaround. Guaranteeing the savings is a good initial ploy…but what else can we do to give us the necessary thinking time to get out of this mess?

    FDR recognized the same conundrum during the depression concerning the role of the banks as the providers of the vital services required by business’s and communities. What did he do? he placed them under State and Federal authority, placed the savings deposits under a freeze but guaranteed the depositors they would eventually get their money back. This act prevented runs on the banks, and allowed them to carry on the business of commercial/retail banking. The investment/speculative component was separated away from commercial/retail activities by the Glass-Seagall act but was eventually repealed in 1985, and was to a large extent responsible for the present crisis. The FDR administration also implemented many other schemes,New Deal etc, which helped bring the US out of the Depression. My point is that the FDR government provides the only historical example of the proper principles which we must now employ,or at least take some ideas from, to guide us through the present crisis.

  23. Lorcan Roche Kelly

    Philip > Right now, things are happening “out there” very fast indeed. Maybe events will overtake us and Oct2nd will be a day when it’s all purely academic.

    It will be academic for the banking sector. The government might try to make life easier for the banks, but their future is out of the hands of the department of finance. As you correctly say, the need for a working credit system is paramount. If the banks can’t provide it, then it would be cheaper to create a new system. It would be a hellishly complex undertaking, but it could work.

    Is it time for another Industrial Credit Corporation? The ICC (remains of which were sold to Bank of Scotland in 2001) was set up in 1933 by Sean Lemass at a time of global financial meltdown to allow Ireland to ‘self-start’ industrial growth. I think we might be back in the same boat. While a rebirth of the ICC might not be ideal, it is a known quantity in political circles, and so might be an easier sell than a more unboxed (but probably more valid) idea.

  24. Lorcan Roche Kelly

    Longlivetherepublics > placed the savings deposits under a freeze but guaranteed the depositors they would eventually get their money back. This act prevented runs on the banks, and allowed them to carry on the business of commercial/retail banking.

    Freeze deposits? David’s idea does the same thing, only allows access to deposits at the same time.

    Speaking of FDR, here’s what he had to say about bankers:

    “Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence….The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.”

    Unfortunately, ‘monetary profit’ is how we now measure ourselves. Changing that will take more than an interesting budget.

    • Martha

      Lorcan Roche Kelly: “Unfortunately, ‘monetary profit’ is how we now measure ourselves. Changing that will take more than an interesting budget.”

      Yes, it will take at least another three generations – if, indeed, we have that long. Our economic system is nothing compared to the problems we face as a species (never mind as just one country) in terms of the effects of rapid global warming! These wanker-bankers are TERRIFIED of becoming extinct! Hello? We’re all going to die someday! If you live on junk, you tend to die younger…

  25. Lorcan Roche Kelly

    The US bail-out bill has failed to make it through congress.

    Time to duck and cover.

  26. Philip

    Least we be dissappointed… talk about deck chairs on the titanic!!

  27. nostramartus

    U.S. bailout rejected, 227 nay 207 yea, does this put a different spin on david’s idea, would it now be pointless. This is essentially the end of the world as we know it, the stock market plummets 4% on news. If you can’t convince the house of representatives to spend other peoples tax money then what hope do the banks really have? the good ones might survive the ones with debts will fail. Obviously not very helpful but we have to look at this new reality and accept pensions are now gone. The whole point of the idea was to restore confidence, the effect of renegotiating the deal is going to spread even more doubt.

    watching it live they don’t look like they have a clue what to do.

  28. Lorcan Roche Kelly

    hang on.

    They’re trying a Bertie solution. They didn’t get the right result first time, so they are going to run the vote again.

    Who said economics isn’t exciting?

  29. nostramartus

    instead of a plaster this bailout failure has thrown salt on the wound, the republicans are trying to blame Nancy Pelosi for it’s failure, but to steal Obama’s thunder, this is a failure of the republicans bankrupt neo-con philosophy over an eight year period. Get ready for a period of bankruptcies and the unthinkable failure of a number of multi-nationals.

  30. Lorcan Roche Kelly

    Me > Who said economics isn’t exciting?

    Of course, I was mistaken. This isn’t economics, it’s politics, as nostramartus points out.

    • Martha

      “This isn’t economics, it’s politics, as nostramartus points out.”

      No, its not economics and its not politics. Its PSYCHOLOGY!

      We humans are (like all the other animals) sentient creatures. We are all naturaly driven to stay emotionally balanced. That is why the Money-mad Control Freaks are absolutely driven to treat the rest of us (not like them) as mere commodities – like the way the gamblers do their Stock ‘n Shares thing every day on Wall Street, or in The City. Like demented loveless testosterone-filled male adolescents, they just can’t stop ‘jerking off’!

      Talk about Dancing at the Crossroads!

  31. Malcolm McClure

    Seems like Humpty Dumpty just fell of the Wall (St).

  32. Longlivetherepublics

    Lorcan Roche Kelly>Freeze deposits? David’s idea does the same thing, only allows access to deposits at the same time.

    Its not the same thing. David’s idea is the government making a promise it would find hard to keep in the event of a simultaneous run on all the banks. FDR’s freeze on savings deposits was the government more or less saying, ‘you’ill get your money back, just not today. Meanwhile the bank is still open for business’.
    Remember this is not some crazy scheme dream t up by one of us armchair economists, the savings deposit freeze was actually implemented and more importantly it worked. This is just an example of a bankruptcy proceeding preserving the useful functions of an institution which are still useful to the economy even though the institution itself is seriously indebted.

  33. Ah watching the American Stock market is better ( almost ) than sex or good golf !. I think it’s rather ironic what’s happening now, for years here in Ireland and to a degree in Europe we all looked towards America and ‘the Dream’…well it turns out to be no more real that the flicks of Hollywood.
    All you have to do is turn East and look at the Asian and Islamic Banking system they are really on a percentage level not been affected by the system we run under.
    So since we are such a fickle bunch and such a small economy on the global scale , maybe Mr Lenno and Biffo should be going down this week to visit the Saudi embassy and see will they buy our little banks.
    Then Parlon and his building buddies could start knocking down all the un wanted office blocks and build a few green houses then we could get back to been farmers again and sell our lovely potatoes to the Arabs at Quinnsworth prices, before you know it the good times will be back and we’ll all be happy again.
    And fingers crossed hopefully Michael O Leary was out buying oil today, as we’ll all need a cheap sun holiday by the end of the year !

  34. Furrylugs

    Well now…….tis 00.14 our time and the NZ bourse has opened to a small disaster. I saw poor old Nell McCafferty on RTE’s Q&A being rubbished and all she was trying to say was pure common sense. Richard Bruton had some spark of realism.The prettier version of Harney, Shiny Hanifin, was vacuous. Sarkozy has called a big crinniu. Bush failed in his big crinniu. Everyone of substance is having a crinniu to try and do something. We have Jonathan Bowman.
    I had a couple of beers tonight with a (very proud) old English hippy domiciled in West Cork who was delighted that her lifelong belief in the chaos theory was finally coming true.I’m a fairly intelligent and sometime opiniated yoke but this time I’m stumped. It does actually look like serious history in the making. To quote ( or mis quote …apologies) DMcW (the Golden One)…the manna is missing. God is too busy elsewhere.
    I’m off to work in the UK tomorrow. I’ve given this place two swipes and I’ve lost my shirt both times. Too insular, parish pump and petty. But thats just the ruling dynasty. The people, my people, deserve better.
    Now, as a parting shot, can we count the current unemployed with the number of one way tickets out of here and add that total to the number of people who are 3 months or more in arrears with one loan or another?
    For a bit of realism…like?
    Thanks be to the Almighty for the Net. I apologise for sounding off but if all I had was RTE I’d buy tea leafs and a big mug.
    Out the gap and gone.

  35. Colin

    brendan, if you love the islamic system, then i suggest you go live in a country where there is one. i’ll be surprised if they’ll let a westerner like you in since all the traffic is going the opposite way.

    by referring to asia, you can include the philippines which has been an economic basketcase longer than ireland ever was. japan has had its banking crisis. if you like singapore’s economics, i suggest you try living there, you may find your civil liberties aren’t quite the same. see if the sultan of brunei can spare you a dime while you live in his kingdom.

    this is not the end of the world. house prices will become affordable for our young people soon. we may get around to knocking those prefabs and build proper school buildings. we might even start car pooling and being nice to eachother instead of looking after no.1 all the time.

    i just see problem as opportunities. relax…’ll be fine, we didn’t handle wealth very well anyway.

  36. Ger Kennedy


    I think they are finally listening. Well done.


  37. So we are either in the biggest ever reality TV show ,…or are the civil servants starting to visit your site David ?….100% guarantee been announced this morning !…… Now start writing about developing a Nuclear Power industry please

  38. @ Colin ,.. Sure the world isn’t perfect , but I don’t think Biffo would give me a few coins if I asked him either, I do live in hope though that this melt down in Wally Street , will wake us up I hope you have a good day and I hope all viewers here have a good day too. As George Bush once said ‘this internets is a big thing!, ( and man and fish can live together )

  39. Rob

    I think Colin was on to something there, we handled wealth terribly badly a bit like Indians been given whiskey for their homelands, we didn’t know what to do with it, partied hard now have a hangover with no roof over our heads .

    Make no mistake though, Fianna Fáil presided over this fiasco and worsened it by kow-towing to the CIF, Parlon and pals for the last 6/7 years. This has beggared a good many young couples who if they decide to stick it out will be left paying mortgages for years on over-priced property. It is conceivable now that people buying down the road from the fictional couple will perhaps pay 30 to 40 % ar a laghad for the same property.

    Is there an element of blame to be attached to over-eager buyers? Yes definitely but at the same time it has soaked up all the juice that should be lubricating the economy, meals out, taxis, purchases etc.

    I only hope that this experience when we emerge from it (provided it isn’t some Mad Max scenario) will awaken us as a people of how we should be governed and quit voting in the same failed poiltical dynasties and the same bankrupt ideas. N’fheadar

    • Martha

      “a bit like Indians been given whiskey for their homelands”

      Hey Rob, forget about Indians (and other foreigners); You only have to take a good honest look at your own people, us Irish (include me out!) to see what a load of ignorant peasants we are!

      BTW, I happen to live in a very upmarket so-called middle-class area of south city Dublin and most (the vast majority) of my neighbours, pleasant and all that they are – are as ignorant as shit! Their newly acquired money (credit mostly) doesn’t make them the civilised people they imagine themselves to be. They’re still scary ignorant peasants as far as I’m concerned.

  40. Well David they took the advice, and if not a good move the only sound one. However, what happens today if or in reality when (a foregone conclusion should think) the money gets pulled from hedge funds.

    Anyway the rejection of the bailout plan has got to be celebrated in the light of profit before people , (privatize profit, and socialize loss/risk,; government thinking they can just ride roughshod: threaten and intimidate.

    Anyway, on a lighter note.
    I love the quote from Allen Mendelowitz member and former chairman of the housing finance board, he said:

    “we are living in extraordinary times, we’re in the midst of a paradigm shift of extraordinary proportions. The Bush administration who took office eight years ago as social conservatives are now leaving office as conservative socialists.”

    Ha priceless.

    The Reagan and Thatcher era is dead and gone: “out out out” I would just like to say.
    History will now se them for what they are, and apart from all the hyperbole, simply a failure.
    Capitalism that does not take social – indeed world – development into account will always fail.

    • Ruairi

      Paddy said >

      Anyway, on a lighter note.
      I love the quote from Allen Mendelowitz member and former chairman of the housing finance board, he said:

      “we are living in extraordinary times, we’re in the midst of a paradigm shift of extraordinary proportions. The Bush administration who took office eight years ago as social conservatives are now leaving office as conservative socialists.”

      Ha priceless.


      Bertie must have been a socialist after all folks! And still ruling FF from behind the scenes like other ironhanded men of history like Putin!!

      Bertie, oh wondrous one, what should we do now?

      A few casinos in the park methinks?

  41. Lorcan Roche Kelly

    Congradulations David.

    As I have previously stated, I just hope the timing is right.

    I’m watching Bloomberg at the moment and they are talking about Ireland showing political leadership. Who’d have thunk it?

  42. Deco

    David McWilliams …..we should have you as minister for Finance….it seems they end up doing what you recommend to get themselves out of a mess anyway….no prizes to anyone for naming the six most insolvent institutions in Ireland at this point in time….as Lenihan said….the banks have made mistakes……the health service makes mistakes too…..and they also get covered up…..

    Gauranteeing the deposits is the only means of keeping the system solvent….expect to see other countries, especially those in Northern Europe who have the tax systems to support such a measure, follow suit….

  43. Philip

    Next phase needs to kick in quickly…stop the job haemorrhaging by improving the business climate here. Money needs to start flowing again – away from property.

  44. MK

    Hi David, you got your wish with the state guarantee of all irish “owned” bank deposits, (400-500 billion seemingly) – however, this wont make one bit of difference. Its bad debts which are troubling banks, not runs on their deposits. The bad debts are driving down share valuations. Not runs on deposits.

    What is new however in the overnight announcement is that a new state guarantee “also covers all money borrowed by Irish banks from other financial institutions”. This is new.

    This hidden gem is a new move and I dont know how many other non-nationalised institutions around Europe have such a guarantee. It means that the state will guarantee the payments on the loans that the main banks here already taken out (presumably, unless they as yet to be announced terms and conditions preclude that) and on future loans, thus in theory at least allowing these banks to get inter-bank money on the open market on more favourable terms than other banks. It can certainly help.

    Of course, it all depends if these guarantees have to be paid out or not. Like any insurance company, the state could lose big time if many of the dominoes should fall. The state guarantee doesnt change the precarious financial situation. Its an insurance policy. Like car insurance, it doesnt prevent people from crashing. And if there are 100,000 car crashes happening in slow motion, where the cars have already left the road but have yet to hit the roadside, insurance just cant stop physics!

    People talk about a credit crunch, but that is in fact something of a falicy. If we look at the ECB, it has loaned 495 billion euros since July, according to this:

    So huge amounts of credit are still flowing to keep the “junkie credit” model propped up, and some would say a potentially mortally wounded model.

    In the house of cards analogy, certainly some layers are tumbling down. Like the unsinkable Titanic, or the World Trade Centre, it is possible that the global financial system will unravel all the way down.

    I wasnt expecting it in this storm, but clearly others who think it could happen and are advising governments are spooked that the vista could come to pass. They are doing all they can to avoid it. But ultimately doing so will depend on us, Joe Bloggs.


  45. Stephen Kenny

    Wall Street will get their bail out. A few bridges to nowhere, and campaign finance “initiatives”, and they could get the compulsory wearing of armbands, and a new national salute, through the two houses.
    This bailout will only really help Wall Street’s most reckless, since it can do nothing about the effect on the broader economy of the massive deleveraging that is going on, and will have to continue going on.
    When you look at the details of what Wall Street has done, now they’re coming out, it is so outrageous, it is, quite honestly, hard to believe that it happened.
    I’ve recently read ‘Smartest guys in the room’, the story of Enron, and what is clearer to me, is the quite honest confusion that Jeff Skilling (Enron CEO) was feeling during his trial. He was being threatened with prison for doing, merely on the scale of one corporate, what Wall Street was, to loud applause, engaged in doing to a significant part of the US economy. It’s much more than similar, and it gainsays the Enron claim that they used ‘innovative financing’ – they just copied.

  46. Rich

    Can someone explain to me, does this guarantee to cover ALL deposits mean that people who have more than 100k on deposit are covered by the government or is this just for inter bank lending?

  47. MK

    > Can someone explain to me, does this guarantee to cover ALL deposits mean that people who have more than 100k on deposit are covered by the government or is this just for inter bank lending?

    Yes. ALl deposits are covered. It covers deposits over 100k. If you have 2 mill, 10 mill or whatever, you are covered.

    “Can you kindly tell to me, who owns that head, upon that bed?”
    “ah your drunk your drunk on liquidity and still you cannot see …..” :-)

  48. The government is just copying everything David says lately. Makes a change after ignoring him for 5 years!!

  49. paddy cullen

    Im actually very uncomfortable with the idea of the government being willing to guarantee all money borrowed by Irish banks from other financial institutions !!!!!

  50. Colin

    brendan, you’re right about nuclear power at least. time for david to write about building them next so that our government will implement it. one for carnsore point and one for malin head, two economic blackspots which did not benefit from the celtic tiger. get prof ed walsh out to thrash it out with the greens. he knows something about nuclear power and enterprise.

    as for your comment on biffo, he does give plenty of dimes away in the form of dole, children’s allowance, rent supplements, even dimes for bogus asylum seekers (some of which leave islamic countries with islamic financial systems)…. a lot more than any sultan of brunei would give you or me. and the sultan is a very wealthy man, unlike biffo.

    …..i can’t believe i just defended biffo, but its in a west v islam context so it wasn’t hard.

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