We are not out of the woods by any stretch of the imagination. Indeed, some Irish banks have been so recklessly managed they hardly deserve to be covered by the guarantee.
Finance Minister Brian Lenihan has made a wise choice. By coming up with a unique, Irish plan — guaranteeing all deposits — instead of importing a failed solution from abroad, he has instilled confidence in the Irish financial system.
Most importantly, Irish banks are now safe. This is the single most crucial upshot of yesterday’s move.
Political and financial reaction has been positive and, encouragingly for the challenges ahead, when everyone else around him was losing their heads the minister kept his.
The financial markets abroad have taken the news very positively. This is doubly impressive when you think of what is going on outside the country. Granted the markets will be jittery and unstable for some significant time to come.
However, by drawing a line in the sand and by indicating that the sovereign state will do its job and preserve the system, the minister has shown real leadership.
We now have an anchor and the stability banks needed to sort out their own houses. The whole point of this is to get credit and loans back into the real economy as quickly as possible.
Nor should the guarantee come for free. The chastened banks will now have to accelerate their process of writing down loans, sort out bad debts, bring developers to book and repay the Government’s trust, not in their own interest, but in the national interest.
One way of looking at these events — when sellers are attacking the Irish system — is to compare it to a military attack.
Time is of the essence. If the defences are crumbling everywhere — as they have been in the UK, Netherlands, Belgium and the USA — it’s no use mounting the same defences as those which have been overwhelmed elsewhere.
You have to insulate your own system first by using tactics that no one else has deployed.
Near term, this government guarantee obliterates the sellers who do not have Ireland’s national interest at heart.
Further out, it also buys us time to sort out our problems. (I’d have paid good money to see the faces of hedge-fund managers in London yesterday morning when they suddenly became conscious that their strategy against Ireland was in tatters and they realised that they stood to lose the millions they gambled against the Irish system).
We are not out of the woods by any stretch of the imagination. Indeed, some Irish banks have been so recklessly managed that they hardly deserve to be covered by the guarantee, but the choice was between the system or bust.
The minister obviously thought that by guaranteeing some banks and not others — as many of his advisers argued — he would open up the prospects of the weaker banks undermining the stronger ones. He has put the system first and this can only be a good thing.
As this column has argued before, there is plenty of time for recrimination. By keeping the banks liquid, the private sector will solve the problem of writing down bad loans, working with debtors to get the best deal and, most importantly, by doing all this in a controlled, not panicked fashion. When people are panicking, they tend to make the wrong decisions.
The nub of the minister’s dilemma was how to do something revolutionary that was quick, decisive and, most importantly, simple.
If we look at what the rest of the world is doing to try to stabilise their banks, we see all sorts of convoluted plans which amount simply to a large game of pass the parcel.
Every time a weak bank is passed on to a not-so-weak bank, market confidence takes a hammering and we are back to square one. The guarantee eliminates all this nonsense.
Now, we have to plot the next phase. How do we keep credit flowing in to those parts of the real economy which are productive? How do we accelerate the process of cleaning up the banks’ balance sheets and in time, and how do we punish those who recklessly got us into the mess?
But yesterday was for action not ideology; it was for stability not recrimination; and, most crucially, it was a time for practicality not complexity.
Over the course of the next few days, we are likely to see capital inflows into the Irish banking system as investors elsewhere seek the sanctity of a government bank guarantee as opposed to the uncertainty of a bank deposit, when it is clear that the banks are operating on the hoof.
Longer term, we can expect foreign banks to move here, setting up offices in Ireland and creating a banking industry which will thrive. We have set the template. The upside greatly outweighs any possible downside. The system is the most important thing at this stage. A threat can now, with the right accompanying policies, be turned into an opportunity.
In time, Brian Lenihan’s move yesterday will be seen as a masterstroke and a practical blueprint for the new financial architecture which will emerge from this global crisis.
Further to to Morgan Kelly’s article in today’s Irish Times:
Ireland’s gung-ho disregard for its partners in Europe,— failing to consult with them about its unilateral bank bail-out,—means that this country is now regarded as a loose cannon that could sink the entire dream of an Economic Community.
Ireland had already raised hackles with its unfairly advantageous treatment of corporation tax and its refusal to ratify the Lisbon Treaty. Now it is apparently in breach of competition rules as a result of last night’s vote in the Dail.
What happens when the Commissioners decide to apply sanctions to discipline this unruly child? It could start by compelling a close look at the AAA rating of Irish bonds in the light of the prodigious level of risk to which they are now exposed.
the EU does not give ireland an AAA rating. Rating agencies do
Lorcan, the distinction you make between ‘international’ and ‘national’ isn’t necessary. I think you’ll find the phrase “Credit Default Swaps” may sadly be on the lips of most Irish people fairly soon..Elephant. Room. Etc.
“European regulators are now investigating Ireland for anti-competitive behaviour after the state guaranteed the €400bn (£315bn) of savings and loans held by six of its largest financial institutions in what bankers said was a de facto nationalisation of the industry.
If the French follow the Irish, as they are believed to be considering, bankers said it would inevitably force all governments across Europe to follow suit. Depositors would then have to decide which sovereign guarantee was safest.
Credit default swaps, effectively the cost of insurance against going bust, on Ireland’s government bonds almost doubled yesterday after the announcement, indicating the level of risk transfer. ”
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3115797/Financial-crisis-French-may-copy-Irish-deposit-guarantee.html
The idea that The Market wouldn’t spot this ruse to temporarily prevent Ireland’s banking system ‘marking to market’ on it’s junk property investments was…..’optimistic’. It may have the unintended result of raising the threat level to, not just the Irish Banking System, but the credibility and integrity of Irish Sovereign Debt Guarantees. The funds you need to borrow for urgent infrastructural investment to generate future wealth just got more expensive……You can’t tinker with one part of the system without affecting others. Morgan Kelly’s article is a robust analysis of the dangers ahead as a result of this ill-advised action.
Just as the British Tories announced a game of ‘catch-up’ on Corporation Tax in Birmingham yesterday to prevent further attrition of business entities to Ireland:
You can be sure that Sarkosy / Brown & Merckel will be having some ‘interesting discussions’ regarding ‘necessary responses’ to Ireland’s disorderly and unilateral reaction to depositor concern/panic. So much for European Unity.
Time to stuff some more Swiss Francs into the mattress.
Kind regards.
Time for the next stage. Renegotiate the bad loans to affordable rates so the banks can remain capitalized ,otherwise the bankers may have to start cashing in their prize bonds before the two year expiry.
Fast track the NDP with Nuclear,Hydro,rail and water management at the top of the agenda, this will give the
builders something useful to do,through subcontracts ect, and allow them to repay their bad loans, thus reinforcing
the stability of the banks (positive feedback loop). Also the NDP would have an enormous trickle down effect throughout the rest of the economy. The cost of the NDP, if it is done properly, to the nation will be reimbursed through the many benefits such an infrastructure build would bring. To finance it, there are a number of options,
bonds,taxes , the European investment bank, bilateral trade agreements.
And one more thing, bust the trusts and bust the heads of whoever would seek to preserve them.
It’s too easy to blame the bankers, who are chasing bonuses in a badly designed incentive system. It’s easy to blame the government, who were chasing votes and were looking to boost the economy in the short term, turning a blind eye to long term problems that were in store in order to maximise their chances of getting re-elected. I think it’s knee-jerk anger to blame these people for the crisis. Don’t get me wrong, heads should roll, etc., in the banks, but in they end they are just doing what anyone else would do in their position, i.e., the system and the lack of regulation is the fault.
Therefore, at an Irish level, we must place the blame squarely on the financial regulator, who, for whatever reason, had their eye off the ball, or their heads in the sand, and ignored for years the building up and massive expansion of risky loans that resulted in todays crisis. Why these guys are getting off relatively lightly in the media is beyond me, they are surely the main culprits and they didn’t do their basic job!
How could I have possibly thought that banks would suddenly begin to do the right thing, in the real national interest, and honestly and fairly fix up their balance sheets, to reflect a world of common sense and integrity?
I’ve been hearing for the past two days that this is in breach of EU competition and state guarantee laws. But can someone explain how?
All countries have a level of guarantee and this varies across the EU. Last week the government offered a guarantee of €100k and this was much higher than the British, Belgian, Dutch and Danish guarantees. If that wasn’t in breach of competition laws then how can raising the limit as Lenihan has done be in breach? Either all EU countries have to offer the same guarantee (which they don’t) or there is no law to breach.
Similarly the fact that this is limited to Irish banks can’t be an issue since it is a consequence of different regulatory and licensing systems across Europe. The fact that NIB is a Danish bank and is regulated by the Danish authorities but chooses to operate here is their choice.
And the fact that Northern Rock was taking deposits here and is being inundated with deposits in the UK based on their unlimited guarantee is nothing different than the Irish banks now.
Finally, I can see how this can be argued to be state aid but surely it’s much less than the governments of other countries directly putting cash into Northern Rock, B&B, Fortis, Dexia and the others?
Maybe I’m missing something but I fail to see how this can possibly be illegal, despite what Brown and the British Banks say.
Brian, I’m no expert but our 100k guarantee was only on cash, on deposits. Not on toxic loans. A world of a difference in what we have done here. Now we’re exposed to €5><80bn of ‘intensive care’ debts they say, possibly another €400bn of debts that slide into toxic territory and more again of actual good debts and good assets should things slide even closer to the plughole. Britain’s nationalising one or two bansk was akin to USA’s letting one or two slide. But when systemic collapse beckons anywhere on the world stage, I can’t see how our brave move here won’t be tested to the full.
Comments above about unintentional consequences is enlightening indeed for some like me. I had presumed, and perhaps that’s what Emmet Stagg was alluding to when he said 5 pieces of legislation were now kicked to touch in favour of one, that all such sceanrios would be wargamed and provided for.
Will someone please tell the Trinity or UCD Chess Society to head to Leinster House with bombs strapped to their chests and kindly explain strategy to FF (mental note, the bombs are just to make them listen intently, although admittedly a banker’s suit usually has the desired behavioural effect in their case).
David
You say recriminations to come later, Irish History surely teaches us one thing and that is we don’t do justice when it comes to white-collar crime among our golden rich elite circle.
The fix may work but I doubt seriously anyone will end up in jail for reckless trading, any financial regulator, central bank employee even fired for being asleep at the wheel. Remember bogus non-resident account scandal did any bank official get jail for the largest organised tax evasion scheme in the history of the state!
When the dust settles the recrimination will be forgotten and I would even say the necessary regulation required to follow this bill as well.
More on the boards
http://www.boards.ie/vbulletin/showthread.php?t=2055388521
Andrew
Anyone have any thoughts on timing. As a lot of your have rightly pointed out, our sovereign credit worthyness may start to come under pressure. But how soon? And as one of you pointed out, if Germany and others decide to do this trick, depositors will only put their cash is those countries they feel it is most sound.
Right now, liquidity needs loosening up. Maybe, a few more rules agreed on deposit movements at EU level and this could be generally applied. That would buy even more time.
Once banks here start to look clean (setting real values on their assets etc)- and I think they have 1-2 months to do this – only then will things stabilise. Banks shares will plummet and will have market caps less than their deposits. But they will be locally regulated. Once the overaction to assets has calmed, we could see banks in ireland showing a stronger growth in value. They’ll be a great buy. Will we see Banks here taking a lead…for a change? Will they bankrupt their developer friends? These guys need to see that the alternative – such as holding out – is just not tenable.
I think the whole issue on future infrastructure spend etc. is academic right now.
Kevin is of course correct that: ” the EU does not give Ireland an AAA rating. Rating agencies do”
However, the EU Commissioners can ask Moodys, Fitch and S&P how they justify an AAA rating for Irish Bonds. For an insurer (Multiline?) triple A is supposed to represent an average of at least double A for all securities available to pay claims. The government’s running capital is all held in the banks they are protecting. Any calculation of its capital adequacy must also be adjusted to exclude security loss tax benefits and any consideration of the NPV of future taxes. Raters should also consider the question, where does the government go to obtain adequately capitalized Reinsurance?
I am or should I say was a great admirer of yours but this time you have got it wrong, completely wrong. The government did not come up with this plan, it was presented to them by the bankers on Monday evening. Contrary to your analysis, there are huge risks involved and while I have sympathy for the dilemma the government found themselves in, nobody yet knows what the fall-out will be. For a much better analysis of the bail-out, check out Morgan Kelly in today’s Irish Times or today’s editorial in the Financial Times.
Comment by Malcolm McClure, October 2nd, 2008 at 12:33 pm+
I would imagine its more a debt to equity type calculation. Ireland has low debt as a nation, ergo AAA rating. Im pretty sure ireland can tap the ECB if needed. too many doomsday scenarios floating around. im sure cash is flowing into irish banks as we speak.
Why doesnt someone go onto the NTMA website and find out irelands debt capital structure. last time i looked they had fixed our IR exposure in EUR at record lows, with long dated maturities. smart stuff like that gets AAA ratings. but you dont need a AAA rating if you are not issuing debt?
http://www.ntma.ie/NationalDebt/maturityProfile_html.php
http://www.ntma.ie/NationalDebt/historicalData1.php
and look who has bought our national debt? the irish banks.
so chillax on the AAA rating. I have riled for years at the LACK of debt ireland takes, and our commitment to pay for CAPITAL projects out of CURRENT income. yet now its payback time for our fiscal (debt) conservatism. lets use the bloody triple AAA rating. its payback time. but next time you are embarrassed going through dublin airport or wonder why the national stadium got shelved, when we are supposedly a 1st world country, it was our national aversion to national debt (we dont seem to have problem with personal debt). DMW refers to this, the transfer of debt from national to personal.
and regarding breaching of EU rules – every government retains the right to manage their own economy in a crisis situation. This is a crisis situation, so the normal rules can be broken. every euro country should retains the power to take it into manual in a crisis situation.
look around europe – there have been many bailouts and capital injections, northern rock, fortis , german banks. look at lloyds tsb and HBOS – competition rules were waived. all those rules go out the window when the government deems it a national crisis
What we need to understand is what caused foreign banks to stop lending to Irish banks while they
kept lending to most other banks in Europe.
MORGAN KELLY IS TOTALLY WRONG HERE.
THERE IS F-ALL INTERBANK LENDING IN THE EURO ZONE
IT IS ENTIRELY FROZEN
ECB IS PUMPING ZILLIONS IN EVERYDAY AND ASSUMING COUNTERPARTY RISK
THERE IS ONLY LIQUIDITY IN THE BIGGEST NAMES, BNP, DEUTSCHE, BARCLAYS, RBS ETC
WHO CARES ABOUT SMALL REGIONAL BANKS LIKE BOI AND AIB? NO ONE.
EVERY BANK APART FROM THE BIGGEST NAMES IS SUFFERING AND GETTING THEIR LIQUIDITY FROM THE ECB
and one more thing while i finish my rant, can everybody stop going on a CDS as if they are some sort of smoking gun. this whole, irish banks have to pay 3$ to insure every $100.
CDS are basically a sentiment indicator. a method of spreading the risk around. while if one of the CDS brokers goes down (like bear or lehman) that is bad, other than that its not like BOI and AIB are going out taking ‘insurance’ on themselves, is it?? Its a sentiment indicator. sentiment is bad at the moment. its bad everywhere.
please stop googling a couple of notional numbers like 54trillion and posting them up to scare people.
you know who you are and you have no idea what you are talking about.
give some people the internet and they just become dangerous.
No wonder the lisbon treaty didnt pass. people passing themselves off as experts. experts at going to http://www.google.com and wikipedia
and one more thing while i finish my rant, can everybody stop going on a CDS as if they are some sort of smoking gun. this whole, irish banks have to pay 3$ to insure every $100.
CDS are basically a sentiment indicator. a method of spreading the risk around. while if one of the CDS brokers goes down (like bear or lehman) that is bad, other than that its not like BOI and AIB are going out taking ‘insurance’ on themselves, is it?? Its a sentiment indicator. sentiment is bad at the moment. its bad everywhere.
please stop googling a couple of notional numbers like 54trillion and posting them up to scare people.
you know who you are and you have no idea what you are talking about.
give some people the internet and they just become dangerous.
No wonder the lisbon treaty didnt pass. people passing themselves off as experts. experts at going to www dot google dot com and wikipedia
[...] are times when it’s trendy to disagree completely with David McWilliams. Times when ology analysis bites the back of your neck. Times when you’d love to tell [...]
Give the financial state of a number of our banks a move like this was unfortunately probably inevitable. I think it’s going to be far from cost free though. I feel Morgan Kelly, in his article in the Irish Times, is being a bit too optimistic. He states total loans to speculators/developers amounts to about 110 billion. Additionally many of our banks have large loans to UK buy to let owners. I remember reading a while back that BOI and Irish Life and Permanent between them owed 18 billion. I’m sure other Irish banks also owe substantial buy to let loans. Suppose this comes to 30 billion in total. That’s 110+30 = 140 billion of very risky debt. A loss of 1/3 of this doesn’t sound at all inconceivable to me, say 40 billion or so. There’s plenty of ordinary mortgage debt as well. I think there’s 80 billion or more of this, plus lots of other credit card and commerical lending which I haven’t counted. This is all less risky, but perhaps a loss of 10 billion would be reasonable. Total loss of 50 billion or so. The kind of figure this country could shoulder I would think. Our current national debt is around 45 billion. Rather ironically, 50 billion would also be, I would guess, roughly the total loss in market capitalization of these banks since their fall from recent dizzying heights. I think we’ll simply end up transferring a substantial amount of private debt into our national debt over the next two years, quite possibly doubling it.
I heard more in the region of 27 billion loaned out to BTL in the UK.
In theory as David suggests, it is the best of a bad lot of options, he seems to suggest that this decision (acknowledging its risks) is far better than indecision. The reality is we don,t know how it will pan out , but we do know that bank management will operate exclusively in its own interest. This bill was justified as being first and foremost in the interest of the Irish people. However The Irish goverment declined to put any measure , enforcing accountability on the top management of the Irish banks, absolutely no mention of an oversight commitee a public hearing, nothing. The people who orchestrated this mess (exclusively for their own interest) and put such a bind on all of our national economic security , arent expected to as much as acknowledge it. If the goverment were genuinely interested in whats best for you and me, they would ensure a transparent exposure of all events leading to the imminent collapse of the Irish banking system.And ensure it was on that reality that our economic sovereignty would be used to bail out the banks,
The fact that they have not done that says it all. The bill should have provided for support in exchange for accountability. If your commercial actions have put you in a place where you either sink or take state support , you take state support exclusively on the states terms. Instead we have a finance minister with a magnitude of discretion over the common fund , never before seen. Its clear there was alot of communication between bank management and goverment , all had been consulted prior to any announcement. We have the Head of ILP on morning Ireland assuring tax payers, which says it all really. The reality is, that all the self created losses on their books due to the property bubble , need to be suffered. Both govt and banks seem to hope that this “daring piece of fiscal management” will free up enough cash to have them avoid economic reality and continue to live in that bubble.
Kevin
In considering your percieved right to criticise the lack of understanding on this issue by your fellow contributors, your discreditation of the views of a UCD Economics proffesor and your litany of assured statements on the current reality of Ithe Irish banking system. Surely in adherance to such principals , it would be wise to identify yourself and outline the basis for such expertise, You have every right to disagree obviously, but to publicly deride the views of others who have exercised the same right of view as yourself, clearly ( to any intelligent obeserver) undermines your proposed authority.
Here here. Well and good to rant (isn’t that what we’re all at, effectively Kevin?) but to tear down other contributors in a generalistic fashion, as you have, warrants great acclaim IF you are indeed correct. So let’s be having you? What makes you such an expert?
CDSs have a huge part to play in the unsustainable financial world we’ve found ourselves in. Along with over-eager dollar printers.
Lisbon was turned down for congruent reasons. You and many like you fail to appreciate that? Something being 8/10 or 9/10 correct should still be shot down or returned for re-processing. Surely you might understand the metaphor of repackaged debt and the toxic debt lying within? Sorry, no metaphors allowed here, offends some posters!
its Moves 2, 3 and onwards that concern most of us now. The Bill has been enacted. That’s done. Even though it no doubt needed nipping and tucking (9/10 rule Kevin?) but this time the elected decided time was of the essence. We are led to believe it was. Now we must prepare for next steps and many counter measures or this is going nowhere.
Ps I am no expert. But I believe that most contributors here have fairly solid stuff to say. This is hardly JoeDuffy.com Kevin, and, even then, Joe Soap has a brain in his head and full right to be worried and WILL know what CDS is before the decade is out.
Feel free to criticise this for a lack of understanding. The more I learn from the Finance guys on here the better. I’m just a regular small business owner, and this is how I see it.
We have a lower debt/gdp ratio than any other large European country. Morgan, one of the most pessimistic commentators has said the potential bad debt losses are of the order of 50bn. I’d go along with that as a worst case scenario. There will of course be bad debts and losses. So if the worst came to the worst, and we had to take that 50bn onto the national balance sheet, we would still have a debt/GDP ratio of around 50% (is the average AAA 44%?), still have an AAA rating and still be able to handle interest payments.
So if other countries offer a similar guarantee, we will still be attractive to depositors, foregin, corporate or otherwise and there shouldnt be a flight of deposits back out. The ratings agencies know this Theyre not idiots. It is a calculated gamble, and not one we wont be able to cover.
Our government has been very debt averse, and has passed the buck so to speak to private debt as David has said. This would amount to a return to a balancing of the private/public debt ratio more in line with other countries.
As for the banks, any excersising of the guarantee will see them raped by the government. They will have to, or face anarchy as has been posted above. This should be enough to cover interest payments, and more besides. So the taxpayer won’t be hit. It would be political suicide and handing the keys of Government to Labour. So the banks are eventually going to suffer for their bad debt, beacuse if it ends up on the national balance sheet, they’ll have to suffer it. At this stage they will be adequately capitalised, and be able to handle it.
I think its a good move, and certainly the best one available at this time. Prof Morgan might be going nuts, and I don’t think he’s wrong, but I don’t see us shelling out for it.
The fact that the EU and Britain is bleating about alone it tells me this is a good move.
“This would amount to a return to a balancing of the private/public debt ratio more in line with other countries.”
To suggest that the reckless lending enduced Bank debt exclusively suffered by the taxpayer is merely a balancing of private and public debt , is firstly , legally unaceptable and secondly economically ineffecient. As it stands the Govt have sold this gurantee as a better alternative then a huge cash injection. I take your point on underutilised govt borrowing options , but seriously advocating a doubling of the countrys national debt to fill the inflated holes created by reckless banking and property speculation would be the ultimate unconscionable act of the so called Celtic tiger . If we accept that the Irish govt will one way or another have to borrow , surely pumping 50 Million into the economy on Capital infrastructure, FDI incentivisation and export industry subsidies would be yield a far greater ROI and remain within the confines of the constitution. Doubling the nations national debt due to the reckless behaviour of over paid bankers , is not something I believe is right on any front. I believe economic reality needs to be faced, the Gurantee was an emergency response to the unprecedented drop in bank shares witnessed monday.
Irish banks and their idiotic use of capital was one of the greatest factors in creating the charade that was the housing boom. Like any inflated asset value , the reality of the economic system inevitably ensures that, it is exposed as an overvaluation. Right now , Irish banks and the Irish Govt are saying publicly that bank asset’s outweigh their liabilities . That is dependent on all the overvalued crap around the country used to secure their loans on being reposessed and sold at the overvalued price on their books, right now in the current Irish economy. If you believe that , then the problem is merely illiquidity. As the foreign sentiment reflects and any basic economic analysis affirms, the problem is current insolvency.
Dominic,
your litany of assured statements on the current reality of Ithe Irish banking system.
–> please elaborate on my specific statements regarding the health irish banking system. I think you will find i have not expressed a view.
your discreditation of the views of a UCD Economics proffesor
–> he is factually incorrect. Foreign institutions are not lending to most other banks. I think you will find most other banks are sraping the barrel of their respective boxes for ECB eligible collateral. Banks are not lending to each other. thats what LIBOR is so much higher than fed funds. Irish banks are not unique, and are having the same problems as many other banks.
“To suggest that the reckless lending enduced Bank debt exclusively suffered by the taxpayer is merely a balancing of private and public debt , is firstly , legally unaceptable and secondly economically ineffecient.”
Youve missed the core point of my take on things from the first line. I cannot see how the taxpayer will be made service any bank debt put onto the balance sheet.
It will be serviced by the banks. You don’t think they can collectively stump up 2.5bn pa to service it, and pay it down when time allows?
Observing that it is a balancing of ratios is just that, and obsevation. This observation shows that it wouldnt throw our national balance sheet wildly out of whack. I’m only interested in logic prevailing at the moment, when things are calmer we can deal with the morality and emotion.
That said, I can see advantages to 50bn going into infrastructure as more efficient. Problem is, thats no use to us right now.
The housing bubble debt needs to be written off , the reality of each bank after that needs to be assesed , if you did that, bailed out ordinary deposit holders and then guranteed the survivors, you would still have a functioning banking sector. Yes you would have a property market with a huge price depreciation. And the economy would have very wide slowdown effects but the reality of all that boom debt would have been dealt with, asset prices would soon achieve economically sustainable standards and the fiscal borrowing options on the table would be far better utilised into an economy based in economic reality than the current one which is desperatley masquerading itself with overvalued assets and billions of unacknowledged bank debt. Simple economics , akin to enrdy in physics means a loss is loss it cannot be hidden (for very long) and it cannot be transferred into something else, its a case of equal and opposite actions , The govt in riding the inflated gains have to confront the deflated loss and the inevitable return to economic reality.
The sad thing is the same people assuring everyone of the fundamental soundness of not just the Economy but the grossly inflated property market, are indeed now the same people expecting us to trust their economic authority on dealing with the current banking collapse. They are either idiots or they are hiding an alternative agenda , I believe confronting reality is obviously too scary politically for them , so this move (as advised by those depending on it ) will work and save the day for all
Hi Brian
My position is basically that doubling our national debt (regardless of whether or not the banks could exclusivley half it) is just not a sound move. The national debt regardless of the banks ability to pay it back , is a debt on each and every citizen of Ireland , and to put 6 PLC banks debt on our nations citizens is not good economically (apart from morality, legality!). The banks need a radical structural change . new managment and more informed regulators, to bail them out , double our national debt and wait for the boom to kick back in is not something that is advisable in my view, A high national debt would have effects on our tax system … and what I am saying Is that we Take the pain , clean up the system and use the national debt to stimulate real productivity. No one seems to report on this , but if you take out housing charade out , we are an Island of 4 million people that enjoy an economy fueled by FDI, imagine we had funnelled all that cheap european credit into sustainable export industries. Thats real wealth and real productivity. The housing boom was a mutually beneficial complex of local/national politics,builders and bankers acting strictly in the short term and a goverment with clearly no real competence for macro economic management. It might be easy to say take the economic pain but it might be the quicker way of the two to buld a real sustainable growth economy. Lets face it without sounding arrogant, Irish people have the intelligence and the education to build a real economy and not a materialistic induced charade
Great interview with Dermot Desmond BTW. Good questions. Does he still have the puffer fish aquarium and remote control windows up there?!
AndrewGMooney > If the French follow the Irish, as they are believed to be considering, bankers said it would inevitably force all governments across Europe to follow suit. Depositors would then have to decide which sovereign guarantee was safest.
This morning Greece’s finance minister George Alogoskoufis had said that all deposits were guaranteed in Greek banks. Spain seems to be on the point of following suit, according to UBS.
>kevin>Comment by Philip, October 1st, 2008 at 2:45 pm
seriously what world are you living in? its not the 1930s. Nazis are not going to take over the EU. the world has moved on in the last 80 years!
Kevin don’t be naive. The central bankers and corporatism were behind the Nazi’s and the other fascist movements
in the 1930′s, and it is the same crowd,in pedigree at least, who are behind the EU and its most recent bastard child, the Lisbon Treaty. Dictatorships are always cheaper to run than Democracies, as you don’t have to worry about operating costs like workers rights and pensions etc, and it is for this reason that corporations prefer them.
Longlivetherepublic
do you not think thats a rather simplistic view of how dictatorships arise? i dont think germany fell into a dictatorship because it was cheaper. im pretty sure it had something to do with the general chaos since the first world war, anger at versailles etc etc.
Whats your solution, another stab at communism ?
This was a good ballsy move but the timing was poor. The government should have allowed the bank failure that was about to happen. It would have sent a very strong message to the other banks that a bailout is not always a foregone conclusion & just as important it would have removed a lot of taxpayer liability. Had the government allowed a bank to fail the guarantee would still have had as much effect as it currently has. I disagree with Davids media comments that grown up countries do not allow banks to fail – we have commercial lending banks like Anglo that are irrelevant to the vast bulk of Irish people.
It is time that the renumeration of bankers is linked to the risks that they take. i.e. if they screw up the megabucks that they get can be clawed back. The whole financial services industry has been corrupted with a culture of heads you/I win, tails you lose
It may be putting more debt on us citizens, but allowing a collapse was not an option. In my situation, if my Bank had collapsed I would have been wiped out and that while my exports are booming and my staff getting a ten percent increase, would be ironic in the extreme. As I stated on this form before, I invested in R&D, while almost everyone else invested in property – now I’m on a roll and they’re stymied. For me, saving the Banks in this way is the best of all options for everyone in this country. – we now have some real hope of trading out of this mess – but heads must roll.
I wonder would any of the shareholders of these banks like to help out? Particularly the large wealthy ones like Sean Quinn who own large chunks of banks. One would also think that the owners of voting shares would keep a closer eye on the running of any business, especially banking. In any other business the board of directors would have a lot to answer for and maybe get voted out of their jobs but not in this case, why?
We have just signed into law a state gaurantee system, why not create an ‘anti-wreckless trading’ law to stop banks going over their heads again.
I usually agree wholeheartedly with David’s views – but not this time. The drying up of credit – no matter this time how dramatic and serious for the global economy was inevitable given the level of excessive credit and inflation that had built up in global marketplaces. Government interference through the excessive creation of credit and the artificial lowering of interest rates has create dthis boom and bust, just like it did with every other recorded boom/bust/depression cycle. And this one is a real doozy because it wasn’t just government sponsored central banks this time that was inflating the world’s money supply this time.
In his masterful 1969 analysis of the causes of economic depression, Murray Rothbard, the Austrian School economist, and successor to the original Austrians, Ludwig von Mises and Freidrich Hayek, argues: “Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance, by repeated doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop, either because the banks are getting into a shaky condition or because the public begins to balk at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, then the piper must be paid, and the inevitable readjustments liquidate the unsound over-investments of the boom.”
Contrary to what we are witnessing today – massive government and central bank intervention to prop up insolvent banks and property developers – he writes: “What does Mises say should be done, say by government, once the depression arrives? What is the governmental role in the cure of depression?
“In the first place, government must cease inflating as soon as possible. It is true that this will, inevitably, bring the inflationary boom abruptly to an end, and commence the inevitable recession or depression. But the longer the government waits for this, the worse the necessary readjustments will have to be. The sooner the depression-readjustment is gotten over with, the better.
“This means, also, that the government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease.
“The government must never try to prop up wage rates or prices of producers’ goods; doing so will prolong and delay indefinitely the completion of the depression-adjustment process; it will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The government must not try to inflate again, in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on.
“The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending but more saving, in order to validate some of the excessive investments of the boom.”
Unfortunately, politicians by their very nature, whether Irish, American, Belgian, German, Japanese etc. cannot resist meddling; nor can they admit to the electorate that their policies were directly responsible for the carnage that has been unleashed.
The current state of the western world’s economies certainly seem to fit perfectly into the von Mises and Rothbard’s boom and bust analysis. Rothbard wrote this article in 1969 just as the credit expansion that had really taken off in the mid-60s to pay for the Johnson Administration’s huge new social welfare programmes and the surging cost of the Vietnam War, allowed inflation to rise dangerously in the US. (Enough so that within two years it caused Richard Nixon to take the US off the gold standard altogether and replace it with the US dollar as the world’s reserve currency.) c
I recommend you take the time to read the article – read it two or three times if you must – http://mises.org/story/3127 – and then send it to your public representatives and the Minister for Finance. Clearly, like his US and European counterparts, he hasn’t got a clue what’s coming down the line.
RE: Comment by Anne Osborne, October 2nd, 2008 at 8:02 pm
Anne, thank you for your thoughful post. My exploration into the byzantine world of economic theory has also led me to similar conclusions. Namely, that the monetarist consensus based around Milton Friedman and the ‘Hegemony of Markets’ espoused by the Chicago School was an interim step on the path to understanding quite how and why ‘market economies’ can deliver sustainable wealth.
Rather than treating his insights as a useful stepping stone: A dangerous consensus emerged whereby Governments and it’s Agencies implicitly accepted the infallibility of ‘de-regulated’ markets such as to allow the creation of the Frankenstein Shadow Banking System which is unravelling before our eyes. Thus, an egregious ‘asset inflation’ was discounted by Greenspan and cohorts. Yet Hank is meant to ‘sort this mess out’……hmmmn…
It increasingly appears that ‘Austrian Economics’ is a far more reliable map and compass for our current predicament.
They say there’s no such thing as a free lunch. Well, there’s no such thing as a ‘free market’ when taxpayers have to foot the bill. Free for whom? Not for Irish / British or American taxpayers, that’s for sure.
Check your ‘bank convenience charges’ over the next year, and you’ll see who’s really going to foot the bill for this ‘dislocation’.
I am a ‘dystopian cornucopian’ rather than a ‘utopian cornucopian’ in that I do not accept that markets are infallible, nor that all participants in markets act rationally. The ‘perfect market/wisdom of crowds’ has a shadow side of maniacal delusions, panics, etc. That’s what we now have to live through.
Most people who espouse Adam Smith concentrate on ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ and have not even read his earlier treatise ‘The Theory of Moral Sentiments’, which explicates the ethical basis of markets which underpinned his cornucopian philosophy.
It now appears that ‘pseudo-conservative economics’ is just as delusional as planned socialist economics in it’s addiction to the creation of fictitious wealth through fiat money via fractional reserve banking systems. It’s not too late to seek refuge in gold: http://www.bullionvault.com/
Ron Paul / Peter Schiff. Eric Janszen: ‘The Last Bubble’:
http://www.itulip.com/forums/showthread.php?p=51507#post51507
http://www.irishtimes.com/newspaper/opinion/2008/1002/1222815460140.html
On a lighter note, I’d like to recommend the following Artangel short videos which ‘deconstruct’ the current crisis with great skill. What I mean is they rip the piss out of the recently dethroned ‘masters of the universe’. Enjoy:
http://www.crisisinthecreditsystem.org.uk/
Looks like the Lenihan plan is being emulated across the board. I expect that shortly there’ll be no relative advantage other than by relative credibility of sovereign guarantee. But really that’s not the point. We are just trying to get the liquidity up HERE. Wonder how the Libor will fare though if more countries start playing this game? Can anyone add their 2s&6d to this? Are we really just playing pass the parcel at a different level?
The tech discussions while interesting, show there is no clear consensus. Some say we are in trouble and some say it not worth worrying about. Great education.
I see this very simply- money is owed. Pay up or go bankrupt and face the music. Looks like we may be dragged kicking and screaming into the latter unless governments start to do take real control and re-cut some laws. Bretton-Woods 21st Century?
Philip > Breton-Woods 21st Century?
There was a half page ad in the Financial Times last August which tried to launch this idea. I kept it, because it’s always good to keep an eye on alternative ideas. In the current atmosphere it is hard to argue with many of their suggestions.
It calls itself the Modena Initiative, and was produced by a multi-disciplinary bipartisan Russian-Italian group.
Their main points are included below. (copied from their website. Isn’t the internet a great resource?)
The Reform of the international currency system, including the introduction of:
The system of fixed exchange rates, that could be changed only within the context of agreements signed between states, connected with the development of the real economy.
The linkage to gold reserves or to a basket of major natural resources and/or a basket of selected currencies.
Defining a new currency (unit) or a basket of currencies (not just the US dollar) for the system of international settlements.
Taking under control currency speculation.
Taking under control capital flows.
Creation of a “double approach” credit system – one with low long-term interest rates for industrial investments and one with high penalty rates for purely financial operations.
Thereupon, the functions of international organizations, such as the IMF and World Bank, need to be redefined, also in consideration of their role in the current crisis.
The Reform of the world financial system including the introduction of:
Regulation of existing derivatives instruments.
Enforcing rules that will ban speculative OTC deals, minimize the derivatives bubble and define the rules and regulations for future financial operations.
Liability for bidding by using derivatives instruments at the stock exchange.
Liability for setting up rating standards and introducing authorization and supervision by a special authority.
Cancellation of off-shore centers.
A ban on hedge fund speculative operations and so called collateralized debt obligations (issue of securities “backed” by debt).
Increase of taxation of financial speculative operations as well as of profits from them.
Support of public and private banking and credit intermediary institutions, necessary for a policy of real industrial and other productive investments.
The Reform of international trade system, including:
The revision of WTO agreements, that have deregulated industry and trade sectors at the expense of the effectiveness and productivity of the economic system as a whole.
Promotion and support of large infrastructure investment projects of continental scale in the transport, energy, communication and R&D sectors.
Establishment of financial institutions for crediting the above mentioned sectors through the issue of project-tied bonds in accordance with the plan of Jacques Delores (European Union Commission President 1985-1995)).
The reform of the taxation system, that will promote investment and effective reinvestment of profits into industrial, productive sectors.
Defining of customs rules and regulations, social standards rules and guarantees for environmental protection, involving trade unions world-wide.
Interesting stuff, but most of it is probably little more than pipe-dreams.
On another subject, I see Irish Nationwide have started to use our ‘good name’ to attract investors. This again, from the FT.
‘Irish Nationwide, the building society, which was on Thursday approaching City workers touting government guarantees and attractive interest rates on bonds.
“We now represent the safest place to deposit money in Europe with a AAA guarantee from a country with the lowest national debt to GDP ratio of any AAA country,” wrote Michael Fingleton, Jr, an Irish Nationwide executive, in an e-mail to employees of a large investment bank.’
Over to you Mr. Patrick Neary.
I’m just after watching Prime Time (Thu 2nd Oct) and I am dismayed by the lack of credibility and knowledge of the head of the Financial Regulator. He is conveying, whether he believes it or not or whether through sheer ineptitude, that the unlimited guarantee just given had nothing to do with the crazy-credit frenzy we had here with property. Is he mad? What I heard from him really makes me worried.
At least Mansergh who was in the dock representing the government had the body language of ‘yes, mistakes were made’. Mind you, he used the collective we as in everybody. But not everybody in Ireland made mistakes, yet everybody is gonna have to pay for those mistakes. Yes “Kevin” (who invited him in by the way?), not everybody was on the “credit heroin”, but a lot were.
LorcanRocheKelly, yes, you are right. Capital Adequacy brought in by Basle (1988) was a filip to banks giving them access to loan out even more. Basel II reduced capital adequacy rules further. But having capital is one thing, the problem is that the level and amounts of loans given out was crazy, and in the cases of some banks they used loans they got in to fund loans out. Leveraging to make money. It works fine in theory when property values are going up. Very fine in fact as the model of the US Investment banks testify. But it is more or less mathematically falled if too much credit is used and given, which is what happened, so in a falling asset value and property slowdown, it fails. And Badly. And as I always remind people, this was not property leveraging only. Everything was leveraged, from the corner shop, to that car, yacht, and large businesses such as eircom. Everyone was LBO’ing.
Someone mentioned that we just have to go through a deleveraging cycle. Yes, we do. But that cant be done without pain. Look at Japan who after 20 years are still not over the 1988 model. They had to introduce 100 year mortgages so people could get a roof over their heads within their lifetime. Many areas have never got back to the 1988 levels in nominal terms, never mind in real terms.
And just out today, now our Tax Take is worse than expected and our spending is up by 10%. Estimated borrowing for the year will be 11 billion, or 6% of GDP. Its approaching 25% of what we actually take in. That’s twice what we are allowed to do as part of the Euro. David, maybe you will get another of your wishes/ideas, maybe we will be kicked out of the Euro!!
The obvious answer is to put up taxes, to reduce NDP, to curb the public sector.
This is gonna get hairy ……
MK
MK, quick question. NDP = Net Domestic Product, or NDP = National Developmet Plan?
Bit of a rhetorical really, I suppose. Both are going to get a hammering.
A rhetorical Question, that is.
“We now represent the safest place to deposit money in Europe with a AAA gurantee from a country with the lowest national debt to GDP ratio of any AAA country,” wrote Michael Fingleton, Jr, an Irish Nationwide executive, in an e-mail to employees of a large investment bank.’
Reckless lending , left the banks with grossly inflated property as security for all the cash lent on
acquiring/building it.
Does anyone believe, any irish bank could foreclose its outstanding creditors , sell their secured property and then pay all their liabilities if it were to wind up tommorow?
If that secured property is marked to its real Irish Oct 08 sale value , Irish banks are most likely insolvent.
Foreign investors/depositors (ie capital suppliers) were uninterested and got alot more so monday.
Banks are clearly using this guarantee to try and attract real capital, solidify their balance sheet and gradually dispose of the bad debt. To suggest as the goverment have that , they are solvent to the tune of 80 billion and that this guarantee is merely in place to restore liquidity for 6 solvent banks , seems hard to accept as fact .
Watching RTE this evening, it was an absolute masterstroke for the government to dig up Foggy Dewhurst from ‘Last of the Summer Wine’ to regale us with how effectively they had regulated the banks. How appropriate, I thought—or was that meant to be a serious economic commentry?
The financial regulator hasn’t a notion.
Financial Regulator came across as a DeValarian era ex Christian brother who just took up teaching business studies after qualifying from Flat Earth University.
If this level of fiscal understanding shows what’s ahead let’s set up the soup kitchens and nominate a county as the token dustbowl.
Jesus Christ, the man came across as a stooge….no sorry, he came across as the three stooges in one consolidated package.
It seems Greece have now followed suit with 100% govt guarantee. Tenner says Portugal will be next.
Nagelz. I watched the Financial regulator. I am disgusted that we the taxpayer are paying the salary plus expenses for such a useless article !!! Either he does not know what is going on, or else he won’t tell us, or a combination of both. I was disgusted by the waster. He was a bit “FAI like” in his level of transparency concerning the interest of the general public.
I did not like the ‘reassurance methods’. I think that the big two banks do not need assistance from the State, and should be told to sell off their foreign subsidiaries and get their houses in order, at no exposure to the taxpayer. And the ‘prestige’ culture of the banks sponsoring the rugby, golf, the GAA, etc.. will have to stop. Now. And the salaries etc.. will have to be capped. And the deadwood removed from the bank management.
We hear now that the son of the managing director of Irish Nationwide was canvassing for business in the UK on the back of the gaurantee of the Irish state. This is very enlightening. Firstly, if you are the son of the director in INBS you get a job in Daddy’s firm. And you get promoted up regardless of ability. Nepotism. Second, he is not too bright. Third, they are desperate cash. Really the taxpayer should not have any exposure to this sort of nonsense. Knock INBS out to be an “orphan in the world”. Time to cut the bank directors salaries.
Demand transparency with regard to the banks from your local FF-Green TD. If the politicians want to expose the people to these hierarchies of careerism, greed, waste, nepotism and selfishness, then the politicians should demand more transparency for the banks.
And the Financial Regulator should be sacked. He is a danger to the state finances, and is totally incompetence. Sorry, if this sounds a bit ‘Northern European’ – but it needs to happen. The Financial Regulator has failed. It’s like as if he spent the last ten years playing golf with the directors of the banks, and enjoying the hospitality of the Corporate suite of Croker, or free rugger tickets. Put an end to this nonsense !!!
Lorcan Roche Kelly>There was a half page ad in the Financial Times last August which tried to launch this idea. I kept it, because it’s always good to keep an eye on alternative ideas. In the current atmosphere it is hard to argue with many of their suggestions.
This is Lyndon Larouche’s idea and he has been promoting it for many years. It is being pushed by the Italian’s (especially Tremonti, the Italian minister of finance) and the Russians as Larouche has been working in close cooperation with both governments. On this account Larouche models his proposal on FDR’s economic recovery plan, otherwise known as The New Deal, and emphasizes that either the world directs its efforts towards a recovery of this nature or we face a collapse of civilization, not unlike what happened in 14th Century Europe with the collapse of the Bardi banking system. So we either implement the pipe dream or face a living nightmare.
http://www.larouchepub.com/pr_lar/2008/lar_pac/080927there_is_plan_b.html
Also I find it Ironic,Lorcan Roche Kelly, that a couple of articles back you included a rather disparaging reference to Larouche in one of your vacuous posts, and here you are now unwittingly furnishing awareness of his very idea’s.
We are not likely to find common ground on Larouche. You think he offers a viable alternative to the political and economic status quo, I think he is a convicted felon with an organisation that looks too much like a cult for me to be comfortable with.
I refered to the Modena ideas as alternative and interesting, but I do not think that are workable. The concensus required to implement them is unlikely to emerge.
Lorcan Roche Kelly – NDP in this case was the National Development Plan. The NDP will have to be curtailed. They have no option I think but to do so in this budget. I also envisage the budget announcing a 2 year moratorium on the Pension Reserve Fund. Even with many other slashes and with tax increases, etc, we will still probably breach the Euro 3% borrowing limit in 2009. We have been living above our means for several years and its now coming home to roost. The frenzy has a cost. All parties do.
> Does anyone believe, any irish bank could foreclose its outstanding creditors
The banks wont have to repossess their property-loan portfolio all at once, unless they go belly up. So it will be a trickle that turns into a stream, etc. It remains to be seen if it will turn into a raging torrent. All we know is that non-payment of loans is increasing and is likely to increase further, as our recession has just started.
One question which has been raised in the Senate was the timing of the guarantee announcement. Lenihan didnt say it was liquidity in the banks but their share price falling as the reason. Now, its obvious to a blind man that the most troubled bank on that day was Anglo, and rumours are abounding that they were potentially up the swannee unless they could get their hands on some guaranteed cash and quickly.
So enter Sean Quinn who persuaded the government to back up all the banks not only on their deposits (which would give them a competitive advantage at the cost of increasing Ireland’s (governments) debt payments) but also guaranteeing the loans they have taken out. This may have saved Anglo, for now. They are leveraged big time and the quality of the loans they have on their books are deteriorating. They hope to trade out of it and hope that property prices will bottom out and sales will start picking up. Like holding your breath, the clock is ticking ……
MK
“”The Irish Stock Exchange is investigating a number of share dealings in Anglo Irish Bank, including those by the bank chairman Sean FitzPatrick and fellow director Lar Bradshaw, in the run-up to the Government’s decision to introduce its E400bn bailout package. The shares were bought over a week ago, after talks had opened between banks, the Financial Regulator, the Government and the Central Bank about the state of the banking system, but before the bailout was agreed. The transactions earned Mr Fitzpatrick a paper profit of E326,000 and Mr Bradshaw a paper profit of E79,000. – Irish Independent”"”
what a joke !!!
An exerpt from a good article in the current “Phoenix Magazine”:
“The perception that the Financial Regulator is too close to the Central Bank –a body that was itself part of the old boys’ banking club in Dublin – has never gone away. The current chief executive of the Finacial Regulator, Patrick Neary, is in situ since the start of 2006 and has a full Central Bank pedigree (as did his predecessor, Liam O’Reilly) having joined the CB in 1971 and where he reached the level of deputy head of banking supervision. Neary continued his close association with the banks when he moved to the FR in 2003 as ‘prudential director’ and in his current role as chief exec has repeatedly asserted that he doesn’t want to rock too many financial boats.
While the board of the FR is technically separate from that of the Central Bank, it does have a number of over-lapping directors, including chairman Jim Farrell (National Treasury Management Agency), Tony Grimes (Director General of the Central
Bank), John Dunne (ex- IBEC boss), Gerry Danaher SC, and, of course, Pat Neary
himself. Other members of the FR board include writer
Deirdre Purcell, (who strangely also sits on both its audit and risk management committee and budget and remuneration committee), former Standard Life ceo Alan Ashe, Alan Gray (Indecon consultants), and Mary O’Dea (consumer director of the Financial Regulator). Most significantly, however, there is also in place a statutory ‘Consultative Industry Panel’, which can comment on proposed FR levies and fees, the impact on competitiveness of any regulatory requirements, and any policy or regulatory documents issued by the Financial Regulator. This is chaired by former HSBC boss in Ireland James Deeny (ex-president of the Federation of International Banks in Ireland) and includes Pat Farrell (director general of the Irish Bankers’ Federation), Aileen O’Donoghue (director Financial Service Ireland), Gary Palmer (secretary Dublin Funds Industry Association), and John Murphy (head of regulatory risk and compliance at BIAM). This panel appears to have had extraordinary influence on the Financial Regulator, who has gone out of his way to ensure that regulation causes as little disruption as possible to the banks and other financial institutions operating in this country.
For example, some of Neary’s speeches – when delivered to the financial community
– have made crystal clear the preference for the ultra light touch that is characteristic of Ireland’s Financial Regulator. At the 2006 Regulation 360 Conference, he noted that
“our regulatory approach is good for
business … We will seek to implement rules
to the minimum extent necessary”.
The word “Gillie” comes to mind.. listening to Mr Neary defend the whole debacle on “Prime Time” last night.
Head of another useless “quango” stuffed with cronies of Fianna Fail, and the “old boys” network, that dominates irish business life.
The exploitation of young irish home buyers by the cabal of FF politicos and their crony developers has come to a head, and unravelled, at the worst possible time in conjunction with related world events such as the bank derivative debacle.
It is sad that there is no credible alternative political party to which citizens could even feel confident in entrusting the stewardship of the nation at this dark hour, as the world plunges into recession.
Paddy Cullen – I am disgust re the ANIB director buying shares with full knowledge that the taxpayer was going to give ANIB a bailout.
There was a time when to be a banker required a very serious strength of character. We do not have character in our bankers. We have gombeen slyness. The real conundrum of this is that the behaviour of banking executives cannot be restrained or even apprehended. There is a strong Thatcherite tendency in the Irish banking elite, combined with an almost Sicilian level of the love of power, intrigue, cover-ups, lazing about, deception, beguiling the authorities, lump sums, and time spent cultivating the network. To see what is happening in Irish Banking, read the journalism of Shane Ross who has studied them for decades.
The government did not need to rescue AIB or BOI. They are both big enough to survice, and would have survived even without this protection. And the EBS could have found a buyer. But fromwhat we have seen above, it would seem that two of the ‘weaker three’ have shown that they have no intention of changing their behvioural problems. And I have no faith in the financial regulator stooge on Prime Time on RTE1 on Thursday to resolve the issue. Sarah Palin would do a better job – and we at least know that she would kick out the old boys networks….our regulators cannot even do that. Or more to the point that is the last thing they will do.
Anne Osbourne’s note on the Austrian Economists Ludwig von Mises and Freidrich Hayek was more education for me. I particularly like the way the author talks about euphemisms. Mind you, the world today is probably too interconnected to let everything collapse suddenly without considerable social and political harm. Sharp shocks are fine…but you need to be sure you can survive them and to be fair to Lenihan and DMcW, I figure they are aware of this. Anyway, governments have little control on credit supply nowadays – which is not to say they cannot be held responsible for exascerbating the issue as that have done here with property.
The issue is banks just did what banks do – lend loads of money when lines of credit are available to them. You can put as much fancy financial paliver as you like on it. The domino system of insuring against non-payments using whatever fancily named finacial instruments created a mirage of an infinite credit pool – the worst of which now comes in the form of “Dark Liquidity”. Clearly the regulators (one of whom we saw in action last night) may be too intellectually compromised to understand the concept of calculating and and identifying risk versus chancing yer arm.
In Europe, or more importantly Brussels, Ireland has probably lost a lot of credibility and friends. Mind you, I think that in the eyes of your mainstreet german, belgian, brit, frenchman I think we actually were admired. Indeed I would go so far as to suggest that we may be seeing the end of the EU institutions if they keep going on with the disconnected nonsense they are prattling on about without realising that the world is moving on in spite of them. Greece Today, Spain tomorrow? and next?
The last 20 years has seen a massive unregulated increase in credit that has been used to leverage for the disorderly destruction of Western world means of production and migrate this capacity to countries which do not have the same human rights (and hence lower costs of production). This kept inflation stable to maintain standards of living and as long as lines of credit (whose honorability people started to loose track of) were in place it was great.
Lets keep this simple. Lines of credit are now discredited. Whoops!
The current bailout schemes are just buying a few weeks time to allow laws be passed on reinventing money and new credit systems without loosing the deeds on your house or your “Savings”. The current system is dead. Lyndon Larouche is right in that regard. Mind you, I wish he’d loose those conspiracy theories. Humans are far thicker than he realises.
The worst thing that could happen now is reflected in what we saw with irish nationwide or one of those institutuions…they started selling their business on the basis of Ireland relative advantage. I hope the guys responsible will be in gaol asap. This is not a case of hoping for the best and business as usual. This is a case of applying some lateral thinking to help us navigate out of this mess. Mark to Market process and closing a few bansk maybe needs to start now or there’ll be nothing to save in a few months time.
RE: Comment by Anne Osborne, October 2nd, 2008 at 8:02 pm
Anne, thank you for your thoughful post. My exploration into the byzantine world of economic theory has also led me to similar conclusions. Namely, that the monetarist consensus based around Milton Friedman and the ‘Hegemony of Markets’ espoused by the Chicago School was an interim step on the path to understanding quite how and why ‘market economies’ can deliver sustainable wealth.
Rather than treating his insights as a useful stepping stone: A dangerous consensus emerged whereby Governments and it’s Agencies implicitly accepted the infallibility of ‘de-regulated’ markets such as to allow the creation of the Frankenstein Shadow Banking System which is unravelling before our eyes. Thus, an egregious ‘asset inflation’ was discounted by Greenspan and cohorts. Yet Hank is meant to ‘sort this mess out’……hmmmn…
It increasingly appears that ‘Austrian Economics’ is a far more reliable map and compass for our current predicament.
They say there’s no such thing as a free lunch. Well, there’s no such thing as a ‘free market’ when taxpayers have to foot the bill. Free for whom? Not for Irish / British or American taxpayers, that’s for sure.
Check your ‘bank convenience charges’ over the next year, and you’ll see who’s really going to foot the bill for this ‘dislocation’.
I am a ‘dystopian cornucopian’ rather than a ‘utopian cornucopian’ in that I do not accept that markets are infallible, nor that all participants in markets act rationally. The ‘perfect market/wisdom of crowds’ has a shadow side of maniacal delusions, panics, etc. That’s what we now have to live through.
Most people who espouse Adam Smith concentrate on ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ and have not even read his earlier treatise ‘The Theory of Moral Sentiments’, which explicates the ethical basis of markets which underpinned his cornucopian philosophy.
It now appears that ‘pseudo-conservative economics’ is just as delusional as planned socialist economics in it’s addiction to the creation of fictitious wealth through fiat money via fractional reserve banking systems. It’s not too late to seek refuge in gold!
AndrewGMooney…I agree with you concerning the point about market behhaviour and morality….We have witnessed a bull market in what James Howard Kunstler calls ‘something for nothing economics’….and it does not add up…and it has been found out…in Spain, in Britain, in the US, and in Ireland. David McW has been pointing this out for years. Unfortunately ‘authority.ie’ completey ran over his points and now we the taxpayer are being used as a means to soak up the mess off the floor.
I think the whole point alluded to in the above few comments is that ‘business cycle analysis’ has been going on for a couple of hundred years, and has been very clear and in agreement since at least Juglar in the nineteenth century, of the basic phenomena of boom and bust. As he put it all that time ago, ‘the only cause of depression is propsperity’. There were many, many economists who devoted their lives to the analysis of this phenomena. And many thoughtful theories. Mises-Hayak’s analysis was certainly of spectacular quality. But for example, Hawtrey’s analysis which focused on increase of stocks held by the wholesale trade that also react to small changes in loan rates (sound familiar?!) rather than Mise-Hayak’s increase in orders for new plant and equipment, certainly contained valuable guidance and warnings..
Now, I’m only a dilletante as far as economics is concerned. But apart from David, how many economists do we have in this country? They must know all this stuff well… but yet they persisted in insisting that debt could be accumulated without a day of reckoning? That all this debt would not need to be liquidated at some time through depression/recession? In my opinion, this is absolutely professionally criminal, and these so called economists (we know well who they are) should be hung out to dry for it.
And as for thoughts they and their cronies might be having of trying to continue the charade..