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.
The government press-release http://www.finance.gov.ie/documents/pressreleases/2008/blo11.pdf
I’ve read it a few times and it seems a bit weak on detail. But it does seem to guarantee every current, and future ‘facility’ at the institutions. The future ones are probably the riskier ones. Strong regulation wil be required.
MK is right when he says this is one insurance policy we can’t afford a large claim on, but if it doesn’t work, we are running out of options.
The banks are returning to their opening level after this mornings bounce.
A few questions.
1. I have a mortgage and some savings with a financial institution, and if it was overwhelmed by toxic assets and went bust, and if the Government refused to bail them out (ie let the “free” market take its course), would I not then be in the clear? If I can’t pay my mortgage, then they repossess my house. Therefore, if they went bust and couldn’t guarantee my savings, surely I don’t have to pay my mortgage to a wound up company ??? Cheeky thinking, I suppose, but what would happen if that eventuality materialised because the State refused to guarantee deposits? Hypothetical question, I know, but I don’t see why I can’t profit from failing banks since the banks have been screwing me forever.
2. Brian Lenihan is clearly getting his ideas from David McWilliams, who has been calling for a move to guarantee all deposits for some time. The beauty of the idea to guarantee all deposits is that it will attract depositors from all over Europe, and cash is king these days of falling asset values. However, how can the State guarantee anything up to 350 billion euros (and more if people move their money here) if it’s stoney broke? What happens if it’s bluff is called and people start withdrawing their money regardless? Can the State afford this? And why should I, a taxpayer, guarantee the solvency of private banks?
3. Why are the majority of the Democrat Party (the “left” leaning party in the States) backing a bail out plan for wall st? An why are the majority of the Republican party (the hard right party of the states and a party in complete hoc to wall st eg Paulson and McCain especially) opposed to this? The Republicans may get redneck votes from the poor, but we all know by now that they are the party of the rich and feckless.
4. The British government moved to nationalise Bradford and Bingley yesterday, which is consistent with its behaviour so far. Why did it take on its debts alone, leaving its profitable savings arm to be gobbled up by Banco Santander? Why is the sovereign state in the UK socialising losses and allowing profits to be privatised by a foreign bank?
5. Most importantly, why haven’t the US Dollar and and the pound sterling now collapsed? Both currencies are nothing more than fiat money, as they are not backed up by an equivalent value in gold, so they only trade on confidence. If both US and UK governments are buying up huge losses, then surely their currency is worth sweet fran adams?
Would appreciate some informed discussion, these are worrying times. The brother thinks it’s time to get a plot of land, get a shotgun, and grow some carrots and potatoes…….
fergus,
point 3.
republican voters in usa like to pay as little tax as possible. the deal to go thru requires taxpayers money. not all republican voters are rich, most are just ordinary people who see the deal as bailing out the extremely rich bankers of wall street. republicans are believers in the laws of consequences, and many think the rich bankers in wall street acted very greedily and have weakened the great american economy which republicans were so proud of.
also, remember in ireland, the working class do not vote for labour. labour get their votes from the middle class. breakfast roll man is unskilled and works on (or used to work on) sites and he voted fianna fail into power as you should know. politics is not an exact science.
Fergus > However, how can the State guarantee anything up to 350 billion euros (and more if people move their money here) if it’s stoney broke?
My worry is that we might see the Ireland’s own credit rating effected. Will there be a reaction from Moody’s or Fitsch?
> Why are the republicans agin it?
I think it is because they are such ingrained free-marketeers. I listened to the speeches yesterday in congress and the republican speakers were calling this a ‘socialist’ bill. They would rather see the economy collapse than be accused of being socialist.
> Why did it take on its debts alone, leaving its profitable savings arm to be gobbled up by Banco Santander?
To save jobs. Governments do not want to be bankers, it is too politically risky.
> Both currencies are nothing more than fiat money.
Find me a currency that isn’t. The US dollar is under huge pressure, but remember, it is the defacto world currency. The petro economies, and China have Trillions of $ reserves. They are now helping prop up the currency, because a dollar collapse will hurt them too. But how much more of ‘helicoptor’ Ben they will tolerate remains to be seen.
> The brother thinks it’s time to get a plot of land, get a shotgun, and grow some carrots and potatoes…….
Your brother is turning into a survivalist. We’ll need a complete breakdown of society before what he suggests wil be required.
Brian Lenihan must have read this article.
Ditto!
Let’s hope things don’t go to the wall and Ireland inc. ends up footing up to 300 billion of bills.
I think that the pposition parties are dead right in demanding further details of the Government’s guarantee of bank deposits, and assurances that the move will not lead to further reckless lending !!!!!!!!!!
Reading these comments makes me embarrassed. The collective financial ignorance of this nation is frightening. Just because you have read David McWilliams Pop-economics you think you understand the working of the financial stysem. At least the UK and US politicans are financial assute enough to make a value assets. The ignorant BIFFO has not got a clue and takes his advise from the Irish oligarcy of Sean Quinn etc. It is a joke that there is a public outcry this morning especially because this is not the first time the government have stepped in and saved AIB and taken nothing for it. Well, nothing for the taxpayer in return for the risk.
Woah there Aidan!
I wouldn’t accuse US and UK politicians of having a clue either.
We are “run” by solicitors, teachers and publicans. All we need is a few taxi drivers and then we will have the full compliment of sages.
Longterm, State ownership of banks is not a desirable solution. If it happens, it should only be a temporary phenomenon. What is needed is something similar to factoring/accounts receivable financing so that financial institutions can insure against the risk of loan-defaults just as businesses can currently sell their debts to financial institutions for 98% of the cost, with the financial institutions having recourse to the bad-debtors. Currently factoring is not available for loan defaults owed to financial institutions. Regulations are needed to require such insurance to be taken out. If necessary it should – at least at first – be a State-owned insurance-scheme. That way the taxpayer will be in better shape to payout in the future if this happens again. As a moderate liberal, I dislike the spectacle of State-bailouts of financial instutions, and hope one day that the insurance-companies can bail them out instead, but we are not presently in a position where that is feasible. In that context I support what govts around the world are doing in guaranteeing deposits, though I am uncomfortable with nationalisations of banks, and I firmly believed that those nationalised should be privatised again once the measures I have outlined are in place and the banks viable as going entities.
FutureTaoiseach has just proved my point. He fails to understand the most important issue re the governments actions. They are fully guarenteeing the debt issuance of all the Irish banks. The Irish State has sold a CDS to the Irish banks and not received a premium. How can I make this more clear for you. You have underwritten an insurance policy for all the liabilities these banks issues. All the risk has been removed and we get paid nothing. CRAZY and the collective ignorance once again previals
When people are scared by things that are not explained to them they will react and whoever looks like they know what they are doing gets the nod.
We are again being screwed by the banks but this time they have been protected by a blank cheque delivered by the government whose biggest desire is to keep us all quiet and looking the wrong way while the bank robs the till.
So as well as paying an overpriced mortgage and having a retirement fund that is tanking you are underwriting the liaility of the banks to these overpriced “assets”/ The banks cannot lose and the taxpayer cannot win.
Bush was on earlier warning that things will be worse tomorrow. The trouble is that people actually listen to that clown.
We need to repay the government at the polls at the European elections. But no doubt people will be distracted by the baubles the spindoctors wave before their eyes.
Todays bailout is merely a recognition of the government’s existing legal liability, since the Family Home Act has precluded the banks from repossessing their collateral assets. That Act would probably be considered illegal under European law, as I suggested here a few weeks ago. Also the multinational deposits would disappear overnight if today’s guarantee were not made absolutely concrete. The government had no choice.
If it all went pear-shaped then the euro would be devalued in a rerun of the Weimar debacle. Bonds would be worthless. Ireland’s fascists would have a field day and there’d be blood on the streets.
The only way to preserve asset value in those circumstances is to have mortgage-free rental property or shares in companies that provide basic necessities.
Aidan > All the risk has been removed and we get paid nothing.
While you are right to say that we are getting paid no ‘fee’ for being the underwriters of the policy, there is a return for us.
The problem with the return is that it is unquantifiable.
This policy has been started to stop something (a bank collapse) happening, and return liquidity to the market (grease the cogs of business) rather than produce a return. If we some day look back at this time and wonder why the guarantee was necessary then it will have been a success.
If the banks are in such bad condition that the policy is called upon, then it will not be a failure of this policy, but a failure of the past ten years of banking governance.
Finally some sense from B. Here here. Lorcan Roche kelly you have no idea what you are talking about. please desist
Finally a commonsense proposal to this whole mess, and more significantly acknowledged by a corporate owned mainstream media outlet, meaning they must be desperate. If it is now bankruptcy over bailout in the US, then it can be bankruptcy for Ireland to, but in a way which will not impair our credit worthiness since all or Europe will follow suit. Lets face it, the magnitude of debt is beyond pay ability.Let the shareholders eat paper and lets not try and hyper inflate our way out of this quagmire or its Wiemar Germany all over again. Well hello there Bretton Woods, its been a long time.
http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview
These banks were audited. See no evil, hear no evil, speak no evil it seems. Not a peep out of them. It is obvious that SOX never worked.
The auditors need to be fired and their firms broken up. It is also obvious the financial regulator couldn’t regulate a tap so they need the bullet too.
We are being robbed with weapons of mass distraction.
The problem is that the eejits in power don’t even know whats going on either and are just holding the door for private enterprise to plunder what it can. Dumb and Dumber are running the show.
Finally a commonsense proposal to this whole mess, and more significantly acknowledged by a corporate owned mainstream media outlet, meaning they must be desperate. If it is now bankruptcy over bailout in the US, then it can be bankruptcy for Ireland to, but in a way which will not impair our credit worthiness since all or Europe will follow suit. Lets face it, the magnitude of debt is beyond pay ability.Let the shareholders eat paper and lets not try and hyper inflate our way out of this quagmire or its Wiemar Germany all over again. Well hello there BrettonWoods, its been a long time.
http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview
Comment by B, >
The auditors need to be fired and their firms broken up. It is also obvious the financial regulator couldn’t regulate a tap so they need the bullet too
>>>Sounds like you are infavour of deregulation then?
No. But if the regulation doesn’t work what is it there for? Window dressing to distract you and me?
Its trial and error. smart people in banks invent new products, blow up system, government bails out, new regulation bans activity, life moves on until the next funky product is invented.
this is nothing new, and wont be the last (although this a pretty severe one). happened in the 1920s, happened as recently as the 1990s S&L crisis. Happened with the invention of derivatives, happens regularly in Latin America. same same.
Humans are by their nature greedy. We are all greedy, the ordinary man on the street drove the irish property boom bust. we are all to blame for this. the sooner everyone stops trying to apportion blame, and accept that we as a country splurged on debt.
No use running around crying saying, ooohhh, you shouldnt have given me the money, didnt you know i wouldnt be able to pay it back???
“Humans are by their nature greedy.”
Kevin, with respect, you know fuckall about Human Nature. Humans are not, by nature, greedy. Otheriwse NORMAL human babies would choke to death (debt?) every time they had a meal, i.e., fed from their mother’s breast – which of course they don’t. I know, because I breast-fed my two babies for a whole year and they never threw up their meal, and neither of them (now adult parents themselves) became parasitic bankers! And yes, they are both doing very well in this screwed-up world of ours!
Kevin, i think most people knew that clinton encouraged Fannie and Freddie to give people chance to get a house. Its still a securitzation caused problem though. no problem giving loans to subprime borrowers, aslong as you know the risk. package up the risk and selling it as AAA was not the clinton administrations idea. The same applies to the Irish economy. It is imprudent leaning practices of Irish/UK/US institutions that created this problem not peoples fundamental desire for the security of being a homeowner. You can’t expect everyone to be as financially astute as a banker and it was the banks, mortgage brokers and IBs insatible desire for yield and reckless disregard for risk that has brought us here.
Re pop economics, how reliable are the “real” economics now? DMcW has read things well so far but I wonder what the the standard orthodox textbooks have to say about all this. Will their authors put their hands up an admit they were wrong or are they being quietly revised as we speak?
On the subject of regulators, someone or other on Newsnight the other evening said on their behalf that they couldn’t retain staff as the finance industry kept poaching them away with better pay. They could perhaps be compared to a referee at a particularly vicious GAA match, risking the lynch mob if they made an unpopular decision. The neutrality of the auditors has long been a matter of controversy (see earlier comment about Enron).
The banks always knew there’d be a safety net but who exactly are we talking about when we say banks? Surely the biggest earners only needed a couple of years at the top to milk the system before passing the parcel and skipping off with the bonus. It’s unpalatable but the choice as pointed out by David could be a depression (I don’t know if this is the first time he has referred to it by name?) This present danger has to be dealt with first, then the reforms should be made.
Aside from unemployment etc it would both discredit capitalist democracy in the eyes of the world (which has been moving in that direction in recent years) and provide a temptation for assorted unscrupulous rogue states to exploit the situation – say China over Taiwan, Iran going nuclear, or Russia pulling a trick out of the box.
What does DAVID MCWILLIAMS think?????????????
Aiden, I don’t expect you, or anybody here to agree with my comments. A little courtesy would be nice, but not necessary.
I have disagreed with David’s deposit gaurantee idea since he first suggested it.
But it’s going to be implemented now, so further disagreement is, in my opinion, pointless.
Aidan – i couldnt have said it better myself. Still doesnt take away from the fact that we are all greedy, the bankers are just smarter and have the capital and position to exploit it. The US economy was rife with flipping – is flipping the honest to goodness home ownership ideal? Greed is in our genes.
http://www.bis.org/publ/work259.htm
Regarding economics – economics is a method for explaining what creates wealth in a country. Blaming economics is like blaming maths for the NASA Challenger crash. What people do with it is their own responsibility.
Lorcan – perhaps if you were clearer and backed your ideas up with some sort of …. reasons? If you put this sentence into MS excel it would be a circular reference
“If the banks are in such bad condition that the policy is called upon, then it will not be a failure of this policy,”
———-
“but a failure of the past ten years of banking governance.”
>> what failures? please elaborate? throwaway sentences like these just annoy people.
They are now helping prop up the currency, because a dollar collapse will hurt them too. But how much more of ‘helicoptor’ Ben they will tolerate remains to be seen.
>>When was the last time helicopter ben cut rates?
And the builder-bailout begins, wow we never saw that coming did we !!??.
Ridiculous! The writer has so obviously been briefed by government to put this idea across prior to the grand announcement.
If this guarantee is called upon even a single time, the state is bankrupt.
I suppose it’s too late for nationalisation now.
Greetings!
I was probably one of the first people who read this article, right after it was posted online in the wee small hours of Sunday morning. And I happened to be the first to leave a comment, at 4:04 am on that Sunday.
Then I took the liberty to send a copy of this article to Brian Cowen, Brian Lenihan and a couple of other ministers who – in my opinion – are able to think for themselves.
Knowing that there was a cabinet meeting scheduled for later that Sunday, I hoped that they might read David’s article beforehand and – maybe – be wise enough to take his advice.
Of course I have no way of knowing if my little initiative helped, if they did read the article before the cabinet meeting, and if it influenced them.
However, today’s announcement is exactly what David asked for. So one could well come to the conclusion that someone in the government is listening to sound advice. Which means there is some hope after all.
And as I write this, there are already discussions in Britain about it, with suggestions they might do the same as Ireland.
As David said – let’s do something specifically Irish, without looking to others for help, and we might get it right and inspire others to follow.
Well done again, David! As long as we have people like you, there is always hope for Ireland.
Kevin. I hope I was not ranting. The legal profession are only one part of a very complex myriad of economic rent infrastructure in place in Ireland. This seriously undermines our economic activity. It is a very serious issue. I think that there is a failure to grasp the need for doing something about our economic competitiveness. I cannot think of any issue that affects our competitiveness more. If you can, then you opinion is highly valued.
We need a somebody who knows about the law to direct policy in the Department of Justice. And we need somebody who knows economics and financial administration to take charge of the nation’s finances. Last week the biggest influence on financial policy was the listenership of the Joe Duffy show. The fact that Lenihan has done exactly as the Irish Central Bank has advised is good. It will work in the short term. But in the medium term competitiveness is the issue. I would put it to you, that Ireland has undermined it’s economic competitiveness. Our competitive sector holds the key to our economic future. This is the big issue. Ireland needs to generate the income that will pay off the debts and sustain our social objectives.
Kevin > What failures? Please elabotate?
http://www.davidmcwilliams.ie/2008/08/31/central-bank-can-crack-credit-crunch
The failures have been discussed here to death. I did not feel the need to repeat them. I am sorry if I was mistaken.
>>When was the last time helicopter ben cut rates?
April 30 2008.
But I was not refering to Fed rate cuts. Again, a failure to communicate on my part. I used Ben Bernanke’s ‘helicopter’ nickname as a nod towards the amount of dollars the Fed have ‘created’ since the start of the crisis.
Ben Bernanke took office on Feb. 1st 2006. He had previously extoled the virtues of Milton Friedman’s idea to use a ‘helicopter drop’ of money into an economy to fight deflation.
In March 2006 the Federal reserve stopped publishing the M3 money supply figure.
According to Ron Paul “M3 is the best description of how quickly the Fed is creating new money and credit. Common sense tells us that a government central bank creating new money out of thin air depreciates the value of each dollar in circulation.”
Ben’s policies are risking the worth of the reserve dollars held by governments outside the US. If the Chinese, for example, who have ~$1trillion in T-bills decide to cash them in, it would lead to a run on the dollar, destroying that currencies value.
http://biz.thestar.com.my/news/story.asp?file=/2008/9/30/business/2151113&sec=business
i think people joined this forum because they think David has a few solutions to our problems.
remember david is patriotic – he was called unpatriotic before by idiots but that has since been found laughable.
david writes his material with the interests of the country coming first.
it is very welcome indeed that the government have started listening to him. like i wrote earlier, if only now david starts to write about nuclear power, building schools, etc…. we will be ok.
some people here are convinced this is a bank bailout. lets wait and see. but what i would like to see is those bankers on salaries of €2,000,000 fired with no golden parachutes. a clean sweep is required
i’m confident house prices will fall further after today which is good news. i’m confident developers will go bust after today’s news.
if only we can stop fighting amongst ourselves, then we’ll be fine
“it is very welcome indeed that the government have started listening to him.(David McWilliams)”
@ Colin: Are they? From what I gather, the ‘government’ is only listening to their own gang of money-mad gamblers, aka The Mobsters. Its the same ol’ Protection Racket.
And lest we forget, The Lads in Power are ALL the products of a “good Christian Brother education” (read ‘schooling’). They were well ‘schooled’ indeed!
Woodsey said:
>We’re all dependent on the ‘banks’, including the government and it’s the ‘banks’ that appear to be broke.<
This reminds me of previous generations (in the not so distant past) who put their trust in the (Irish branch of) the Catholic Church. And just look at where their childish wishful thinking got them – or rather us – their descendants. We’re still stuck with this deluded “government” who are still sucking-up to their Masters, at our expense!
Remember that ‘Sweetheart Deal’ Bertie & Co did with the Catholic Church re the victims of the Industrial Schools? Its the same scenario. Then again, I suppose one could call it Poetic Justice? After all, Irish Society (as a whole) just sat back and let it happen – as in the ‘huddled masses’…
The thing about risk aversion (if I may dirvert a tad) is that it decreases in proportion to your bonus. Bankers (supposed to be cautious with other people’s money) are now encouraged to be risk seekers. And when you see the bonuses, can you blame them.
What bugs me about this guarantee is that the current hyper risk aversion will be slammed into reverse. Remember we are dealing with guys who know little about risk other than if the odds are long, the gains are bigger. You are not dealing with responsible people. Never confuse money with intelligence. You are dealing with a closed elite – politicians, legal profession etc are all in on it and that means no one will get the bullet. There is no meritocracy operating here. Just pure preferential and referential ass licking.
Really, I believe this whole mess is completely out of control. This measure can only be temporary. It’s only a matter of weeks, maybe days that higher interest rates or a run on the Euro will cause a flight of cash out of the banks and then the state is in doo doo.
I really do question the need for a bailout in the US and even similar for banks here. They need to be put thro’ bankruptcy and we need some kind of FDR treatement on deposits so business can continue.
Hey! maybe that’s the plan…once you get enough cash in, freeze the lot and do yer thing for the countrys infrastructure and development programmes for the next few years.
Aside from the comments congratulating the government on taking David’s advice (I’ve obviously lost the plot here) how is it good for the country – not just the economy, but the whole social fabric of Ireland – that our government bails out the banks, which are, after all, PRIVATE lending institutions?
They don’t just make a healthy profit, they make OTT ridiculous amounts of money just pressing buttons and pushing pens all day. Not exactly productive work, is it?!
Martha,
I couldn’t agree more re your estimation of the practices of Banks in general. My reading of the situation today is a bit different though.
The McWilliams Plan is motivated by a desire to avoid capital flight from Irish banks, where as the Paulson Plan is to shore up the Banks with real money. The McWilliams Plan has the merit of not incurring real debt in the short term, whereas the Paulson Plan mortgages the tax payer by giving real money to the banks (which will no doubt be followed up with Freidman-esq massive cuts in public spending (except defence, obviously) and truly will sell the nation to private industry, and this seems to be the basis for opposition to implementing the Paulson bail-out plan). The McWilliams plan as a finite possibility of not costing the taxpayer a cent. Thats my reading anyway. I don’t see it as a bail-out, as such. (just listening to newstalk.ie on t’internet, clearly this is not how others are reading it)
But I agree, the individuals who got us in to this mess in the first place need to pay personally for what they have done. If you take big risks, then if you screw up it would not be unreasonable to run the risk of not only losing your job, but being banned from holding any executive position in the finance industry for life, for example. But we need to get through the existing shit-storm first.
Interesting, so
David says: ” make the wrong [decision], there is likely to be pressure on the Irish banks, leading to chaos and, ultimately, political instability ”
and according to the beeb, Cowan says (in more restrained tones) ” [doing nothing] would put at risk the entire stability of the Irish financial system” (http://news.bbc.co.uk/2/hi/uk_news/northern_ireland/7645125.stm)
Forgive my noobishness for the question that follows: this effectively means that without actually incurring real debt (yet, and in fact the exchequer recouping some fees for doing this) we shore up any worries that anybody has about Irish banks, and we mitigate the risk of the exchequer having actually to cough up the reddies by taking a punt on the Eurozone not taking the same hammering that Sterling and the Dollar will likely get? How much will this be offset by our dependance on the US and UK as trading partners?
I wonder how this affects the Banks motivations re their lending policies. Follow-up tweaking of banking regulation will have to be done carefully i guess so that we don’t end up just letting the banks off the hook but also don’t inhibit their ability to consolidate their positions. This sounds like the best possible start, but its just a start.
Already the UK media is reporting that some are worried that this move will undermine the UK banks positions. Then again if even a small amount of UK deposits ends up in Irish institutions (David alludes to this possibility, but is it realistic), would this then provide a huge amount of liquidity to the Irish banks? How then do we stop the banks giving out “40 year mortgages for some developer’s 500k apartments”, as another commenter suggests? What kind of plan do we have that will instead use this as an opportunity to restore economic competitiveness?
What can we say about the alternative choice (though that is clearly out of the frame now, unless the EU turns around and says no dice), of letting the chips fall where they may?
Sorry for so many questions, maybe the answer is “i’ve only got two balls and neither of them is crystal” which for me pretty much sums up the discpline of economics (no offence to present company intended).
Regards,
-Liam.
in fact philip has asked similar questions, in a more succinct fashion :)
Hats off to David for making the call.
But…there’s always a but.
As stated by others, the beauty of this is that the government is not actually spending taxpayers money (yet!) but just using it is a guarantee.
The net effect of this depositors are now reassured, any potential bank run is nipped in the bud and credit should start to flow once again as depositors (from all over world) can start lending to Irish banks. Happy days so far!
The first problem is, is that this credit-crunch is a global problem and not just a problem with Irish banks. So the first thing that will be noticable is that expected deposits from abroad may not materialise in the volume that could have been expected.
The second problem is that any deposits that do arrive (and for the sake of arguement lets assume the volume exceeds that what might have been expected) on Irish shores are quite likely to come from monetary areas that are in the midst of this crisis, and thus will only compund the problem in those areas – the offset of this is that governments from those areas will only be encouraged, or forced to follow, what is being called the ‘Irish solution’ on BBC2′s newsnight (we all know it is the ‘McWilliams solution’).
Thus, if the Irish solution is perceived as the best (or only) solution, then it follows that others will follow. The end effect is that you will having competing economies competing for deposits which just arent there.
The only light at the end of the tunnel is that Ireland has moved first and while others dither, Ireland will benefit.
Ireland will benefit?
Just like we did from our experience of Rome Rule? I don’t think so. Unless all that you learned from the Romans (Catholic Church) was to fuck everyone else who got in your way – including your own children! No thanks.
Skin,
Good points, but can the UK or the US really implement this solution? If the UK does this, any security the UK government offers is dependent solely on the performance of the UK economy and if sterling tanks, its worthless. Ireland is a small economy when compared to the entire eurozone, so Ireland’s battle is on the front of competitiveness only and the Irish government is not also battling to maintain the value of an indigenous currency. So in theory our offshore debts and ability to borrow in the short term are greatly enhanced in comparison to the UK and US.
The elephant still resides in the room.
Empty housing estates countrywide.The property market remains frozen.
Loans for land purchased at unrealistic prices are still on the bank books- nothing is marked down,as yet,because nobody knows where the bottom is..
Nobody is even prepared to say; “the emperor’s horse is dead.!”
Nobody will take the first step to bringing realism into the picture.
It is all still all too terrible to contemplate. GUBU.
And so the bank shares gyrate between 30 and 70% daily.Fortunes to be made overnight for the bold and the canny, with deep pockets.
Nobody knows how deep the well is, and nobody will throw the first sounding line.!
If the government give guarantees for debts they can not realistically cover in a doomsday scenario, will the cost of annual exchequer borrowing to fund the economy, increase.? Many questions remain. This tinkering with the dysfunctional market is unprecedented.
Govt isn’t covering the unknown liabilities (some of which are bad) of the banks, its covering the known deposits in the banks. The only US is attempting to pool bad debts.
This policy announcement is clearly the right message that needed to go out to the general public to prevent a run on the banks because I suspect there were worrying signs that this was starting to happen.
David McW has previously stated that a series of measures are needed.
Deposits inflows into Irish Bank accounts is questionable because each country will have their own guarantee scheme in time – although we have the first move on this with the exception of Northern Rock in the UK context. However, there is a limit on the deposits that Northern Rock can accept without conflicting anti-competitive regulations so there may be some scope for depositor spill over into the Irish Economy once this cap is reached. It is unlikely that UK depositors will seek Euro deposit accounts, however I am sure Irish Banks will not turn away sterling deposits.
If the UK Economy dithers over a decision to guarantee beyond the £50K limit which it looks like doing, it does provide scope for Ireland to take advantage. £50k may satisfy most depositor needs but the Guys that have big money will need alternative secure investments.
First move poker play strategy with all chips on the table may work backed by replenishment of new investor capital chips and spin on single fundamental – ‘being Europe’s lowest debt/GDP level’.
Agree with previous post on public infrastructure investment in Schools through PFI initiative.
What I am baffled with today has been the total silence from our 6 banks , not on any radio or ‘state television’ have we heard a comment from ‘the bankers’ , who we are been asked now to guarantee. Again as a blogger mentioned here the pop economics, I would not be surprised if a civil servant had read this article on Sunday or maybe the Governor of the Central bank prehaps had a glance over his Sunday orange juice .
Twenty five years ago we bailed out the AIB and their depositors paid for this with their charges afterwards. Why have no Bankers came out today ? . It’s simple , they are all lying from the top down and their ‘respected auditors’ who have ‘valued’ the banks assets are lying too. When Japan had it’s banking disaster , at least they had the culture to come out and ask their fellow country men and woman to take their forgiveness. Funny today how Sean Quinns bank rose so much more than the other 5 !.
Again we are just looking at the total lack of back bone present in this country and the headless leadership we presently have. When I sold my house four years ago I was pestered by my then Bank manager to buy again and he was quite prepared to ‘have a look at my books ( been self employed ) to help me move up the ladder , until I told him to f**k off looking for his bonus from me , and he looked at me as if I was a naughty school boy !
I would like to see an elected member of the Dail ask in the next few weeks for these bankers to come in an answer , why they fiddled with figures to give developers these loans and why they conned the general public into stepping onto or up the property ladder.
I am though also looking forward to what Mr Williams here will have in tomorrows independent .
I could be wrong here, but my understanding is that the property market will not in the short-term bounce back, nor should it as it is overvalued. People have had their fingers burnt in the last year and will be doubly cautious about buying now. The irony is however that it would appear that the Irish banks, due to the state guarantee, will be in a position to offer lots of money out, 110 per cent mortgages etc. It will remain to be seen however as a quid pro quo if Cowen et al will enforce stringent lending criteria on the banks thus enforcing a cooling of prices back to realistic levels. That said and others have touched on this is that our focus needs to turn away rapidly from property and address the fundamental factors affecting the competitiveness of the Irish economy. While it is fine on a macro level to talk about liquidity crises etc. what about the hundreds of Irish people loosing their jobs every month. This is an actual and very serious issue. I believe that in the space of a year the jobless total went from approx 140,000 to 240,000, this is a catastrophe.
The Dail has adjourned until tomorrow and as far as I understand the ‘primary’ legislation has been passed with little explanation of the risks and the probability of future liabilities materialising considering there is no idea of the assets!
Do the big 3 legal heads – Brian Lenihan, Brian Cowan and Paul Gallagher really understand how to value banks ?
Based on a rough calculation of how much the 6 banks are worth by market value is less than €15 billion (which is less than 5% of the €400 billion being guaranteed) ! Does this make sense, especially when there is no idea of the current value of the ‘assets’ which are bascially mostly property loans or personal guaranteed backed by property ?
€BN
AIB 5.2
BOI 3.9
Anglo 2.9
ILP 1.3
IN 1.0
EBS 0.5
14.8
Do they know where these assets are, for example Anglo have €60 billion in loans outstanding but only 42% in ireland. 60% of Anglo’s €75 billion in funding is from customer deposits – how much of this is irish investors ? If it was all from irish customers that would be €10k from every citizen in the country in one bank. Question – who is protected?
I wonder if they read an article published by Morgan Kelly Professor of Economics, University College Dublin this year.
http://www.ucd.ie/economics/staff/mkelly/papers/developers.pdf
“Last summer it was costing banks under 30c to insure every €100 they borrowed. Now insurance is costing Irish-owned banks between €1.50 and €3.50. Given a base borrowing rate in wholesale markets of just over 4%, Irish banks are now having to pay from 5.5% to over 7% to get funds.”
If this has been happening the government should be charging an ‘insurance premium’ of at least 5% considering the risk at the moment are so severe that a failure of banks and the system was/is imminent – that could be €20 billion+
We are the 1sr country to guarantee the deposiits and loans from all the domestic banks, who is advising the 3 boys ?
Fair play to them. Being unpredictable could help these days, if we just copy Britain, the speculators would have a much simpler game, now at least they have to think and not just replay the same game with smaller numbers for Ireland. still I hope theres some stick there to force the banks to start fixing their issues…
So what can ordinary punters like ourselves do? Hopefully, we can start to change our perception so that a 500k mortgage is not a sign of wealth, its a sign of stupidity. Nor is a new BMW X5, unless you’ve paid cash, even then its a sign of something. Maybe we have got a big enough scare that we will stop looking at the repayments and look at the price tag. And also nobody has a clue where rates will be next year, 0% or 10%, who the f*** knows, we might be paying it back in a different currency. But you will be chased for it! I know its late to be doing this but better late than never.
We need a lot of things to go our way … and even then this thing will cause real grief… The best case scenario is thousands of people will be ruined for taking on too much debt, the worst case is we all will…. but sure if you’re not cold, hungry or in pain, its all good!
Comment by Johnny Dunne, September 30th, 2008 at 11:30 pm
€BN
AIB 5.2
BOI 3.9
Anglo 2.9
ILP 1.3
IN 1.0
EBS 0.5
14.8
Read the press release. Its deposits and the debt capital structure of banks that are insured. you are taking 2 and 2 and getting 400bn.
The guarantee other banks and depositors can lend to Irish banks, knowing that if they fail, or are nationalised, the government will cover them getting their money back. Thats it.
Other than that when will the posters on this forum realize that we are all are to blame. I have seen various politicians, bankers, auditors, the legal system, someone even had a go at the catholic church saying that someone they are still masterminding this whole thing. We all sat around and got giddy at the thought of our house price going up, and deluded ourselves that somehow ireland was different and special and it would last.
WHY IS NO ONE BLAMING REAL ESTATE AGENTS? maybe i will add them as my own personal pet hate. I will give up trying to explain how we are all part of the same pyramid and just blame someone. It wasnt my fault, thats for sure!!!
“WHY IS NO ONE BLAMING REAL ESTATE AGENTS? ”
My experience of this whole mess, was having a Mortgage Broker trying to persuade me to go for a more expensive bit of property, saying to me that “property will prices will keep rising”. They were basically trying to convince me that it was win win, so I should over extend myself with a large mortgage, as the risk is very low. Luckily I knew they were talking complete *****, so I bought I place that I can afford even if prices tank. Unfortunately, alot of people fell for these lies, and they are now getting burned.
[...] Originally Posted by David Cochrane Actually, David McWilliams came up with the idea, he wrote about the proposal in the Sunday Business Post last week. Just read through his column – published on the 28th, with the government announcing the guarantee on the 30th. Hmm, I wonder if Mr McWilliams’ gets a credit on the Bill…? State guarantees can avert depression David McWilliams Archive [...]
[...] “State Guarantees Can Avert Depression” – 28 September 2008 [...]
[...] [...]