October 12, 2008

Breaking the vicious circle

Posted in Banks · 82 comments ·

The solution to getting the world’s economies moving again is to turn cash, which is still out there, back into workable credit.

This article was going to concentrate on the next necessary steps of the Irish banking plan and the prospects for the budget. However, events have overtaken us. This has been the worst week in financial markets in decades.

Despite government intervention, the money markets are still frozen and the stock markets are in free-fall. Everyone wants cash, and those who have it are squirrelling it away in central banks. The central banks don’t know what to do with the stuff because the commercial banks don’t want to lend and therefore, counter intuitively, the world is without credit, despite the fact that there is no shortage of money.

Let me explain this point, as it is important to appreciate. Cash only becomes economically significant when it is turned into credit. The banks normally perform this function. They borrow cash short-term from the central bank, their depositors and their bank counterparties.

They then lend this as credit to us and to companies long term. If this source of short-term funding dries up, the banks are in trouble because their liabilities do not match their assets.

This is precisely what is happening at the moment. Banks do not trust each other. They are reluctant to lend to each other. Bank A does not lend to Bank B because it is worried about Bank B’s ability to pay back the money.

Even if Bank B starts out with a decent balance sheet, the fact that Bank A won’t lend to it provokes the very illiquidity that Bank A was unduly worried about in the first place. Following this logic, it is easy to see how the system can dry up and the crunch becomes self-reinforcing.

This also implies that recapitalising a bank now simply means good money follows bad down the plug hole. The reason for this is that, in the event of a credit crunch, the world knows that the bad loans on the bank’s balance sheets will get worse.

This means that more and more shareholders’ capital will be needed to cover these future write-downs. Therefore, investors sell bank shares, knowing that their shareholdings will be vaporised by the crunch.

Another reason for selling shares is that investors realise that the putative recapitalisations of banks by governments will come at the price of preferred shares for the taxpayer, diluting the private investor further.

Finally, the economic impact of the crunch means that profits have to fall. With no one borrowing or lending, demand dries up. As private demand is some 63 per cent of GDP in the US, no demand means no income, higher unemployment and fewer sales for companies. Fewer sales means fewer profits and, thus share prices have to fall to reflect this new reality.

The major question now is how does the world pull out of this tailspin. Many different options have been tried with varying degrees of failure. The possible reason for this underwhelming market response to government interventions is because these solutions do not solve the primary global dilemma, which is how can we turn good money back into workable credit.

The solution now has to be global rather than piecemeal. The following suggestion is the most pertinent and simple way to solve the crisis. First, the long-term stated aim of the G7 should be to create a new global banking clearing-house.

A clearing-house is a bank where all other banks can clear their debts to each other. The clearing-house stands over the loans of other banks and, for a fee, creates a mechanism by which banks can lend to each other. This is what the G7 should create this weekend.

The clearing-house plan needs to be bolstered by at least three supporting moves. First, as it will take time to set up the clearing-house, banks must be forced immediately to lend to each other. For banks that have been part-nationalised in recent days, their new shareholder, the government, can compel them straight away.

For the rest, this should be made a condition of any further state aid. The state must underwrite counterparty risk, both in word and deed.

Second, in addition to this move, all governments should follow the Irish example and – for a period of time – guarantee interbank loans and deposits. Third, the world’s central banks should open the discount window and pump as much money into the system as is needed, reducing official rates in another coordinated move simultaneously.

The US Federal Reserve made the unprecedented move of accepting banks’ commercial paper as collateral during the week. This is a brave – some might say foolhardy – move, but it underscores the meltdown in the US.

Only intervention of this magnitude can save the system now, because investors are in full flight and they are in no mood to hold anything other than cash – and cash, of itself, is not worth a penny in this crisis unless it can be converted into credit which holds its value and buys everyone time.

Even with such moves, it is still obvious that the world will hurtle into recession in 2009.The objective now is to prevent a global depression. In the US, this gradual slump has been well flagged; however, Europe is moving from solid growth to recession without the intervening slowdown bit.

In Asia, the collapse of commodity prices is telling us that demand for raw materials has plummeted, implying a sharp contraction in China and possibly the rest of Asia. Counter intuitively again, without American demand, Asia is likely to drown in a sea of its own money. The Asian central banks have billions of dollars, but their big bet was on the US motoring more than their own countries, and now that bet is off.

For Ireland, we still will need a massive recapitalisation of our banks and, if the government plays its cards right, it can use the bond market to raise the money cheaply in order to inject cash into the banks. Simultaneously, we, the taxpayers, can demand significant equity in the process. This still remains the most likely and best plan.

Timing here will be crucial. If we recapitalise the banks too early, our money will simply disappear like other shareholders’ cash. If you doubt this, just ask all the sovereign funds that lost their shirts in the US investment banks, because they refinanced too early. So the state needs to mop up when all other shareholders have been destroyed.

In addition, this bank bond can be sold on to other investors, lightening the debt burden to an already strapped state. Given that Brian Lenihan, the Minister for Finance, is facing impossibly tight budgetary arithmetic, such dexterous use of the financial markets is not only desirable, but also necessary.

While politically we will naturally be focused on Leinster House for the next 48 hours, events abroad will have as much, if not more, impact on our jobs, mortgages and income as anything the minister will announce on Tuesday.

  1. Hallo again, David!

    Events in Ireland – and in most other countries – have indeed been overtaken by the international reaction – or perhaps over-reaction – to the US credit crunch.

    A new international clearing house under the control of the G 7 would be useful, I agree. But we need a lot more to get the economic fleet sailing again. State pressure on the banks will be necessary, yes, but at this stage one has also to contemplate a complete nationalisation of the whole banking system.

    We were very kind and generous to the banks by giving the guarantees, but it seems to have little affect. The problem is that leopards do not change their spots. So they try to carry on, perhaps with reduced speed, but still staying on the same old course. This has to stop.

    If we put all our money and state resources up, then I think we should also have control. And that means first of all a change of course and of leadership. Heads need to roll, quite a lot of heads, and from the top downwards. Most of the CEOs and directors have shown their incompetence and recklessness only too clearly, so they have to go – fast and without golden parachutes.

    There should be a new rule that no-one in any company – including banks and stock brokers – can earn more than ten times the income of the lowest paid employee. This would lead over night to a massive increase in equality, and also lead to more investment.

    Simultaneously Brian Lenihan should raise the income tax for all people earning more than 100,000 per annum significantly, and introduce new taxes on the buying and selling of shares. Betting taxes should be raised as well, and all the loop holes for the super-rich should be closed immediately.

    Further the government should – through the budget – impose an immediate freeze of all consumer prices (especially for food, fuel, electricity and all essential commodities) for at least 6 months. This would be a great relief for everyone, but particularly for people with lower income, and get us well over the winter. The freeze should be reviewed in 6 months, with the option of an extension.

    In terms of structure, all the various regulators should be abolished and merged into one single national consumer authority, directly responsible to the Taoiseach, and with real powers and teeth, as they are in existence already in many continental countries. This would reduce state expenditure and strengthen the effects of regulation.

    IDA, FAS and other institutions should focus on supporting existing Irish businesses and helping to start new enterprises – especially small and medium size companies – in Ireland and owned by Irish people. It has been one of the main mistakes to concentrate always on the big international companies – mostly US owned – and give them millions in advance of even coming and creating jobs. They all packed up again when the extra benefits ran out, or when they got better offers elsewhere.

    In general Ireland and Europe should reduce their economical and financial ties with the USA as much as possible. The USA have created this crisis, out of greed, stupidity and criminal activity, and now the whole world is suffering as a result. We have to be realistic and look after our own interests first. (As the Prime Minister of Iceland said so rightly last week: Every man for himself.)

    Fortunately we are not entirely on our own and have the EU and ECB behind us. If Europe uses her very well developed infrastructure and skill base, the recession will not last as long as is feared now, and it will also be manageable. Let the USA sort out her own mess, which is entirely of her own making!

    Europe could come out of this crisis a lot stronger, and become the No. 1 economic power in the world, if we do things right. Otherwise we will always depend on whatever the USA is doing.
    Let the Americans sink or swim, whatever they can manage. Their country is meanwhile so run down – in all areas – and riddled with social and political problems that have no relevance for us.

    I am no socialist as such, and as we have seen in Eastern Europe, most socialist models have failed as well. But we need to realise that capitalism of the US & UK style, which has so far been our model as well, does not work. It has its failure already built into the system. So if we repair the damage, only to return to the old capitalist model, we can as well leave it and save us the bother and money.

    There are very good and workable models of moderate capitalism with a social dimension, especially in the Scandinavian countries, but also in Germany, France and some other nations. These models we need to study closely, and then adopt which ever is the most suitable for us. If we do that, we will have a safe and prosperous future. If not, we will be sucked down into the abyss by the vortex of the foundering last empire – the USA.

  2. Skin


    Personally I think we, the taxpayers, the bankers, the governments…the lot!, are all clutching at straws. Each day seems to produce another ‘co-ordinated central bank intervention’ and/or ‘ global government intervention’.
    None have worked, stock markets have plumetted and all that is left is hope.

    The money is gone, the global world economy has collapsed and what we are seeing is nothing but an illusionary smokescreen. The hope being that before the smokescreen clears and we realise we have fallen into the abyss, that someone, somewhere, something will resolve the problem.

    With respect, the above article smacks a little of desperation, not on the part of the author but rather on trying to find a ‘solution’ to this crisis.

    The notion that the G7 should create a ‘clearing house’, on the face of it has merit. But really it is nothing more than what the central banks are doing now by pumping billions upon billions of dollars/euros bank into the system in order to reduce the cost of borrowing between banks. They are in effect the clearing houses that David is talking about.

    It is too late, the money is gone, the system has collapsed.


  3. Ger Kennedy

    Hi David

    With all this government capital being used to re-capitalize banks all over the world are we now looking at a situation where banks are going to become like utilities? Power companies supply power. Water companies provide water. Cities provide infrastructure. Banks provide money and credit. Definitely not free market. It looks like a whole new ball game.

    BTW It looks like the irish Government are trying to bail out the builders by providing 300K mortgages to the anyone earning less than 60K (which is a stupid loan to income ration imho). Looks like lessons not yet learned. It wont work anyway because confidence is gone. I will be surprised if many people take up these mortgages. But it is worrying that those now “running” the old sod are still so deeply buried in the pockets of the builders. I thought surely they would have figured out what the main portion of Irelands problem is. They are beginning to believe their own BS that “the crisis in Ireland is all caused by external events” and has nothing to do with Ireland’s manic property boom. Sure the external events brought things to a head more quickly than would have happened otherwise. However the main underlying problem in Ireland is that Property became madly overheated and a large correction will happen one way or another. The 300K mortgage gig is either an attempt to prop up the market to clear the builders “empties” or it is an attempt to “kick start” the property market. Either would be idiotic. it is just throwing away good money after bad.

    I really thought Ireland would never go back to the 80′s. I see a lost decade or two in Ireland’s future. It sucks. I think we blew it.


  4. There is still some hope, gentlemen (Skin & Ger Kennedy), and some good options are available – as I have explained above – to Ireland and any other country that has the courage to act.

    But act they must, and quickly as well as decisively. Otherwise your pessimistic outlook might very well the reality for all of us.

  5. Deco

    EmeraldIslander – I agree with many of the positive aspects of the Scandinavian model of capiltalism. But it requires a standard of morality, and respect for others in society, which is sadly lacking in nearly every form of Irish authority/influence. We need to identfy possible causes for this and systematically reform them.
    i) nobody is punished for corruption.
    ii) defamation laws ensure that even the most corrupt elements of Irish society are ‘entitled to right of good name’. This is in the Constitution. Cynics at the time said that Dev inserted so that people would not publicly blame his allies for the death of Michael Collins. Interestingly Brian Lenihan made the laws even more stringent. As a result we are a society that is full of rumours. There should be a constitutional referendum to take it out. Honest people have nothing to fear.
    iii) the economic rent infrastructure which exists purely to extort superprofits from the commoner in Irish society
    iv) the bloated public sector with it’s various entitlements which are the result of politicians buying votes
    v) monopolies, oligopolies, and ‘tidy little arrangements’. If anybody seen the Prime Time special on the second car industry, I recommend it. It is educational.
    vi) a tradition of saying ‘but what difference I going to make’
    vii) alcohol promoted as the way to deal with the problem
    viii) a political system with has become the source of patronage, and nepotism
    ix) Competition Law is not implemented.
    x) The National Consumer Agency exists purely to make sure that nothing happens to enable people to seek redress from the corrupt element of Irish society. What was the National Consumer Agency doing concerning the poor standards of residential housing, the exhorbitant prices charged for toll roads, newspapers, housing, cars, taxis, insurance etc… The National Consumer Agency should be abolished, because all it stands for is pretence. Instead let a non-government funded body operate like a loose cannon and rip holes in the economic rent infrastructure.
    xi) the media seems to be influenced by two few elements in Irish society. Indo News Media has too much power. RTE is under the infleunce of the Minister for Communications, and is not independent enough. And because of the TV licence TV3 is producing rubbish just to stay alive.
    xii) the fact that nobody in Ireland gets sacked in Ireland for incompetence, nepotism, corruption, etc..
    xiii) authority in Ireland always backs up authority figures. We have the ‘safe pair of hands principle’ – a safe pair of hands is a euphemism for somebody in a position of power who prevents any truth emerging concerning failings, or who can cover up bad news. In Ireland the public are in disqueit, but it is a silent burning disqueit.
    xiv) people like Eliot Spitzer or the mafia judges do not exist in Ireland, or if they do exist, the entire breadth of Irish authority combines to knock them down, because even an example is a serious threat. The Willie Walsh episode in Aer Lingus is an example where Bertie Ahern had to undermine and shaft somebody who actually knew how to run a semistate body successfully. The entire system of nepotism appointed managers and wasters in the Irish public sector was threatened. And Ahern acted, because he was the representative of such interests in the goverment.

    • I agree completely with all the points you listed, Deco. Absolutely. And if we want to have a proper and functioning state eventually, we will have to clean out the dirty stables one by one. It will not be easy, but I can be done, if a majority of the people has the will and self-preservation instinct to demand it.

      One of the most important steps you haven’t mentioned is a reform of the education system. No church or religious organisation should have any influence over schools any longer, and the curriculum needs to be reformed as well, with a focus on knowledge and life skills, and not based on believes. (Churches and religious groups can promote their ideas and doctrines in their own time and on their own premises.)

      The idea of a non-governmental consumer protection agency is very good, and even better than what I proposed above. They have that in Germany. It is called ‘Stiftung Warentest’, publishes a very good and informative monthly magazine (which is very popular) and also awards test certificates and ratings to all sorts of companies and consumer goods. Such an agency would work wonders in Ireland.

      Another reason for all the problems you listed is that – after 86 years of independence (in various degrees) – we are still basically a carbon copy of Britain. We still have the same rotten legal system, the same financial system and economy structure, the same education system and so much more.
      I often wonder if we actually want to be independent. There are not many signs for it, after nearly a century in charge of our own destiny.
      Many people even support English Football teams, which is one of the reasons for the appalling state of our own Soccer clubs.

      But like with everything, changes can be made if there is a will. Should the Irish people refer to stay asleep, ignorant and complacent, then we could well end up as a banana republic (without growing bananas) or a failed state. I don’t want to paint things too black, but what happened in Bosnia some years ago could easily happen in Ireland, if the proper structures we are used to should fail.
      One often hears the word ‘nationalist’ mentioned in relation to the Republic and Republicans. Well, I have so far met very few real Irish nationalist. Most people in this country are tribalists, who don’t give a hoot for the nation and only care for themselves, their family, clan or county. The GAA is a very good example for that, and it fuels tribalism even more through its county-based sporting contests.

      What we need is a political leadership that appeals directly to the people and creates a true national identity. So far we have not had that in 86 years (and the Irish language is not doing it either).

      I am confident that we could clean up the country and make things a lot better, if enough people want it. If not, then it might actually be better to forget all our ‘national’ pride and return to Britain, with the tail of the ‘Celtic Tiger’ between our legs.

  6. Woodsey


    ‘Skin’ has it sewn up. We’re all over the precipice now … pedalling madly in mid-air. It’s ‘crash-time’. That’s the solution.


    Thanks 4 the e-mail!

  7. Deco


    Accountability – or culpability – depending on your perspective. State taxation policy as a blunt instrument – or simply the force of what Pat Rabbitte called ‘the tint’ ??

  8. Hi David,

    Maybe a period of ‘cold turkey’ is what’s needed. The authorities need to accept the natural realignment of credit to underlying productivity. Throwing ‘as much money into the system’ at the credit junkies without a total shakeup in their views as to what is productive use of credit and what isn’t, will only result in greater waste, greater eventual pain.

    It’s time for a rethink, and and for heads to roll for the gross mismanagement of risk.

    Le Meas,

  9. The news Sunday indo is fascinating ,that we all pretty much knew for some time now (even if we were not being told):
    “Merrion Capital has forecast staggering write-downs at the country’s two biggest banks, the brokerage predicting that AIB will write off €5.3bn while Bank of Ireland may write off €4.5bn”

    When this happens it will be the beginning of replacing confidence in our banks.The truth will set them free.

    We never could have guessed it would be this bad:
    “Some of the Irish financial institutions have massive exposure to property lending. Anglo Irish Bank and the Irish Nationwide Building Society have up to 80 per cent exposure to commercial lending, while AIB have 37 per cent exposure and the Bank of Ireland is believed to be about 30 per cent”.

    Next question will any of the bank people go to jail.?

    “It is believed that the real state of the two main banks’ property loans books is now being reported directly to AIB chairman Dermot Gleeson and Richard Burrows, chairman of the Bank of Ireland.”

    • To a Lawyer and a Drinks company exec .. we are all sorted then …

      Best article of the weekend was Kathleen Barrington in the SBPost

      “Anglo Irish Bank chairman Sean FitzPatrick has shown little remorse over the long-term implications of boom-time lending by banks.”


      I was all “you tell em Kathleen” until I read the Profile about how the Secretary of the department of Finance was a shoe in for the next head of the Central Bank (err lads isn’t that the problem …. .. .cosy cartels and all that … me i´d prefer a Stanley Fischer type figure … tapping the diaspora and all that)

      And best comment was on the far, far too close to the bone website An Apology from Icelanders

      “We suddenly found that it was generally not a good idea to have on the front line people who had been selected to be there due to their quality of seeming harmless.”


      My wife is still a ride though.

  10. VincentH

    All, the credit crunch in the US did was to point out that the emperor had no clothes, and not only had he no clothes he was rampant.
    David as you say this is a issue with credit, and what the banks are doing with what they have received so for. At the moment that cash is just being swallowed. And until a floor is placed this will continue to happen.
    You, only a few weeks age were going on about the difference between the cost of a house and the wages of those expected to pay for that house, and just how insane was this situation. Well until the banks get to the point of a reasonable valuation on the assets they hold, all banks, then this will go on. And the central banks will become just another shareholder investor or depositor. And with no reasonable expectation of getting this money back. Far better if they held their horses until that money would do most good, this would have been when a floor was reached. It is bull, to say that any state could not do what the banks do at the practical level, every one of them have agencies which are in every small town where small loan transactions could take place and for larger requirements then go a bit higher up. If B700 was ploughed into the US economy at the correct level, it is then much more likely to do some good. All that is stopping this is political positions which no longer hold. You speak on credit liquidity as if the banks were the only place such liquidity can be delivered, and this is not the case.

  11. Furrylugs

    Given that the IMF, World Bank etc form InterBank Clearing Plc, and this mess comes good, we as a country (forget anyone else) are still in doo doo. We have Merrill Lynch & Price Waterhouse Coopers advising on the upcoming BOI/AIB merger.
    Young Lenihan is being supplied tactical information from the ESRI which is dated.. All leading to a stop gap budget revised in March 09.

    Our leaders don’t seem to realise the FF mushroom treatment can’t work with the internet. We know too much. That was always a FF tenet. Say nothing to no-one about anything at all at all times ever. Unless you make a buck out of it.

    The vast majority of people in this country didn’t see a tiger. All they got was the minimum comforts one would expect from a functioning Western European country.
    Or duped into huge mortgages and a false sense of affluence.

    As David says, next Tuesday may be irrelevent if the international crisis remains unsolved but we still have to live here somehow.

    Because one element of society has screwed it and lost paper billions means jack to me.
    Why should I take the hit? Or the pensioners, nurses, carers, small shopkeepers or local business?

    There will be a lot of anger come next Friday.

  12. Deco

    Soldiers of destiny – you comment is enlightning and you finish with “They never knew what was going on”. Of course not. They were preoccupied with such important issues as attendanc at corporate functions,making key note speeches, and unveiling their genius in other ways to the great unwashed. Time to wash them out. The UK government have got rid of the turkeys. We have comforted them.

    You might be interested in the following link. I find this senior executive’s arrogance startling. Our culture creates this sort of disfunctional human being. This is the type of people who run Irish economic life. We have a societal moral problem. These people are the source of the problem. In England these people are sacked. In America they are dragged before committe to answer for their actions and get public humiliation. In Germany they can spend a spell in the clink. In Russia they might disappear. In China iit is the rope. In Ireland, they get a bailout, and they go back to their smug existence, and life anchored on golf events and keynote speeches.


    What I feel really worrying is the threatening tone towards the media. There was a time when the Bishops behaved in this manner. This businessman clearly believes he can shut up the media.

  13. AndrewGMooney

    Here’s hoping the Eurozone Meeting today will restore order and coherence and that the Eurozone countries co-ordinate their differing responses in a way that allows a unified response which may calm Markets. Pleased to see Gordon Brown has been invited to speak, given UK’s important role as an adjunct to Eurozone. Hopefully, Bush, Bernanke and Paulson will be watching via live video link and will give their perspectives as well, so that that tomorrow shows there’s still some time to co-ordinate a global response. I suspect it’s too late, the panic is entrenched, but I accept I live in a psychologically exploded landscape, so I no longer trust my intuitions. I trust the experts to save us and I’m going to stop worrying about it and just go shopping to help the economy.

    Must be almost impossible for Lenihan or any other Finance Minister to finalise a budget until there’s some sanity in the situation.

  14. Jay

    Hello David,

    I read most of your articles with interest. I particular remember an article of yours from about 2002 in the Irish Indo which predicted that Irish property would crash and burn. This stop me from going ahead with buying an apartment in Dublin. At times of course I regretted this decision but events have proven it to be correct.

    How as events do roll from one catastrophy to another I wonder where is there an opportunity to invest some cash (I have some). Stocks are low and now maybe a goodtime to buy shares in brands such as Nokia, Sony and even banks if one can assess which ones will survive. What do you and the other members here think?

    Kind regards,

  15. Jay. invest it in a good safe for the foreseeable future-unless of course there is a firestorm sale of new penthouse apartments in the Dublin Docklands.Dont count on that though..

  16. Deco, the media are breaking free from the Devil´s lies.
    This story should be nailed on the door of every church and council chamber in the land.
    We await a new Martin Luther to lead us ?
    If Mr Fitzpatrick operating in New York instead of Dublin he would probably be wearing handcuffs now -not giving interviews to the media about how happy he is to be bailed out by Mr Lenehan.


  17. Jay

    Penthouse apartments in Dublin or anywhere else are of little interest to me. A good safe or a good private bank (Rabo). My question is whether selected share in certain companies (Example Volkswagen, Nokia, GE) is something that should be considered now that prices are low. I know it could go even lower but overtime is now the time to pick a few shares. The cash will disappear as the cost of living rises and high interest accouts are not the only way to make cash work a little harder.

  18. Ire_in_Exile

    Two points lifted from the worthy forum above deserve highlighting…

    By EmeraldIslander-
    “In general Ireland and Europe should reduce their economical and financial ties with the USA as much as possible. The USA have created this crisis, out of greed, stupidity and criminal activity, and now the whole world is suffering as a result. We have to be realistic and look after our own interests first.”

    By Deco –
    “I agree with many of the positive aspects of the Scandinavian model of capiltalism. But it requires a standard of morality, and respect for others in society, which is sadly lacking in nearly every form of Irish authority/influence. We need to identify possible causes for this and systematically reform them”

    I repeat that the current crisis is more a moral one rather than a money one, it is the inevitable ugly conclusion to a trend of rapacity that made money making for it’s own sake the only stake in the game at the expense of all else.
    Attempting to find a solution by throwing money and further credit to greedy and corrupt financial institutions only furthers the malaise. without restructuring practices and setting higher codes of conduct there can be no recovery…

    This clearing house is a positive idea but it should be combined with the untouchables!

  19. martymac

    The government should secure the necessary controls within the banking sector to introduce retrospective laws to confiscate monies from Fitzpatrick and his like. Set down a new standard for corporate governance and remuneration/compensation policy based on performance over the longer term. Public humiliation, not sure, if it would work on some of them, they seem to be too brazen faced.

    Another good news story, if you needed one!

    IMF in global ‘meltdown’ warning

  20. Malcolm McClure

    David said “First, the long-term stated aim of the G7 should be to create a new global banking clearing-house.”
    The world has two of these international banks already, the BIS and the IMF (see wikipedia) and a fine mess they have made of it recently. (Bank of England Governor Mervyn King sits on both boards giving rise to some concern about the validity of ‘the British Plan’)

    Our banks have us by the goolies, and they have always known it. Our role as mere peasants is to sit quietly, with eyes agape, and wait for them to sort themselves out. Meanwhile, we can just be grateful that a few crumbs fall our way in the form of schools, hospitals, roads and a considerable improvement in housing and living standards over the past 15 years.
    On November 21, 1933 President Franklin Roosevelt told Edward M. House ‘The real truth .. is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson – and I am not wholly excepting the administration of W[oodrow]. W[ilson]. The country is going through a repetition of Jackson’s fight with the Bank of the United States – only on a far bigger and broader basis.’
    There is no point in worrying about the credit crunch. Money is the fifth dimension–the entity that lubricates everything that happens in human space in the course of time. We tamper with its instruments at our peril.

  21. I am no economist and I only passed my GCE applied maths exam many years ago , because we had a gifted tutor.
    The following figures are being tossed around by various columnists:
    Bank loans outstanding to developers 110 million Euros.
    Monies outstanding to foreign banks 80 billion.
    Banks expected to write down the value of loan portfolio to 35% of current values.
    This is a loss of about 70 billion which has to be repaid to foreign banks.
    Government can put in max maybe 16 million from National pension fund
    (Will this act cause further mayhem on the stock market?)
    All that aside, I come up with a back of a cigarette package; insolvency figure cerca 54 billion Euros.?
    Somebody tell me this is not so.

    • Woodsey


      Insolvency figure of €54 billion? Way, way low son, by a possible factor of 10. It’s what they’re determined not to tell you. Bailout’s not possible by anyone, anywhere. National pension fund biggest buyers of derivatives. No money there. It’s called ‘a crash’. There will be survivors, probably all of us but … will we be wiser?! Poverty is no disgrace. Just very inconvenient! David has to write all this stuff. It’s David’s ‘bread and butter’!

  22. Dan Healy

    Thank you David for being a voice of reason amid the chaos that engulfed all of us over the past eighteen months and especially in recent weeks.

    Personally, I don’t think that there are any fiscal actions which can now; at this late stage avoid unprecedented hardship to the great number of our citizens over the coming months and years.

    And these hardships must be shared by all of us, along with the blame for this whole mess.

    There will be those who will blame external forces for the predicament that Ireland and its people now find themselves in, just as we’ve tended to blame England for all the ills of the famine years in the 1840’s. That wasn’t true then and it isn’t true now. There was a ruling merchant class in Ireland which was immune to the famine and they prospered very well during the period. I see no evidence that it will be any different today. The planned incentives for €300K local authority mortgages in Tuesday’s budget would be laughable if they were not so tragic – a scandalous attempt to squeeze the last pennies from Joe Public to save the shrinking wallets of the very people who orchestrated the property bubble which has proved so disastrous.
    Time and time again in recent years, these people have proved themselves to be above the law. You will no doubt recall that during the “Bertigate” furore, the management of Allied Irish Bank quietly issued a statement admitting that the amount of cash they defrauded their customers out of in their foreign exchange overcharging scam had increased by €31.6m to the grand total of €65.8m. Oh, and by the way; it all happened so long ago that they just wouldn’t be able to discover who masterminded this major theft. To quote the RTE News website at the time; “The bank said that, in view of the lack of evidence, due mainly to the passage of time, disciplinary action against any member of staff could not be considered.”
    Newspaper reports on the same day included a Judge’s reaction to fraudsters when, after a seven week trial, she sentenced a man of 72 from Nenagh and his son to three years each in jail and described their crimes as a “greedy scam” for attempting to de-fraud the Department of Agriculture out of €85,000 — small change indeed when compared to the boys and girls at AIB.
    I listened yesterday to the horse trainer Jim Bolger recount his story of being systematically overcharged by his bank on RTE’ radio’s Marian Finucane Show, an experience unfortunately shared by many people.
    These bank scams were dreamt up, developed, planned, implemented, managed and concealed by a sizeable number of bank employees — who were they?, and who was directing operations?
    And why weren’t the Special Branch, Fraud Squad or Gardai dragging people from their beds or searching bank branches and headquarters in an attempt to identify and prosecute these criminals?
    Another recent example of white collar crime and extreme professional misconduct was when a number of firms of solicitors were exposed for overcharging clients who had received awards from the Redress Board, resulting from abuse when in the care of the state. Once again, to my knowledge no-one was brought before the courts and no individual or firm was disbarred from practising law.
    We, as a society tolerated all this, along with the planning scams and close relationships between Government parties and vested interests in the property boom; after all haven’t we consistently voted them back into office time after time.
    So, now is not the time to be blaming anyone else for the predicament we find ourselves in. What we must do is resist any further bailing out of the vested interests and roll up our sleeves to help ourselves, our families and our neighbours survive the next few years. Join and support St. Vincent de Paul, the Civil Defense, or The Red Cross. Forget all about personal fortunes, give a cold-shoulder to the powers that be and work to change our society for the betterment of us all.

  23. Furrylugs

    STOCKHOLM, Sweden (AP) — If history is any guide, this year’s Nobel economics prize will award the developers of economic theories that have had the time to take root, grow and prove resilient.

    DMcW arrived at the Bank guarantee formula that in one shape or another is being aped worldwide.

    Let me be the first to congratulate you.

  24. Lorcan Roche Kelly

    Furrylugs > DMcW arrived at the Bank guarantee formula that in one shape or another is being aped worldwide.

    Interesting counter-view on this in last weeks Irish Times.


    Paragraph ten is quite a dig at David.

    In David’s defence, I have never heard him take the credit for the idea.

  25. Ed

    “If Mr Fitzpatrick operating in New York instead of Dublin he would probably be wearing handcuffs now -not giving interviews to the media about how happy he is to be bailed out by Mr Lenehan.”

    Soldier, it’s only a game to Mr. Fitzpatrick, money isn’t important – well that’s what he said in this interview.


  26. Finbarr

    Why cant there be an incentive/requirement where the banks have to publish their loan books when they avail of outside help. The lack of transparency in the banks is one of the things causing the fear in the system. An incentive could be where banks that disclose fully their exposure now and later ask for help will be given better terms /less punishment than one who tries to hide their exposure and has to look for help later. This would expediate getting investors back on side as they could make proper judgements. Banks also could make proper judgements as to what other bank they could lend to, thus get some thawing of credit. Also, Banks should not be given any assistance if they are just going to sit on money and not use it.

  27. Skin

    I agree somewhat with Finbarr. I would like to see a system where a daily rating is published that identifies a banks exposure to lending. For instance, if the rating scale were a 1 to 10 then a 10 would mean high exposure to lending relative to the deposits on hold.
    The offshoot of this is that banks with high exposure would need to offer higher interest rates on deposits to compete with other banks, or alternatively lower lending rates.

    However this system would allow the customers to be much more informed, banking would be much more competitve, and it would be down to each individual to decide what deal they want and with what bank.

  28. Ed

    “Pleased to see Gordon Brown has been invited to speak, given UK’s important role as an adjunct to Eurozone.”

    Andrew, An adjunct is what you might call him – Angela might use an other word.


  29. Deco

    Emerald Islander – the Catholic Church is not responsible for the current economic criris, except maybe that the gangsters running the country clearly never listened to any of the quotations from the New Testament. Quotes like, ‘love your neighbour’ etc. are lost on our gombeen business culture. If you want to take the Churches out of education, I would not jump so fast. In the mid 1980s the Catholic Church dominated the health system. Then the state took over. State control is now evident with increased mediocrity, nepotism, management, waste, deaths, misery, and a hole in everybody’s PRSI contribution. The Catholic Church was very strict on nepotism and other similar malpractices, in part because of Martin Luther had made a big issue of it. You would be hard pushed to find a more meritocratic system in Ireland than the education system up to the Leaving Cert. After that it is state controlled. So maybe we should thank the Churches for maintaining an element of fairness in a society that is corrupt, selfish, rotten and skewed. I listened to other years to various PD attempts to facilitate greater inequality in Irish education. They did influence state policy in the universities with respect to maintenance grant for third level students. If you have something better, then all and well. But the neoptism in Irish society could very quickly take over in the education system, and turn it into another HSE. Not a good idea !! I am a realist about this.

    Actually most Irish people would reckon that association with one’s family or social class is about the height of it. It is safer than nationalism. But it is unhealthy compared to a sense of community civic duty. National civic spiritness has become a ‘come-all-yah’ for all sorts of nonsense, including the most arrogant and repugnant Irish idendity culture that has controlled Irish idendity since 1990. Mostly it is pride in expression of pride, rather than pride in acheivement. What exactly have the Irish soccer team achieved anyhow ? I mean I have listened to all this huha about the ‘greatness’ of the national soccer team, and how we should celebrate their achievements. Has nobody got any self respect ? I don’t buy into that BS. Only third world countries behave like this. I mean what about the boxer from Jobstown who won was world champ in his weight for a while – did he get half as much nonsense !! Of course he was selling hunky dory crisps and not Guinness, so it was a matter of influence.

    Many Irish people are civic minded. But they are disgusted with the current shennagins, and many of them have been suspicious about the whole property ponzi scheme for years. Unfortunately such people have been silent, in the midst of all the noise made by ebullient economists, aggressive auctioneers, malign marketing people and the general babble of ‘we are the Celtic Tiger, and everybody in the world is jealous’ (please join us in becomming arrogant…)

    • I agree with you on the point that the health service got worse after the religious pulled out and left it to the state. That’s a fact. But we also have to ask ourselves why they pulled out. Not because they had lost interest in caring for the sick, and not because it wasn’t profitable to run hospitals.
      No, they had to pull out because they ran out of people. Religious orders, who had plenty of new vocations in the past, managed to discourage potential candidates to such an extent that eventually vocations dried up completely and the orders are now not more than small communities of old and ageing people. So they had no choice but to hand over, since they messed up their own career and personnel management.
      Speaking as a consultant, I have to say that the Catholic Church in Ireland (it is not as bad in many other countries) had – and still has – the worst possible management team I can imagine. And this is even worse in the area of personnel management (these days often called HR). Having had the run of the schools for centuries, they have not managed to maintain a steady flow of new recruits to their cause, despite plenty of potential and interested candidates. I could draw up a long list of men who studied at some stage for the priesthood and were very committed as well as suitable. But they were all dismissed from seminaries by arrogant and incompetent senior priests who feared their intellect and determination. All the hierarchy wanted were dumb and complacent ‘yes men’. Many of those were promoted up the line, and today the Church is actually in a worse state than the banks are.
      I have nothing personal against churches or religion (and should mention that I am a long-time close acquaintance of the present Pope, and also his biographer). But I have left the Church in disgust over the crimes, arrogance and absolute incompetence I found there. They are as incapable to sort out their own mess as the banks are.

      There are three reasons why I want religion out of the schools:
      1) It is a source of biased and sectarian education and produces people with the wrong attitudes. As long as you go to confession afterwards – an get forgiveness on the cheap – you can do anything wrong and be as useless as possible. Do not underestimate the influence of this idea on the people who are responsible for all the financial mess, the nepotism and corruption.
      2) Discipline and general attitude. I have lived in various countries and seen schools from the inside in many places. Nowhere – with the exception of the USA and the UK – have I encountered such sloppy and undisciplined pupils than in Ireland. There is no proper leadership, and no-one is taught for life. They do not produce young citizens, but churn out half-educated consumers with no opinion on politics, the economy and many other important things. Churches and religious groups are not interested in bright people with independent minds, as they can see through their twisted believes and doctrines. (Looking outside Ireland for a moment – Islam is only as strong as it is because all Islamic states have a policy of low education and high rates of illiteracy. Thus they keep people in a state of mental childhood and can manipulate them as they please. In contrast, the USSR had very high educational standards, which led eventually to her downfall, as the people realised the lies and scam of the system and turned against it.)
      3) Lack of quality people. Most priests I know in Ireland are weak and badly educated. They give no example of leadership and are willing and happy parts of the system that produced gombeen men in large numbers. Quite a lot of them are gombeen men themselves. I could list many occasions where a priest on an educational board has blocked sensible and necessary reforms, but no-one on the board dared to speak up against him. There are great Catholic priests, well educated and people with natural authority. Unfortunately I have not met one of them in Ireland.

      When the churches were taken out of the schools in Germany after WW II, it lead to an immediate explosion of knowledge and achievement. While they were in charge, barely 10% of all children in German schools made it to a university. The rate began rising steadily after the war, and now stands at over 50%. It has done the churches no harm in Germany, and they are still there as they always were. Actually, they have a lot less problems there than they have in Ireland.

      On another matter – we all know how people get jobs in Ireland. It is not what you know, it is who you know that decides over a person’s job and career. With a strong state-controlled education system we could create a true meritocratic nation, where knowledge and skills count more than the friends and golf partners of one’s father or the word of the local priest, which is usually based on the record of mass attendance.

      Proper nationalism – which is pride of one’s own country and feeling co-responsible for it – is a good thing. Nationalism only turns sour when it contains hatred of other countries. That danger I cannot see in Ireland. So we would be stronger and more efficient with proper Irish nationalism.
      What I see instead every day is tribalism at best, and pure egoism at worst. “Every man to himself” is the cry when a ship is sinking. But in Ireland it is the standard behaviour of most people, even and especially when the ship is happily afloat. This attitude has produced our current crisis. Bankers and developers only thought of their own pockets, and not of the nation.

      We have of course not been given any positive examples from our political leadership. People like Bertie have become the inspiration and excuse for every crook and criminal in the country, from the bank bosses down to the petty thieves and drug pushers.

      But when the people have a chance to make a difference – at elections – they keep electing the same old faces over and over again, regardless what mess they have produced or how incompetent they are. In my constituency there have been many angry people over the years, with many good reasons to be angry about. But did they elect new TDs when they had the chance? No. We have the same picture – 2 FF, 1 FG, 1 Lab – here for ages. One TD is actually quite sick and should have retired years ago, but he is still there and people vote for him. Another retired six years ago, only to be replaced by his son, who is a clueless waster of time. But he also gets elected. And I could go on and on. It’s the same everywhere.

      Most people who meet here and comment are obviously able to see reality and hope for a change. But that can – and will – only come when the majority of Irish people begin to take an active interest in politics and the affairs of the state. This, however, depends on education. And so my argument is that a reform of the education system, with a removal of all religious doctrines and bigotry, would be the first step on that route.

      With regards to Soccer – I have no interest in that sport, nor in most other sports. And I don’t really care if our footballers are any good and get to international tournaments or not. Many other small countries are in the same situation and never win anything. But they still have a functioning amateur league system for the domestic audience. They do not support foreign clubs and spend millions on their merchandise. Austrians cheer for Austrian clubs, and not for those in Germany. Belgians are keen on their footballers, and not on the French… etc. etc. It is only here that more people support English clubs than our own, regardless how good or bad they are in playing the game. Another fine example of missing national identity.

      Anyway, you are quite right that over-emphasis on sporting achievements is a sign of third world countries, as they have not much else to cheer about. And in many ways Ireland is actually a third world country, even though we are supposed to belong to the first world. The amount of time, energy and money that people invest in all sorts of sports here – without achieving much in them – is really amazing. Would the same resources be invested in eduction, infrastructure, economy and culture, we would be a much better and more successful country.

      Once again, all sign posts point in the direction of education. So I better rest my case here, as this entry is already quite long. Let me just add one more thought: Every country has the government it deserves. So if we want a change, we have to vote for different people. The next chance to do that is next year in the local government and European elections. And even though they are often seen as less important, they are not. Many future TDs start their political career as local councillors. So this is the time now to look for new and capable people – preferably independent – who could bring about a change on local level. It is a first step, but without that, all others are futile.

  30. Garry

    I started looking for some figures earlier to try to gte a better understanding of the scale of the financial system…. Basically to work out if Browns 50 billion and Paulson/Bush’s 700 billion is a lot of money capable of changing things or not.

    From what I can see, theres an over 500 trillion derivatives market which has gone pear shaped in a sub 40 trillion dollar world…Now it strikes me that this beast has gotten hungry; and it can chew up all the cash thats ever been printed and still not be satisfied.. (Or indeed produce anything of any benefit to mankind, but thats another story)
    . Apparently there are less than 1 trillion dollars in existence in paper money….. So brown and paulson’s injection is significant in terms of dollars printed, and significant in terms of the value of the stock market but insignifant in terms of the derivatives market

    These numbers are from searching for some solid facts to see what is real money in this game, millions/billions/trillions/whatever and actually finding very little of substance despite all the ‘analysis’.
    http://www.nytimes.com/interactive/2008/09/15/business/20080916-treemap-graphic.html this is one graph worth a gander…

    Can anyone tell me what is going on? Or correct these very rough figures? Or tell me why Im looking at this from the wrong angle? I don’t have a financial background. and the ‘facts’ are just based on searches and trying to put things together… so Ive probably got the wrong end of the stick completely….so don’t be afraid to put the boot in :)


  31. AndrewGMooney

    Hello Ed, hmmmn…what rhymes with adjunct?
    I’d read the Sunday Times article. Piercing.
    But Angela can just get off her high horse as she has to explain to her citizenship how a tax-evading off-shore, offshoot of Hypo-Real with seriously off-balance sheet shite based in Dublin managed to blow up the German banking system….allegedly.

    Some Germans are more German than others and the teutonic rigour has thus been compromised by those who have ‘played games’ with Eurozone disparities. Naughty.

    Here’s a good link for you. Opening paragraph is Groupie Gordon kneeling at the feet of false idol Greenspan. They’re both now toast, but we all have to pretend that our ‘leaders can save us’. Confidence tricksters urgently needed. Also worth clicking on IMF link on Britain in article if you can’t get to sleep.


    PS: The post you referred to by me was a desperate one -hoping that some EU solidarity and subsidiarity would be dished up today. As expected: No such luck. I was actually being facitious. We’re all toast. Must ensure all future posts drip with overt withering sarcasm. Time for Horlicks.

  32. Furrylugs

    Deco, I see where you’re at but I’m a bit ambiguous about the role of the Church in education. Twas a very efficient clone production line while it lasted. Mna na h-Eireann and all that.

    The Tiger told us that we were egalitarian, cosmopolitan but not “Tan”. We finally stood alone, taking our place among the nations. We were but got sold out by grubbery.

    Revisionism is starting with comments about the good old days with hot spuds under the ocksters, bare feet and Michael O Hehir.

    I looked at The Dragons Den tonight with new perspective. Good ideas with some social merit were shot down because the entrepreneurial Geheime Staats Polezei couldn’t see immediate profit. Everything has been geared to immediate and tactical as opposed to strategic long term value.

    Myopic gnats with incestuous connections have ruined us all.

    DMcW should take credit. he didn’t jump from under a mushroom with revalation. His history speaks for itself. As with all other Nobels though, this one will be given to someone who marks current thinking.
    To be really facetious Andrew G, I’d give it posthumously to Schumpeter.

    I prefer cocoa.

  33. Furrylugs


  34. Furrylugs

    Uh Ohh………………………………………….


  35. newname

    Deadly Derivatives

    The chief financial factor in this carnage is the world’s largest casino, the derivatives market. The derivatives market is far larger than the world’s stock and bond markets combined, with bets in the quadrillions of dollars compared to the trillions of stocks and bonds. While it is impossible to put an exact number to the size of the overall derivatives market, given its unregulated operations and the way most derivatives deals are privately negotiated, it is possible to put a number to the value of the derivatives bets outstanding, and that number is zero.

    Derivatives were the great financial innovation of the Greenspan era, a form of sleight of hand designed to hide the bankruptcy of the financial system after the stock market crash of 1987, the collapse of the savings and loan sector, the bankruptcy of the banking system as a whole, and the collapse of the junk-bond bubble. The derivatives market was a fraud from its inception, a virtual market where the big banks and other speculators could bet on the movements of currencies, bonds, stocks and the indices associated with them. Because the derivatives did not require the ownership of the instruments upon which they were nominally based, the level of bets soon outstripped the levels of the underlying instruments, with, for example, far more derivatives bets on bonds than there were actual bonds.

    The derivatives market also employed high degrees of leverage, placing bets with borrowed money. Using leverage, the speculators could place far larger bets than they could were they limited to their own money. This leverage was highly profitable–at least virtually–as long as the game was expanding, but turned deadly when the music stopped. The, reverse leverage set in, and the players began losing not only their bets but the money they borrowed to place those bets. This reverse leverage made it possible for the gamblers to lose multiples of the money they put in, before the loans.

    Another innovation that was highly “profitable” before it blew up was the market for credit derivatives (a.k.a., credit default swaps, or CDS), a form of insurance policy for bonds and derivatives bets. While the derivatives market was in full swing, banks, insurance companies and other financial firms sold trillions of dollars of credit derivatives to guarantee the value of a wide range of securities. The credit derivatives were a fig leaf, a necessary part of the derivatives scam. The derivatives sellers, for example, routinely created triple-A rated mortgage-backed securities and collateralized debt obligations out of pools of subprime debt, and through the use of credit derivatives, were able to sell such triple-A rated junk to pension funds and other buyers who had a fiduciary obligation to buy only high-quality securities. Without the fig leaf of credit derivatives, this scam would not have been possible, nor would all the losses which followed.

    The obvious point is that, in any widespread securities crisis, the credit derivatives sellers would never be able to cover the insurance they wrote. A.I.G., for example, wrote hundreds of billions of dollars of credit derivatives, including a substantial amount based upon securities issued by Lehman Brothers. When Lehman failed, so did A.I.G., which has now received some $120 billion in emergency loans from the Fed.

    The settlement date for credit derivatives written on Lehman securities was Oct. 10, at which point the Lehman securities were valued, optimistically, at just 8.6-cents per dollar of face value. This will be the largest payout ever for the credit derivatives market, assuming the sellers can afford the payments.

    Shut It Down

    The attempt to save the fictitious “values” and “profits” of the derivatives market is one of the prime drivers of the largest bailout attempt in history. We stress attempt, because the bailout is not working, and can not work–there isn’t enough money in the world to cover all these funny-money bets, and the efforts by the central banks to print that money, is fueling a hyperinflationary bomb which will wipe out not only the remnants of financial system, but also the governments, national economies and the means of existence for most of the world’s population.
    It is therefore essential that the bailout of the derivatives bubble be stopped, immediately. All derivatives trades should be declared null and void, and wiped off the books of the speculators. Any financial instrument containing a derivative should also be declared null and void, and wiped off the books. This unregulated, insanely leveraged casino should be shut down, and all claims arising from derivatives bets nullified, as if the bets had never occurred.

    There can be no compromise on this. Shut it down, and shut it down now. Your life, and the nation, depends upon it. johnhoefle@larouchepub.com

    • AndrewGMooney

      Newname: You might be interested in this blog post on derivatives I’ve just read. Particularly the Alternative to the G7 5 point plan. I think the sanction proposed for 5 is particularly exciting. Live on T.V please:

      “5) Any banker or fund manager discovered to be creating excessive risks in these markets through their trading strategies, and that are discovered to create market instabilities of the nature of those that we have seen in September and October 2008, will be tried under a revised Global Patriot Act. If it is proven that the individual concerned took their actions by allowing greed to overcome risk, their actions will be deemed as unpatriotic, no matter what nation or nationality they represent. The minimum sentence for such activity will be five years’ incarceration with a maximum sentence of death by being hung, drawn and quartered. That last one should put us all off ever doing this again.”


      For the record: I’m not a ‘Brown lover’. Not into scat. I am into scathing scalding baths of sarcasm disguised as chauvinist cheerleading. Also, not into golden showers – and I don’t think Gordo, Sarky and Angela are either. If I was Lenihan, I’d stop pissing into the tent, so to speak.

      Let’s all have a collective online pray-in and keep ‘trusting the experts’ to restore Faith and Confidence. Gordo and Darling have been trying to strike up the choir this morning, expect couter-point harmony from Dubya, Hank and Ben later on. Will our EU/ EEA brethren join the choir or issue a nihilist ‘remix’ with Bjork, Nana Mouskouri and Sinead adding the screeching, discordant overtones which will give The Market participants in the stalls, circles and gods the heebie-jeebies?

      As if it will make a blind bit of difference. The Apocalypse In Slow Motion may pause for breath for a few days, but then Sauron will launch his Orcs again. And this time I have a gut feeling he’ll win. Cue Yeats and Cohen, etc:

      Things fall apart; the centre cannot hold;Mere anarchy is loosed upon the world, The blood-dimmed tide is loosed.Give me back the Berlin wall give me Stalin and St Paul I’ve seen the future, brother:it is murder. Things are going to slide, slide in all directions Won’t be nothing Nothing you can measure anymore The blizzard, the blizzard of the world has crossed the threshold and it has overturned
      the order of the soul When they said REPENT REPENT I wonder what they meant

      • blueangel

        AndrewGMooney >mere anarchy is loosed in the world
        maybe consider your analogies with more care?
        In 1929 when consensus last disappeared about how to value products and services there was questioning and rejection of social structure, leadership, organisations, governments etc. This led to idealogical polarisation, nationalism, war, contrition and so on and the phoenix reemerged from the flames of change. But for the majority life went on.
        Granted the stakes are higher today, figuring resource depletion and nukes into current reality. But on the other hand people are networked directly today and multinational economics makes sovereign government less significant.
        Cutting to the chase. This is not the opening movement to Cormac McCarthy’s ‘The Road’ because there is no line of logic which leads to that.

        • AndrewGMooney

          hello blueangel

          I don’t have to consider my analogies with any more care than I fill my wine goblet or eat another pack of crisps. I don’t claim to be an ‘expert’. I don’t get paid to post passing thoughts here. As Neil Young so eloquently put it: I’m just pissing in the wind.

          There is every possibility that The Great Unwind will move from disintermediation of financial instruments to retrenchment in real-world trade, retreat from cultural hybridities, etc. For ‘the majority’ living on $1 a day, all of our agonised ruminations mean doodley-squat. Yet their terrible lives go on, and on, and on. Until they expire without any headlines or debates. Sub-saharan African ain’t gonna see a phoenix anytime soon, despite the best efforts of our billionaire business philanthropists and media entertainers.

          I agree that ‘sovereign government’ is less significant today, but there’s a shadow side to that which Naomi Klein has usefully outlined in her Disaster Capitalism Scenarios, whereby there’s no possible manifestation of disorder that can’t provide a quick buck (Katrina, Iraq, credit-cruch, commodity supercycle, etc)

          I haven’t mentioned Kunstler or ‘The Road’ once on this site, because I have children and, therefore, have a visceral reaction to both scenarios: I simply can’t allow myself to seriously consider them.

          Whether this is a long, medium or terminal crisis is impossible to call at this stage. But it’s obvious that the smug, fatuous face of self-congratulatory smirk of multi-national and ministerial managerial competence has been slapped with a stinking kipper. From that I take some comfort.


        • blueangel

          You feel that the seriousness of the crisis is impossible to call at this stage. Obviously.
          Yet people are ‘knowing’ about complex and ambiguous situations.
          Precisely because of the children some of us are driven to try and synthesise lines of logical events.
          I’d suggest not paying too much attention to corporate and sovereign leadership – these operate reactively and have conflicting agendas.
          Thanks for the Naomi Klein reference.
          A recurrent pattern: Life has this way of distaining my simplifying models and scathing me from time to time in my life. Mortality, relationships, risk and so on turn around and bite my complacent arse every few years and reconnect me with other people’s reality. Maybe that is the silver lining in this cloud that can somehow flower and:
          1. deflate peoples detachment from each others lives
          2. damp the ongoing climate change carcrash-in-slow-motion
          3. remind us to appreciate our blessings relative to so many – our relatively pain-free state, scope for self-realisation, (relative) solvency, ability to profess impressive ethics without inviting loss of property or life
          Whatever does not kill us makes us stronger.

  36. Stephen Kenny

    Topol is actually a very interesting missile, if missiles can be deemed to be interesting. They’ve had a lot before of course, but taking as read, for a moment, the charming logic of nuclear war, Topol puts us back, to a large extent, to the days before the hugely expensive, and very somewhat uncertain, Star Wars programme.
    Topol may not be rich, but is certainly very smart..

  37. Malcolm McClure

    Garry said “searching for some solid facts to see what is real money in this game, millions/billions/trillions/whatever and actually finding very little of substance despite all the ‘analysis’.”
    As pointed out in newname’s post above, these derivatives are the elephant in the room that everyone is scared of. There are probably many readers of David’s blog who understand these things better than I do, and can find more up-to date sources. However the Bank of international Settlements tries to keep track of their volume. Their figures up to December 2007 are summarized on http://www.bis.org/statistics/otcder/dt1920a.pdf.
    They are listed under two headings: Notional Amount Outstanding and Gross mkt values. Based on these figures, the NOA of CDSs is now above 60T. This is dwarfed by NOA of Interest Rate Swaps, which although apparently 6 times bigger, only expose about 8T GMV to total default. However, that CDS ‘notional’ figure seems to represent the actual exposure of insurers of last resort if everything went pear-shaped.
    Derivatives are no more evil than letters of credit, so long as the ultimate guarantors are properly funded and regulated. But they aren’t.
    £40 billions to bail out British banks is very small potatoes compared with the $60+ Trillion in CDSs that might be coming home to roost if more banks go bust.
    Lehman Bros failure has already triggered a tsunami through the CDS market that will wash up on every shore.

  38. jk

    Garry, yes I for one believe these “bail-outs” are nothing more then using a bucket of water on a burning house and are largely meant to make it appear politicians “are doing something”, in case of US; ride out the journey to Nov 4th (Bush must be desparate by now to leave the hot seat; not sure why anybody on earth would want to take over though, both candidates must be insane for aspiring that job right now…).

    “Newname” is spot on; banks should be forced to open their books completely and all “casino-style” rubbish should be nullified immediately. If that makes these banks fail than let them fail. But with all the bailout / 100% guarante talk, no government has even mentioned this would be required from banks; Politics is indeed “the shadow of big business” (intersting piece by Chomsky on Friday in Times).


  39. Furrylugs

    Stephen K,
    Bit worrying that the Russian bourse has lost most of its value, the Oligarchs are nursing multi billion hits yet they start launching a new range of fireworks.
    Bit of a statement.

    On a lighter note……………………
    Following the problems in the financial sector in the UK and US, uncertainty has now hit the Japanese banking sector.

    In the last few days Origami Bank has folded, Bank of Sumo has gone belly-up and Bonsai Bank announced plans to cut some of its smaller branches.

    Yesterday, it was announced that Karaoke Bank is up for sale and is likely go for a song, while today shares in Kamikaze Bank were suspended after they nose-dived.

    While the Bank of Samurai is soldiering on following sharp cutbacks, Ninja Bank is reported to have taken a severe hit, although they remain in the black.

    Furthermore, 500 staff at Karate Bank got the chop and analysts report that there is something fishy going on at Sushi Bank, where it is feared
    that staff may get a raw deal.

    ….. Oh yes, and rumour has it that the Indian Karma Sutra bank is f****d…..

  40. Garry

    Thanks folks, No more than ever I’m convinced the whole world is mad…..

    Theres 651 billion Euros in circulation…. http://www.ecb.int/bc/faqbc/figures/html/index.en.html I believe theres more euros in circulation than USD…

    So Paulson has thrown 700billion at the problem…. Thats effectively the same number as if he went around to everyone in the world who has USD cash, took it all and offered it to the banking gods…. And they just shrugged…

    So they are doing a tour of all the worlds currencies to burn at the altar of the banks. And the scary thing is nobody in the media seems to connect the 700B figure as being approximately the same amount of real dollars in circulation. The basic principles of maths still work with these figures, theres just a few more zeros.

    Its funny…. we haven’t really evolved that much since we were killing people to keep the gods happy…..

    I suggest we sacrifice Tom Parlon and some bank economists to appease the angry gods here, and maybe burn a couple of ministers at the stake just to make sure, it might just work and it would make me feel better :)

  41. Furrylugs

    “I suggest we sacrifice Tom Parlon and some bank economists to appease the angry gods here, and maybe burn a couple of ministers at the stake”

    Ah now garry, think of the environment too.

  42. Garry

    ah Furrylugs, if you insist we can compost a green minister, (Im sure they’d like to be carbon neutral)…. but it wont be the same standing around the compost heap, much better craic at the bonfire….

  43. Deco

    EmeraldIslander – you do make some very compelling arguments !! I am impressed. The way I see it we have a very narrow spectrum of Irish society leading us down on road to ruin. The CEO of ANIB is the very epitome of what I am talking about. We need to take these people out of influence over Irish society. And we need to do nothing else until we deal with this. You mention the Germans and yes I think the German model of authority after WW2 is interesting. It was heavily infleunced by the model of authority also existing in the US and Canada at the same time. Since then American authority has been steadily corrupted. It empasized responsibility. We in Ireland have a deficit of responsibility in our culture. I have met people from the former DDR, and I have been astounded by the standard of education, and they had no religious infleunce on their education whatsoever. Problem is that we cannot have the Education system to be allowed part of the current Irish authority culture – it is so corrupting and disfunctional !!
    I did not buy into the ‘Celtic Tiger Eurphoria’. This blog seems to full of people who stayed ‘quiet in the corner’ while the madness was in progress. And it dominated our culture and our self perception. It was all nonsense. A culture that should be now binned. We have experienced ‘Peak Arrogance’ in Ireland :))) No we can start learning to be humble and wash ourselves of all that (expensive) nonsense. It is the cultural basis of our obedience to the Economic Rent Infrastructure. It makes us feel proud and happy, whilst be robbed right left and centre of the fruit of our sweat. It is a culture delusion. Kunstler writes about the delusions that America needs to lose. Well, we have borrowed American delusions, and created many of our own also. The soccer fan culture was the best and most example. and it connects with the Saipan Farce which gave us an interesting insight into how authority operates in Ireland. But the same blind silly crowd behaviour exists in other sports.

  44. MK

    Hi David,

    There are 3 points I want everyone to comprehend.

    1) the understanding of the problems is not universal, so we have media, market participants, banks, governments, ‘experts’, etc in many different states of understanding of the underlying problems. Hence the myriad of solutions – lets try this, lets try that. People are drowning in the problem and are desperately trying everything. The problem is systemic. Many trying to solve the problem are part of the system, so are part of the problem.

    2) whilst this is a major financial system storm, it will most likely be possible to patch things up and go on nearly as we were to essentially delay a bigger crunch in the future. If credit systems dont change fundamentally, and with a global population boom addng 1 billion people every 12 (twelve) years (yes 12!), we will get through this blip for it only to happen much much worse at some point in humanity’s brief earth-living future. In essence for now, the people boom presuming it continues will provide underlying demand and get earth back on a growing GDP.

    3) Moral Hazard has already been created – its one of the reasons we are in this mess. When banks were saved in decades gone by, many in the short-sighted industry which is more or less licensed to extoll money from the real economy (some call it the oil of the economy, more like the drag on the economy) were systemically emboldened to act with moral hazard, and to expect to be saved. They could take shortsighted risks, get rewarded handsomely and knowingly realise that they could get away with it scot free. Moral Hazard is endemic. Its in the language of every solution – “we cant let a bank go bust”. Here the European finance leaders after their meeting repeat the mantra, again, and again and again. Its that moral hazard which is partially to blame for the problem we are in. And here we are going for the same solution. Fannie Mae was solution for 1930. See how that went decades later. Maybe after all this has died down, new EU laws should be passed that saving banks is made illegal. Otherwise we are doomed to repeat these recent failures.

    Back to some of your points David:

    > Everyone wants cash, and those who have it are squirrelling it away in central banks. The central banks don’t know what to do with the stuff because the commercial banks don’t want to lend and therefore, counter intuitively, the world is without credit, despite the fact that there is no shortage of money.

    This is not the case. The Central Banks do not have swathes of money deposited by other people. The Central Banks do have swathes of blank paper which they can print to increase money supply, or, which is more usually the case, use electronic accounts by which they can issue new money (its not even on paper). The latter is the money window facility and financial institutions have been eating it up in droves. Central Banks create money in a ‘fiat money system’, from nothing!

    Its also not a case that the commercial banks dont want to lend to each other. They dont have the money, they need money to shore up their asset base due to bad debt write-downs. Its the bad debts and the over-creditized market which is behind all of this on a collosal systemic global scale. With Basle, banks were only keeping around 8-10%. Now they need more as bad debts are on the way, its a steam train which has yet to crash into the train station.

    > recapitalising a bank now simply means good money follows bad down the plug hole.

    Agreed. I think a few weeks ago you were advocating recapitalising though but I’m glad you’ve pulled back on it a bit and seen it for the folly that it is if not done properly. Timing is everything when you are catching a falling knife. So, yes, recapitalise a dead bank, but dont prop up a dying bank. Make sure its absolutely dead. The get all the equity. Run it better, sweat its assets out over the long-term. A state can do it as it has time on its size.

    > the bad loans on the bank’s balance sheets will get worse.

    Agreed. For many markets they have not ‘marked down to market’ yet and are only slowly doing so, even though that IS the reality, not firesale, it IS reality. Our banks are as guilty as many others.

    > the primary global dilemma, which is how can we turn good money back into workable credit.

    But is that the primary global dilemma? The problem is that we have had too much credit. Too much leverage. Everywhere. Giving out more credit is only papering over the cracks, trying to shore things up. Using the credit junkie analogy, is some more credit heroin really what the credit heroin junkie actually needs?

    > First, the long-term stated aim of the G7 should be to create a new global banking clearing-house.

    I dont think a clearing house will help. Its not clearing that’s a problem. The banks clearing systems are working, by and large, although there could of course be better regulation as the Credit Lyonnais trader problem showed and the now Galway-based Nick Leeson (Hi Nick!) with the Barings 888 accounts. Credit Default Swaps (CDS’s), who knows if that can be cleared. Maybe earth is in debt to future generations at such a scale that it is now unmanageable, that the future generations yet to be born wont be able to take it.

    > banks must be forced immediately to lend to each other.

    No, you cant force banks to lend to each other. And such a suggestion does not recognise the problems. I’ll point you towards point 1 above.

    > pump as much money into the system as is needed

    Isnt that what got us into this problem in the first place!!! Too much credit. Too much leveraging. No, pumping money is foolish.

    > accepting banks’ commercial paper as collateral during the week. This is a brave – some might say foolhardy – move

    This is yet another type of guarantee and a step further towards nationalisation, although in this case partially foolhardy as the taxpayer (=government) is taking on the risk with little of the benefit.

    > it is still obvious that the world will hurtle into recession in 2009.

    Yes, but isnt this what happens in Boom Bust economic cycles. George Spros is right, we have experienced two post war booms, the latter which may have just run out. Booms come, recessions come, we just have to muster through them. People will still need to eat and a place to live.

    > if the government plays its cards right, it can use the bond market to raise the money cheaply in order to inject cash into the banks. Simultaneously, we, the taxpayers, can demand significant equity in the process. So the state needs to mop up when all other shareholders have been destroyed.

    Agreed that the state can mop up. Maybe we dont need to go into hock to do so. Wouldnt the NTMA be wise to use some of its money to get these near-failed banks at bargain basement prices. Of course it could pay for the bonds which is the same thing effectively as peter pays paul.

    An interesting week for Ireland with the budget and yet another interesting week for the global financial system ……..


    ps: didnt get a chance to read the near-50 comments above, will do so later in the week, after the budget.

  45. Furrylugs

    “Timing is everything when you are catching a falling knife.”

    How true and don’t forget to keep your toes out of the way, just in case.
    All I can hear around the financial circles this morning is “Phew, that was close……so who do we screw next?”

    A big band-aid has been splodged over the wound but the wound is still septic. Theres nothing to stop the first opportunistic Hedge Fellah going on the attack again. Look at the wolves hovering round Santander.

    From Deco
    “This blog seems to full of people who stayed ‘quiet in the corner’ while the madness was in progress.”

    Going back to a previous arguement, what vehicle do we use to vocalise what has been postulated on here. Very few of the arguements were invalid and I for one learned far more from this open dialogue than from any of the free market commentators. The current political parties represent car boot sale choice and I want to shop in Brown Thomas.

    Ther Nation State is effectively dead this morning with Global Financial Forces ruling the roost. We have been held to ransom.

    It sticks in my throat.

  46. Lorcan

    David > recapitalising a bank now simply means good money follows bad down the plug hole.


    > Cash only becomes economically significant when it is turned into credit.

    Recapitalising the banks is an exercise in national wealth destruction. If we borrow the money for the banks we are turning today’s losses into tomorrow’s bills, i.e. letting the future pay for it. If we take advantage of our Fiat money system and ‘create’ the money for the banks, we are reducing the value of all our money.

    Cash doesn’t have to be credit to be economically significant. It has to be spent, either to satisfy demand or invested. The only time it is economically insignificant is when it is under the mattress, or when it is (the current situation) ‘stuck’ in a bank that is unwilling to lend it out to others.

    We do need to get cash moving again, but do we need to first throw so much of it down the recapitalisation blackhole?

    MK has highlighted the ‘headless chicken’ effect that always prevails in times of crisis and the media fueled need to be seen to do something. The banking system has become a millstone around our collective necks, if we’re not careful we will loose sight of the much bigger picture in our chase to save what is looking increasingly like a national white elephant.

  47. Deco

    FurryLugs – in retrospect the sceptics were silenced by the maddening euphoria. We have also had several subtle forms of censorship in place in Ireland. It is obvious now, seeing that we are in an economci crisis that was ‘officially’ arrived at, almost overnight :)))
    i) The first exists especially in the private sector media is called ‘our (advertising) sponsors would not like that’ :)))
    ii) in the public sector we have the Ray Burke effect – like when RTE pulled the plug on Dermot Morgan’s “Scrap Saturday”. It was so successful it had people turning the radio to RTE 1 on a Saturday morning, and then rolling around with laughter… Recently we had attempts to control Joe Duffy. And of course Eddie Hobbs never got to do RipOff Republic Series 2. The first series was a serious blow to the masters of the Economic Rent Infrastructure. A second series might have caused a revolution. Anyway the ‘damage’ was done, people were starting to wake up.
    iii) The contacts effect. Leading personnel in media organizations, or even individual personalities try to direct news events with a certain spin. Mainly because they are on good terms with people who are part of the news. Ireland is a small country.
    iv) The silence effect. This occurs because the consensus amongst the media that releasing news would upset some consensus or other, or affect the media’s stance on certain issues. Events occur. But the media downplays the importance, or decides that the rest of the population is not mature enough to digest the news.
    v) Bias. It is everywhere. The biggest bias we see now is that the entire Media talked about the boom as if it were an everlasting economic feature. When the media decided that we were going into recession, it was one week after the Lisbon Referendum was supposed to be passed. However, by the time of the Lisbon Referendum large sections of the population were already in a state of recession. Like in Soviet Russia, the official pronouncement came long after the event was publicly acknowledged by the masses. Until the positive spin was kept running. There were economic bad news stories over the previous two years. But they usually took second place to health stories in the headline list on the RTE Six O’Clock news. Of course, health stories are a turnoff. Nobody wants to know the latest blunders from the HSE. Especially if the event is in Letterkenny. And the event usually ends up in a death. That is a big turnoff. To healthy people, and especially to young people in the high spending age bracket, health stories are completely irrelevant and seem a long way away. A lot of the bad news was sank behind health scandals in the last two years. I mean the health scandals were absolutely scandalous. But it was apparent that consumer confidence was being protected. So they switch the TV off or change the channel to get something interesting before the announcement that 120 jobs are gone in Clonmel is given to the nation. Given the uncompromising attitude of the former Taoiseach on any form of discussion concerning consumer confidence, this should not be surpirising. [I think most of you will remember the time he talked about negative forecasts in early 2007 – ‘sure lookit…if I listened to all the negative forecasts on the economy….sure they wud make yah want to hang yourself’. Apart from the bad timing (the suicide prevention council published their report the previous day), it was obvious that he was not going to tolerate any form of news that was less than glorious.
    vi) The “Carol Coleman” effect. Be careful about how you treat heads of state. You might ‘yanked’ out of it.
    vii) the fact that there is a concentration of media ownership. We are not in Rupert Murdoch territory yet. But we are still overly concentrated.
    Eh forget, Brown Thomas. Most of the electorate would be happy with Lidl or even SuperValu, in terms of political choice.

    • Ire_in_Exile

      Very good Deco. Spot on on all points…let not the media squirm away from the current debacle, for the media was as quagmired and complicit in the creation of the phony boom farce as anyone and deserve now as much of a shakedown and beating, if not more, for they hold more public responsibility.

      Indeed, one could easily anticipate builders and bankers behaving as cowboys if they can get away with it (and they could..) but the media swoons indulgently at it’s own self importance, holds up it’s deliberate, self appreciating, overtly liberal chin as information giver in the public interest ..but they have now been widely exposed as traitors… the effects of that betrayal to the public is an even bitterer pill to swallow….”while we kept reality from you by entertaining you with low level culture- our friends (and advertisers) stole off with the loot!!!”

      For the governments interest in the media, I refer you to Victor Hugo…

    • Furrylugs

      Begod Deco, you’re getting even more cynical than me.
      Well summarised.

  48. Colin


    i agree with most of what you say.

    the gombeens are still well and truly with us. i work in construction and a young chippy, aged 20 was was telling me that he thought another chippy aged 25 was a loser cos he doesn’t own his own house yet. now, that idiotic 20 year old is obviously conditioned by his parents to think that it is best to own your own place as early as possible. i tried to explain to the 20 year old that property values are falling, but he still wouldn’t change his opinion.

    however, about the catholic church, its easy to criticise. i believe the church has failed because it took on too much responsibility on religious instruction. religious instruction should come mainly from your parents. however irish parents don’t give a fiddler’s fart about instructing their children and are very happy to leave it to the school. that’s the root of the problem. also, it always makes me laugh when confirmed agnostics boast proudly about becoming godparents and look forward to having a piss up afterwards.

    i don’t fully agree with your sweeping statement that irish people can’t think for themselves. i believe they can, but a large majority choose the “follow the herd” “safety in numbers” mentality. this is why so many people bought houses even though the mortgage was 10 times their salary. these people suspended their intellect and are now trying to blame the government for their own mistakes. while i believe the government are uber gombeens with bertie being the chief gombeen, it is not the government’s fault if you took out a loan you knew in your heart of hearts may become difficult to repay.

    “there’s nothing that undermines your financial judgement more, than the sight of your neighbour getting rich”.

    finally, on holiday homes abroad, when did it ever make sense to own property abroad? when will it ever? have these people never heard of hotels/house exchanging/renting apartments/camp sites/staying with relatives/staying with friends?….the mind boggles.

  49. Stephen Kenny

    One upshot of this breathtaking taxpayer investment in the banks might be a lot of coughing, followed by some appalling badly acted expressions of utter amazement, as more bad debts appear, magically, from the nether regions of an old filing cabinet in the accounts department’s toilet, and are written down.
    Once the applause has died down, and the politicians have started to strut around, wearing national flag underpants on the outsides of their trousers, we will, as the UK’s Dear Leader so often implored us to do, move on.
    But move on to where? and from where?
    The business model of the country is for us all to run around like mad things, building, buying, and selling property.
    The taxpayer has just been beaten senseless, and then robbed of a reasonable chunk of their life savings/pensions, by the world’s governments and banks. While we’re groping around in the dark, trying to find a plaster, a light switch, and a large brandy, there’s one final smash and grab that leaves us with a piece of used cotton wool, a old birthday cake candle, and a dribble of sweet sherry. To add insult to injury, we’re then told, by the thug as he drives away in his nice new Bentley, that it’s all for our own good.
    So, there we are, sitting on the carpet dabbing our somewhat swollen noses, and a car draws up outside. it’s a Bentley, and out hops a sprightly young man who seems vaguely familiar. We go to the door, and with a certain amount of trepidation we open it. To our utter unamazement (after all, we’re cynical old gits), it’s him. Except, of course, that he isn’t wearing a stocking over his head this time, but a sharp suit and sharper smile. Would we like to ensure a wealthy retirement by borrowing 6 times our income – just-fill-in-these-forms-no-questions-asked – to buy a spiffing new investment property in the wondrous new ‘Beelzebub Executive Estate’?
    Think carefully, on our answer rides the very future of our financial lives. One false move and you’d be wishing you’d kept some of that sweet sherry.

    So, we’ve just spent untold billions (which some poor sap in the future’s going to have to find, to pay off that giant national credit card) and we find ourselves exactly where we were. Now what? Let’s just do it all over again?

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