October 19, 2008

Bank guarantee will mean survival of the weakest

Posted in Banks · 62 comments ·

By inserting a clause which ties the fortunes of our biggest banks to those far more susceptible to financial ruin, the government has erred – with potentially catastrophic results.

There is a clause in the bank guarantee rescue plan that has the potential to complicate the scheme by placing the weaker banks in the state on a par with the stronger ones. In so doing, it threatens the integrity of the system. This column has maintained that the guarantee has to be the first phase of a three-phase programme, which would convert a banking threat into an economic opportunity.

Phase one was the guarantee, aimed at saving the system; phase two was a root-and-branch reform of the banks’ boards and senior management, which got us into this mess in the first place; and phase three was the orderly recapitalisation of the banks, to enable them to lend again and get the economy moving once more.

In arguing for the guarantee, this column understood that it would be part of a process which would lead to a better banking system in the years ahead. Underpinning such confidence was the expectation that the government would act in the national interest, rather than in the banks’ interest.

In addition, the working assumption was that ‘bad’ banks would not be rewarded for their ‘bad’ behaviour. However, now that the details of the guarantee have been published, we see a clause which has the potential to insulate those banks which behaved most recklessly and lumber those banks which are stronger with the sins of the others.

Clause 2.6 of the legislation covers the possibility of what might happen when a bank which has taken the state guarantee goes bust.

It says that, where the guarantee is called on and a payment is made, but the financial support cannot be recouped in full from the covered institution to which it was provided, it would be recouped in full from the covered institutions by the state over time, ‘‘in a manner consistent with their long-term viability and sustainability’’.

At first blush, it looks okay. It seems to protect us, the taxpayers, from the possibility of having to cough up for a bank which, despite the guarantee, might fail under the weight of the bad debts incurred during the boom.

Typically, in these desperate circumstances, such a bank would be unable to find a buyer at any price, the capital of the shareholders would be wiped out and the state would be compelled to nationalise the institution.

According to the legislation, any costs accruing to the state/taxpayer from such a bank failure would be recouped from the other banks. So far so good – we are insulated and at least the banks will pay for the sins of other bankers.

But let’s look at this another way. Let’s look at this from the perspective of cui bono. Who benefits from this clause? The people who stand to gain most are the management of the weakest banks because, by tying all the banks together, the government has linked the shareholders of the stronger banks to the balance sheets of the weakest.

This means that, if one bank goes, they all pay. The clause casts a huge cloud over the whole system because it implies that the ability of the strongest banks to lend over the coming years will be hamstrung by the bad debts of the weakest banks.

This is a living example of what is known in economics as Gresham’s Law. Sir Thomas Gresham was Elizabeth I’s chancellor, and came up with the expression that ‘‘bad money drives out good money’’, when trying to stamp out the use of debased coinage in England at the time.

He forecast that, if two currencies were in circulation and one was fully silver and the other debased silver, people would try to use, and thus get rid of, the debased silver coins, while hoarding the real silver ones. In such a case, the good coins would be hoarded out of circulation, leaving only the debased ones. This, he argued, would undermine the currency, leading to the progressive debasement of the currency and, eventually, to barter.

Fast-forward to today and we see the threat of Gresham’s Law in our banking system.

If the worst banks are tied to the better ones, the better ones will suffer. The ability of the better ones to lend will be compromised by the threat that their balance sheet will be penalised if one of the other banks goes under.

More egregiously, the management of the weaker banks – the most excessive cheerleaders and sponsors of the property mania – have managed to hitch their wagon to the stronger banks. Obviously, this is a brilliant deal for the management of our most reckless banks.

A conspiracy theorist might suggest that the weaker banks have pulled a stroke over the bigger ones – AIB and Bank of Ireland – using the Department of Finance in the process. Surely not? Could this happen in our clear-thinking country? Could our Department of Finance favour one bank over another? Never!

More likely, the scheme was drawn up with political considerations in mind – with the government under pressure from the opposition not to be seen to put taxpayers’ money at risk.

For the economy in general, the worst aspect of penalising all the banks for the sins of one is that it smells and looks like the discredited Japanese model. It means that we have tied the whole banking system up in knots. This can only slow down any recovery of the banks.

It would have been far better to have followed the Swedish or Swiss approach, by sticking to the three-phased programme, weeding out the guilty while recapitalising the system using government preference shares.

Now we potentially have the worst of all worlds. The moral of the story is that, when you try to satisfy the left- and the right-wing, you end up with a dog’s dinner. This is hardly the best platform for recovery.

  1. jk

    Well David, it seems the Govt just did what you suggested without really understanding what that exactly was…

    Anyway, it’s a daft thing altogether. All that should have been “guaranteed” are the depositors savings, to avoid panic and a run on banks, like some Eurpean countries have done; guaranteeing everything (all loans included) was a mistake. Best thing that can happen in my view is for the weak banks (all of them…?) to be let fail; let some strong banks (e.g HSBC, Santander) come in and take over their deposit accounts and the good loans, get rid of the rubbish debt in the process.

  2. Malcolm McClure

    Seems to me that the government is deliberately setting the banks (and itself) in a dominoes formation, telling everybody in no uncertain terms that if one falls, they all fall in quick succession, with the state at the end of the line. Quite clever really. Therefore they must work together to ensure that everybody survives by extending interbank loans to each other. After all, they collectively got us into this mess, so it behooves them to pull together to get us out of it.

  3. Johnny Dunne

    “The moral of the story is that, when you try to satisfy the left- and the right-wing, you end up with a dog’s dinner”

    All the banks assets are backed by mortgages or security from Irish property owners and all the liabilities by taxpayers.

    Minister Lenihan has signed a guarantee with no management control over the banks or insights into their ‘solvency’.

    There was haste required in drafting the legislation but who was giving ‘independent’ advice. It seems the Government are not seeing the ‘wood from the trees’ ? Any business person can see the banks got an amazing deal.

    Alternative course of action should have been debated or at least the downside covered. Nationalisation (or partial with control) would have been an alternative, if all went ‘wrong’ afterwards then the ‘maximum’ the tax payer would be out for would be the equity investment in purchasing the shares of the 4 PLC banks with a market value of €7 billion, assuming the system was really going to collapse a few weeks ago their ‘distress’ value would have been much lower.

    The government could have used it’s leverage to invest 2% of it’s current exposure for ‘ownership’ via preferenace shares of the banks instead of guaranteeing 100% of the liabilities and ‘tying a rope’ around them as mentioned.

    There should have been a ‘risk’ based return for the guarantee of the liabilities of banks which should produce a considerable return in the future if / when hopefully they succeed. The taxpayers reward should be more than ‘nothing’ – as the banks charge / fee is to only cover the increase cost of borrowing to the government….

  4. Garry

    “In arguing for the guarantee, this column understood that it would be part of a process which would lead to a better banking system in the years ahead. Underpinning such confidence was the expectation that the government would act in the national interest, rather than in the banks’ interest.”

    Theres your mistake…. expecting our government to act in the national interest. I started to realize this as soon as it became clear nobody would resign or be fired, it is ‘business as usual’.

    They have gotten so used to “the politics of plenty”, that they cant envisage whats coming down the road. They are still thinking “Drinks for all my friends, were rich!… and send the bill to the kids working in that foreign factory over there….”

    @Malcolm, hope youre right but I think youre clutching at straws

    The last few weeks have been great for the economy…. the black economy.

  5. Philip

    It seems David’s plan was doomed from the start. When you think of it, the whole auditing process which should have been showing red lights everywhere for the last few years is a symptom of the underlying issue we have in this country. PwC, KPMG, you name it are supposed to be the experts and the honest monitors for the whole process. But they gave the all clear and got the fees and no doubt the partners and the boards of management are all on their regular golfing outings discussing the next stratagem. And guess who’ll be “untouchables” in the coming weeks no doubt getting paid millions to see why those naughty people are not calling in the loans from those naughty greedy developers.

    The problem is the whole system is too in-bred. No one will be fired. This act of tying the whole banking system up in knots is what happens. They have effectively closed ranks and the value of this country is heading the way of a debased currency – no foreign investor nor any real money will want to have anything to do with it.

    Malcolm is correct. It is a clever mechanism of creating mutual dependency as a condition of mutual survival. The shameful aspect of that is that it encourages the survival of old clapped out ideas and all that goes with that. It effectively rubber stamps a complete lack of belief in our nation and our people.

  6. Furrylugs

    Do the Chinese have medical cards for over 70′s?

  7. Deco

    You are correct. It is a support for inefficient, badly managed capitalist enterprises.

    There is a term to describe this. Socialism for the rich, Capitalism for the poor. The electorate is outraged. So we will see a response of state intervention, as those with a stake in the state (all of us) respond to protect interests. The biggest conflict will be Private Sector Taxpayers vs Public Sector Taxpayers. This is going to get very ugly. So far the Public sector have been winning. Private sector unemeployed are getting out of the country. Immigrants – who nearly exclusively in the private sector are having to fight cronyism, discrimination and all sorts of bias. But enough of them have seen Irish people coming to work drunk to decide about the Irish workplace, and decide that they are happy to leave also. We are seeing the conflict of the virtuous/hardworking element and the lifestyle experts/insiders in Irish society. This is going to make Ireland a very angry place, especially in middle Ireland. People who work hardest are now going to get alarmed in a situation that is very like that which has been occurring in England over the last year.

    The problem with every form of government intervention is the behaviour that it creates in terms of the response from the participants. It seems that no politician or policy expert ever thinks about this when devising a public policy. This is especially true with respect to the economic intervention now in progress. The population at large are baying like pack dogs to see the banking executives and developers punished. The public want capitalism for the capitalists. They want equality of responsibility. This means that everyone accepts responsibility for their actions. It has strong overtones of personal and civic morality. Interestingly in the US, the Republican Party, being obsessed with war, has failed to connect to this, overtones is now hemearraging whilst trying the elect a candidate that has 11 homes to the White House. The only blip upwards happened when a working class mother of five, who likes hard work, and fights cronyism, was made the vice president candidate. It was like as if the Republican Party leadership searched everywhere for the correct element to get a response from the electorate to support an increasingly irrelevant candidate. If she knew economics, it might have been fixed. Foolishly the US media pulled he up for her foreign policy credentials, at a time when most US voters are more concerned about trade policy, and the waste of taxpayers money to bailout out Wall Street. This is parallel to the leftward movement in the Democratic Party, away from the corporate friendly celebrity loving Clintons – who are now completely absent from the media. America, a land of plentiful resources, is now changing it’s mind concerning how to efficiently allocate resources. In the UK, the approach is completely different. The British in comparison want to see the emergence of greater fairness and are moving to the right, because they see the Labour Party as being interventionist to the benefit of the rich. In Ireland there will be a different response. I think we will see the emergence of more Independent candidates to safeguard local facilities. We may see the emergence of an anti-public sector vote, like occurred in the late 1980s. And we will see an anti-private sector vote, as public sector employees stick together to get more economic rent from the private sector. This occurred from the mid 1970s until the country was practically bankrupt in 1987. The pensioner rebellion seems to have completely undermined the current status quo, as the public sector made continual gains at the expense of the private sector. The extent of outrage in the private sector is steadily increasing. When Fianna Fail changed from Reynolds to Ahern, the emphasis on Fianna Fail changed from a pre-occupation with private sector expansion, to public sector expansion. The ulitmate expression of this is the National Development Plan and the latest scheme to get (already indebted) local authorities to buy houses above the market price. The failure of the PDs to fight public sector interests destroyed them politically more than any media bias. The state became increasingly interventionist, whilst staying decidely non-interventionist in areas relating to the failure of competition policy.
    However the behavioural aspects are still with us, and have no signs of changing. The bailout is actually bailing out not the bank shareholders, or bank customers, but actually the entire management of the banks. The management of Ireland’s banks have collectively failed – with the possible exception of the ACC Bank, which is run by the Dutch and private sector unions, and which is focussed on agricultural and small business lending. Ireland’s mainstream golf playing, rugger supporting, county GAA jersey wearing, big house, big car management has failed. Utterly failed. Thy should be in a state of shock. Instead they are still in a state of disbelief. There will be no ‘kiri-kiri’ in Irish banking. There will be no Japanese style public apology to all concerned. Just some grovelling to the political masters of the system. And the purpose of the market is to punish wasteful behaviour. This is the necessary pre-requisite to any recovery. But this bailout has ensured that this will not occur. The political leadership has given the management of the entire retail banking sector a ‘Dig-Out’. We do not know if it is a gift or a loan. The Germans have a word for poison which is similar to our word gift. The poison in this circumstance is still in the system. The behavioural problem in Irish banking has been nurtured back to life, when it was at it’s death bed. It is still possible that shareholders could change things. But we have all become shareholders in a rounabout way to the Irish banks through our taxes. The people are morally outraged. Unlike Eliot Spitzer in New York, Governor Palin or Senator Obama, our politicians never criticize the failure of the Irish business elite. Our politicians instead concentrate on telling us that all is well, when the market and the people think otherwise. It is an almost Soviet era like disconnect between officialdom and reality. Our politicians are far too close to the banking directors to inspire trust in the public. When Lenihan told the Dail ‘those banks where like orphans to the world’, it was like as if bailing out banks became part of government social policy. It was an impassioned plea, that originated from an impassioned plea from bankers whose careers are power was about to be removed. The bankers and not the economy was facing obliteration. But now the economy as a whole is in trouble. Ireland’s sovereign debt rating has declined. Interventionist policies to prop up the vested interests have sent shock waves to the private traded sector. And nobody in the private traded sector wants to carry the heavy burden of bad state decision making or bad policies.

    This government is a bunch of amatuers. The most frightening aspect to the current policy is that those close to the political leadership influence policy, whilst those furthest away from it are the subsidizers of the entire systems. Most of the competitive traded sector would be included in this category. Those having the least influence have now woken up, or are in the process of waking up. The entire Economic Rent Infrastructure is now to be assaulted by a motley combination of High Tech workers, accountants, factory workers, and public sector workers who are sick of the nepotism in the state sector. The cosy consensus is about to be blown apart. All the Taoiseach can do is tell everyone to calm down, and leave things as they stand. People are ignoring him. It was obvious by the reaction to the Joe Duffy bank run that people have no faith any more in the official pronouncement on anything. Welcome to “Post Saipan Ireland”, where Rip-Off Republic, Roy Keane, Lidl, and doing the shopping in Newry are the new badges of identity. When you see people arriving back to Dublin Airport carrying carrying home electronics purchased from German discount superstores you know that people are going to great lengths to circumvent the Economic Rent Infrastructure. Ireland under Ahern has built up an unsustainable cost infrastructure. Whilst David, George Lee, Colm McCarthy, Moore McDowell, Robbie Kelleher, and Sean Barrett criticised this as economic lunacy and unsustainable, the voters never flinched between weekends of alcohol fueled fervour. Two lawyers, a social worker and a student politician, who epitomize the sort of thinking that created the mess, are certainly not going to develop a proper economic policy for Ireland, to get us out of the mess. It is just not possible. With many people heading for Australia and Canada to find work, things have changed. (Bear in mind that Canadians are sceptical of the honesty levels of Irish people – and are right to be sceptical). In fact they seem completely oblivious to the current economic competitiveness of Ireland, and how fragile it can become. Ireland, and her politicians have taken far too much for granted. Bailouts are not the answer. The government should have decided what could have been preserved from the economic failout. And the part that should be preserved at all costs is the competitive private sector. This government is playing fast and loose and is threatening the private sector with it reckless policies, and it’s endorsement of reckless behaviour.
    The fee to be charged to banks should be based on their usage of the state ‘Insurance’ scheme. The banks books should have been made available to the public, so as to show foreign investors that we intend to run Irish capitalism cleanly and properly. The directors of the banks should have been removed, and then placed for re-election again by shareholders. And the government should restrain itself from using taxpayers money to create a national price floor for house prices. The prices should be allowed to drop until people can afford housing again. This will act as a boon to the competitive sector. It will also have positive long term social consequences for the commuter generation.

    In other words we need socialism for the poor, and capitalism for the rich. Too simple for our vested interests and economic rent seekers to ever understand with their need for supernormal profits.

  8. Deco: They’ve also given the builders a dig-out under the guise of a social-housing initiative. Why roll out such an initiative now when many commentators are suggesting there’s significant drops yet to happen. Sure, it wouldn’t be like the Irish government to try to reheat the building market in a budget initiative. Can’t remember when that last happened :)

    I think the fundamental thrust of your interesting post is that the current government lacks the expertise to deal with this problem. In particular they lack economic sophistication and are not prepared to take advice from more knowledgable economic commentators. Malcolm’s mutual dependency or “domino effect” is perhaps a natural byproduct of interbank lending. The government creating extra mutual guarantees between indigenous banks rewards recklessness over what might optimistically be described as prudence. Although it may be moot!

    Many feel there’s a storm brewing on the 21st when the Lehman CDS’s come into play. There are problems in this financial crisis that may not actually be solvable through recapitalisation as the sums involved are simply too large with the potential exponentiation of debt as each layer of credit derivative is unwound. If that happens, financial institutions will have to resort to good old fashioned negotiation to rebuild trust and markets. This seems more likely than the catastrophist “end of capitalism” that some commentators are suggesting and the speed of the global reaction suggests pragmatism. Hopefully…

  9. Lorcan

    David > A conspiracy theorist might suggest that (…)

    Not that I am one, but having just watched the nine o’clock news on rte, I was struck by the lack of commentry on the economy. Has it become old news already? Or will Fianna Fail’s ‘attack’ on pensioners prove to be a public opinion masterstoke?

    The PR legerdemain that is the medical cards issue has taken fickle media attention away from the Irish banking crisis, and the longer it can be dragged out the better for the banks and their supporters.

    I worry that there is a hope among the powers that be that this crisis will go away if ignored for long enough. If I was a conspiracy theorist, I could easily see the medical card issue as a red herring designed to give the crisis time to solve itself while public opinion was looking elsewhere.

    Lucky for me that I am not one, and have full faith in our leaders ability to see us through to a brave new dawn..

    Furrylugs, how was the fishing?

    • Furrylugs

      Bit on the breezy side but gave me a great chance to mull over current affairs. Unfortunately, every comment I had to make had been made by the time I got back.
      I’ll have to join the Sky News blog to get a word in edgeways.

      Legerdemain. Now theres a fine word. Wouldn’t get that used too often on RTE. Can’t watch same RTE. News for the proles.

      I don’t think it was a PR stunt. They’ve cocked up the 1% levy and that looks set for a climbdown too. Apparently, Lenihan threatened to jack if the roll back happened. I can handle him because he hasn’t had a proper chance to demonstrate how incompetent he is.
      However, Harney has had ample time.

      It’s quite obvious now that the State is effectively being controlled by right wing conservative business interests.
      The strategy of treating the country like cattle backfired because of new technology in some part. (Hence slow broadband rollout)People have more means of assessing a situation than depending on RTE diktat. And people have travelled more. The die hard FF element has been diluted.

      The badger is in the corner. FF want to get re-elected. The banks want FF money. The people don’t want that. Neo-Celtic business wants to retain the same priveleges.
      Watch them all come apart at the seams over the next week or so.
      Theres one thing all the vested interests struggle with and that’s loyalty.

  10. B

    Our “leaders” have no idea what they are doing and it is our own fault for being a shower of thicks and voting them in yet again.

    We don’t have anyone bar Richard Bruton and Joan Burton who knows what is going on. Neither are being listened to.

    I don’t vote for the wack jobs in either Labour or Fine Gael but Fianna Fail with their absolutely stark raving bonkers loan scheme of housing loans is even loonier than I thought they could be. I would vote for that loser the Financial Regulator first.

    The patriotic flag that Lenihan pulled out of his hind quarters is a disgrace. These people are no more patriotic than an invading army.

    We are facing a long and deep recession with “leadership” who have no experience of hard times nor any ideas or guts to do anything to help.

    God help us.

  11. AndrewGMooney

    Once upon a time, poor Paddy went to the races. Before going, he spent many hours studying the form of the prospective runners. He found out everything he could about each of the horses. How they were bred and raised, who had trained them, how they had performed in previous races, any injuries they had suffered, etc.

    From this preparatory study he was able to deduce what was the ‘reasonable expectation’ of each horse winning the race against the other competing horses, thus providing him with some winnings.

    He really needed to get this right as his business was having a bad run and he needed to inject some funds in it. He had no interest in the drunken lads and lasses around him. No harm in ‘that kind of thing‘: If they chose to waste their money by gambling on horses they knew nothing about. But it was certainly not the way he wanted to live his life.

    He knew he wasn’t ‘gambling‘: If he couldn’t make a judgement based on past performance and likely future development, he may as well just stick a pin anywhere in the betting slip. He had bills to pay, children to feed, and could not afford to waste time or money cavorting at the races just for the fun of it. He wondered how the drunks nearby could afford to risk their money so casually. Maybe they had all inherited fortunes. Lucky for them. But for Paddy, this was serious business. He was investing. In his own future. His family’s future. And in the future of the owners and trainers of the horse he’d back to win.

    So, he finally chose his horse, placed his bet and awaited the outcome. For the duration of the race, he was in a state of anxiety and fear. But his research had paid off: The horse he’d backed won. Not easily, but it won. Paddy was ecstatic!

    With a feeling of great satisfaction he went to collect his winnings. But then something strange happened. Everyone else at the racetrack joined the queue for a payout: Including the drunken eejit who had been cavorting and blathering nearby. Now he had overheard them before the race, and was sure they had backed another horse, he was sure they had done no research on the form. He was confused. Surely not everyone could have suddenly all decided to back the same horse?

    When he finally got to the head of the queue, he found that his payout had been drastically reduced, and didn‘t reflect the opening odds he had staked his money on. In fact, everyone in the queue got the same payout – no matter when their horse crossed the line.

    Some even got winnings for backing an entirely mad horse that had bolted, throwing it’s jockey off, breaking his neck! Paddy had suspected this one horse was a wild one and would never have bet a cent on it. Never! So why were his winnings being shared with those who had backed the ‘wild horse’?

    Paddy asked the sweet young girl behind the booth: “Jesus, Mary & Joseph: What the feck is going on?” She smiled wanly and handed him a single printed sheet. It was from the ‘Offices of The Two Brians’ and it simply said:

    “Clause 2:6 retrospectively applies to this and all other races. Sucker!”

    Paddy drove home with a quiet determined anger. He explained the situation to his wife and they agreed to pack up all their belongings and book a Ryanair flight to…..almost anywhere else.

    Anywhere they could take their family that rewarded research, patience, hard work and considered risk taking. Not ‘head win, tales win’ nonsensical ’gambling’.

    He no longer wanted to live in a place that just let everyone make bets at his expense, taking stupid risks with his money, knowing they couldn’t lose: Because they knew they could insist that, under Clause 2.6 (B.B), he’d be forced to share any future race winnings with them anyway.

    Well, they’d be enjoying the next rigged day at the races without his investment in the pot.

    Kind regards.

  12. sue

    nice story…and nice analogy….but predicting the future race winner is very difficult nigh impossible..except to say..the 2 brians will not tackle the public sector issue after the lambasting they got over the medical cards…so how much longer can a struggling private sector ..support a bloated public sector ? Next year is going to be 10 times worse than this year unless somebody fixes the race and gets us out of this mess!!

  13. dc

    When did the Irish get into FIAT Money?

    Dear David,

    I am an avid reader of your columns and I would like to complement you on your work.

    When I first heard on that Tuesday morning, the 30th Sep, that the minister was going to guarantee all Irish Bank deposits, alarm bells immediately started ringing in my mind. The first question that came to mind was, where the hell is the Irish Government going to get all that money to cover deposits in the event of a Banking System collapse?.

    I rang the Financial Regulator as soon as the news on Radio 1 finished and I asked them that very question. Where is all that money going to come from ?, does the Government have all that money in it’s coffers to cover Irish Bank Deposits?

    The very polite girl on the other end of the phone was a bit perplexed because there was a long pause and shuffling of paper as she tried to find the answer to my question. My guess was that she had been given a prepared script of questions and answers and couldn’t find a match to my question. She then said she would have to ask her supervisor. Her supervisor, another girl, came onto the phone and I repeated my question, “Where is the Irish Government going to get all that money to cover deposits in the event of a Banking System collapse?”. She said that the Financial Regulator couldn’t answer that and that it was a matter for the Dept. of Finance. She gave me their number, so I rang them.

    So I asked the representative in the Dept. of Finance the same question. The girl explained to me that I was mistaken in the way that I perceived the ministers suggestion of a 100% bank deposit guarantee. She said that the government was not guaranteeing bank deposits persee but that the government would underwrite / guarantee the loan a bank could make in order for the bank to stay liquid. I explained that in order for that to work we would still need the bank to be there. I wanted to know how the government was going to be able to give all of the stolen Irish Deposits back to the people in the event of a banking collapse. She said that she didn’t know.

    So I waited for the detail along with everyone else while I admired the shrewd chessboard move of the government with the 100% bank guarantee offering nothing but their good name.

    Your column today in the Sunday Business Post re “Weak Logic” and the flawed Irish Bank Guarantee is the first column I have read on “the detail” of the Irish Bank Guarantee that the government took so long to publish. I am not suprised at the weak logic behind the Bank Guarantee but I am none the less still saddened by it and worried about money in general.

    I have been researching how money works on and off for a few years now and I now realize that the government are trying to patch a very very very leaky bucket which is not fixable with is the current money model.

    Do you know when the Irish Government adopted the FIAT money system? Do you know if our constitution specified that our sovereign money should be based on gold or something physical as in the American Constitution?

    I was as shocked as everyone a month ago when I found out that my hard earned money was only protected to the tune of €20k by the bank deposit protection scheme. I said to myself, how can a private bank just take my money where they have operated so recklessly and profited so much?

    A few weeks later and after a few minor bank runs and a growing anpost bank account, the minister on a saturday afternoon announced the deposit protection scheme was now at €100k. This news was more comforting, but I still had questions.

    I appreciate how stuff works, however, since I started researching money in order to try and find out how it works, it’s current implementation is so confusing and convoluted, it makes your head spin.

    Money, which is meant to be such a simple idea/tool to replace bartering, is totally and completely flawed by virtue of the implementation of the FIAT money system / interest / leveraging / derivatives / the stock market / money products / credit default swops , etc etc,

    I think that the only way for the populous to address the scale of the problem is firstly to educate on the current flawed system, then debate the implementation of a better money model.

    here are a few links/videos on the subject, you’ve got an audience and a great way with words, maybe you can educate the masses in your columns, this is why I’m sending you these links. I assume that you already aware of this info I’m sending you, but one should not assume. In engineering, “assumptions are the mother of all F***ups”. Sorry if you’ve already seen these links.

    Best of luck




    • The gold standard you refer to is no longer in place in the US. The last vestige of the gold standard was the Bretton Woods agreement which fixed the price of gold in the US to a fixed rate against the dollar. Many countries had pegged their currencies against the dollar so they had a pseudo gold standard in that they had a fixed transitive rate against gold. Commodity backing for currencies tend to become unstable in war time and it was the vietnam war that brought about the end of the BW agreement.

      However, the largest banks all invest in commodities for the rainy day, as far as I know anyway. Gold, oil futures etc. The Swiss banks probably still maintain tonnes of gold and the US federal reserve still has a massive horde of the shiny yellow stuff :) In Asian markets like Hong Kong it’s still accepted in barter situations although I couldn’t tell you how regular these are. Some commentators like Peter Schiff in the US are suggesting stratospheric price rises in gold on the back of a global economic meltdown. Whenever there’s a crisis, gold comes back on the agenda.

  14. Just going back to the point about the social housing initiative:
    It makes the blood boil!

  15. Furrylugs


    What’s the betting this is next “Initiative” to offset the medical card mess?
    I’m sure the Senior Civil servants have Google alerts set up for this type of buinniocht.

    In engineering, “assumptions are the mother of all F***ups”.

    Only if they’re not backed up by sensible risk assessment.Anyway, only Architects make assumptions. We engineers are paragons of sober deliberation.
    In commerce though, assumptions like our recent budget, based on out of date information from ERSI etc, are fiscally fatal.

    I know it’s difficult to effect social change. Everyone affected gets twitchy posteriors but we could make a start by avoiding gobbeldygook like the word “Initiative”.
    It’s become symbolic with engaging on a learning curve when the rest of the world has come to understand the root cause of the problem 6 months previous. A substitute for pragmatism and common sense.

  16. Garry

    Agreed Shane,

    @Malcolm Seems to me that the government is deliberately setting the banks (and itself) in a dominoes formation, telling everybody in no uncertain terms that if one falls, they all fall in quick succession, with the state at the end of the line. Quite clever really. Therefore they must work together to ensure that everybody survives by extending interbank loans to each other. After all, they collectively got us into this mess, so it behooves them to pull together to get us out of it. …
    @Philip Malcolm is correct. It is a clever mechanism of creating mutual dependency as a condition of mutual survival….

    Can ye explain how needlessly putting the state at the end of the line is “clever” …. Personally I think ye are like the crowd in “The life of Brian” .. Remember. “He’s not the Messiah, He’s a very naughty boy”

  17. Malcolm McClure

    @dc: Welcome to the DMcW blogosphere. Views expressed here don’t always agree with David’s line of argument but mostly accept that he raises topical issues that are most relevant to Ireland’s economic welfare. In so doing he kindles responsible patriotism, unlike Lenihan, who larded his Budget Speech with words about patriotism to the effect that “Kathleen Mavourneen wants you peasants to tighten your belts”.
    Real patriotism requires taking your commendable actions (phoning the Financial Regulator and Dept. of Finance) a stage further. (Its too easy for them to rig their exchange with an answering machine saying “If your inquiry is about economics press 4″, etc. ad infinitum)
    – Round up a delegation of half a dozen people, walk into their offices, tell them you are from the DMcW blog and say you’re not leaving until you have got e answers to questions that are bothering a lot of us. (See archived blogs for examples).
    The problem with Irish democracy is that politicians feel insulated from the electorate between elections. Departments of State are doubly insulated, as they only respond to Ministers. Even a mild sit-in for a couple of days, and the publicity it will generate, can help to change their bad old ways. It is totally unacceptable in the age of the internet that organs of state who spend our money should ignore the politely expressed opinions of the masses.

  18. Deco

    dc – your search for answers from the various state institutions concerning this gigantic scheme makes for an interesting case study into experience of accountability in Irish Public institutions. In effect, we get little if any. These people and not the pensioners should be the ones to take the hit for incompetence that was caused by their failure to do their jobs.
    Andrew GMooney. Your story concerning Paddy at the races is completely correct. Problem is hard work and hard saving are concepts that were supposed to be destroyed by Reaganmics as practised by Bertie Ahern – with a socialist schemes to buy votes thrown in. Reaganomics is derived from the idea that consumers have lifestyles to live within, not budgets. Reaganomics has found it’s death, in the levels of debt.
    Shane Dempsey – the problem with hard money like gold, silver, nickel is that it requires less bureacrats to administer. It is also less useful for meddling politicians.

    I think we are all agreed that the current ‘leadership’ is completely adrift of reality. We need a new Minister for Finance. Richard Bruton would be a considerable improvement – though I do not know if he is sufficient to meet the challenge. Joan Burton is not up to the job. Forget the sound bites – I don’t she actually has any idea to fix the problem. And the Minister for Health should resign, having been a failure.

    The solution to the social housing issue is to let prices fall until the buyers can afford them. IT SEEMS THAT CURRENT GOVERNMENT POLICY IS TO PREVENT HOUSING BECOMMING AFFORDABLE. This is probably unconstiutional. So it can be challenged in the Supreme Court. What do the multinationals and the IDA make of this ? I imagine they must be fuming. As Andrew says, we have a rather biased and nonsensical system of capitalism. We have a government that is fighting market fundamentals for the sake of property confidence. Joe Behan said that Dev and Lemass would be turning in their grave over the current government policy. It neither protects Irish manufacturing, nor enables it to compete effectively in other markets. Reynolds and McSharry must be fuming in their armchairs. They completely reformed state policy to nurture the private competitive sector. The private competitive sector is being ignored. It was the private competitive sector that worked Ireland out of the last ten year recession. All other strategies failed. Our policy makers seem to be making policies that are gradually starving the ‘goose that lays the golden egg’. I am not impressed by the words of Mary Coughlan in this regard. It seems that our political leadership seems to respond the economic problems in line with the Bush Doctrine – by jawboning confidence into the populace. The populace are becomming increasingly cynical. Bertie Ahern made Reaganomics the ecomomic policy of the state, whilst using the proceeds to give out socialist type windfalls to key consituencies of the electorate. He basically banjaxed the economy for a generation. We will survive this is we dismantle the Economic Rent Infrastructure, streamline the public sector, and reform key bottlenecks like CIE, the ESB and the professions.

    We should organize the economy so as to grow the private competitive sector. Under Ahern we let the economy become structured so as to suck the life out of the private sector. Governments on the continent are eager to displace our private sector, and atract that investment into their countries. Instead of trying to do something to fix the problem, our political leadership is jawboning the Bush Doctrine about consumption and confidence. An increasing share of the US Republican Party, and possibly all of the US Democratic Party regard this as nonsense that will end within five weeks. Yet, our leaders are completely behind the curve. The medical cards fiasco instills no confidence in the intellectual capaiblilities of our leaders. Only a hammering at the electoral polls, the loss of one large multinational, or a massive national debate on the scale of Saipan will make them do some thinking. Discussions like the one on this board are a good place to start.

  19. MK

    Hi David,

    I’ll come to your article later (see below).

    Did you see that TV programme on BBC3 about chaos maths and economic modelling? Basically, the summary of the programme was that chaos in the universe is normal in nature, on earth, elsewhere, etc, yet economic models are based on very basic and non-chaos mathematics. This results in economists being unable to predict whats going to happen, especially important shift-changing events such as the one we are living through now, the so-called credit crisis. Thoughts?

    Back to your article:
    > In addition, the working assumption was that ‘bad’ banks would not be rewarded for their ‘bad’ behaviour.
    > The people who stand to gain most are the management of the weakest banks

    But David, one of your points in a previous article was that we need to save the Irish banking system, yet I was saying that we should let the weak banks fail, be taken over, etc, and overall avoid adding to the high levels of Moral Hazard which are already in the system. The government double-guarantee solution saves the weakest and the weak and all shades thereof, and lets not forget that it isthe whole Irish banking sector that is weak (apart from ACC and perhaps a few others). ‘Lance the Boil’ still applies in my opinion. Credit will be supplied from somewhere, and based on risk. The banks need credit themselves to survive, so will be the last ones handing it out despite their banking licence to do so.

    > It smells and looks like the discredited Japanese model. It means that we have tied the whole banking system up in knots.

    Well, you cant have it both ways. You cant have state interventions without some form of knock-on effect and the level of ‘knots’ they are in now was arguably worse before the double-guarantee. I dont think we will follow the Japanese model and string this out over a couple of decades, although so far the sticking-the-head in the sand model adopted by Irish-based (I wont label them as our) banks is just like Japan of the late 80′s and 90′s.

    > Now we potentially have the worst of all worlds. The moral of the story is that, when you try to satisfy the left- and the right-wing, you end up with a dog’s dinner.

    I dont think it was a left versus right battle. What most countries have done incluiding ours is to shore up the capitalist system (the right?) with the taxpayers money (the left?). Different governments have different scales of problems with the banks in their areas, so there are different scales and types of solutions in place. We do seem to be behind at the moment. But if banks have a solid business, they will survive no matter what our government does or doesnt do.


  20. Furrylugs

    New tack.
    Given the assumption or certainty that the friendships and relationships forged 30 years ago in the States elite schools and Universities have carried on through cossetted career development and given that this State-within-a-State Entity has always found it rather common to concern itself with life outside the Pale, it follows that the only solution possible is one that ensures the survival at all costs of that Entity.
    That the same Entity has been incestuous regarding ethics, ethos and probity can be deduced by simple logic.
    To ascribe generally accepted norms to this Entity is therefore impossible. Their Universe is totally parallel to the one occupied by the confused commoners who have displayed an obstinate refusal to conform to their betters judgement. But this Entity expects to retain and maintain all the trapping of privilege.
    They will be insular and protect those institutions, at whatever cost to the nation, which provide the privilege. Therefore they will conduct themselves as normal, but less visibly.
    They care little for the State but only what the State has provided in it’s bastardised function as a Republican Royalty.

    They will take some shifting now.


    We already have them.

  21. B

    I agree.

    Chaos is the norm. Stability is an illusion.

    Unfortunately this scares the horses. So we have a political class based on Officer Barbrady from South Park. Nothing to see here, move along. We can fix all your problems. Keep watching Ryan Tubridy and Fair City and it will be OK.

    What astonishes me the most is the lack of protest. Take medical cards from a few aul wans and the place is up in arms but risk the whole country on a few gambling shysters is OK.

    • Furrylugs


      This was Lorcans comment above;

      “The PR legerdemain that is the medical cards issue has taken fickle media attention away from the Irish banking crisis, and the longer it can be dragged out the better for the banks and their supporters.”

      There’s still a lot of latent anger out there relating to class sizes and welfare cutbacks etc.

  22. Lorcan

    Mk > I watched that BBC4 programme last night too about the maths of chaos. It’s economic commentary seemed to be along the lines that it is easy to spot ‘tipping point’ events retrospectively but finding them in the present is hard, and looking for them in the future is pointless. They used the assassination of archduke Franz Ferdinand to illustrate their point. i.e. a random act that caused huge international ripples, the ‘butterfly effect’.

    It did, as you point out, make some interesting points pertinent to the current crisis. Mathematical ’cause and effect’ models can be very badly skewed by very small changes in the factors involved. So should we be looking to solutions to past crisis for solutions to the current one? Or will the fact that this one is sufficiently different to previous ones make previous solutions irrevelant?

    I watched Ben Bernanke testify to the House Budget Committee today and I was struck by how often he refered to returning the credit market to ‘normal’. What does he mean by normal? The implication was that he wanted to see a return to the easy credit of the past ten years to act as a stimilus for the (US) economy.

    Would we not be wiser to consider the current situation to be normal? We are used to a credit glut, but the bills left from it still have to be paid. Borrowing more to stimulate growth is only certain to ensure debt growth. Recycling the problem is not a zero-sum game.

    Paul Krugman made an interesting point about economic predictions in an interview on Bloomberg over the weekend. He said “For economists, the plural of annecdote is data”

  23. Philip

    Shane, you say “Many feel there’s a storm brewing on the 21st when the Lehman CDS’s come into play” – What could happen next? Will we see first effects in Asian markets tomorrow?

    • Lorcan

      The auction value of the Lehman CDS was 8.625, leaving the insurers to pay 91.375 cents on the dollar for $400 billion of Lehman CDS. By tomorrow.

      There is an argument that this is not the financial time-bomb it seems, many funds and banks holding both sides of the deal, i.e. hedging themselves. Some, including the DTCC in New York put the final ‘net’ bill at closer to $6bn. But most observers put the bill at around the $200bn mark.

      The interesting part of all this is that lack of fuss about who is getting paid this money. A lot of the gainers are hedge funds who basically ‘shorted’ Lehman CDS, expecting the bank to fail. They never had any of what Charlie McCreevy called ‘skin in the game’.

      Should the contracts be honoured if it means using tax-payers money to save a badly exposed bank for the benefit of a hedge fund? (Not that I am aware of any Irish bank having much exposure to Lehman CDS)

  24. Deco

    We are seeing a massive fallout to the Lenihan budget. The medical card policy seems to be politically unpalatable. We are seeing Irish society divide right down the middle. Those who have to compete in the harsh world, and those that expect the state to enable an easier life, are heading in an all out political conflict. But every political party is trying to play both sides. In 1987 McSharry and Alan Dukes both knew which side would need to be taken seriously in order to get Ireland out of trouble. Bertie Ahern completely rolled this back and made the system biased in favour of the public sector. At this point in time, the current leadership seems incapable of knowing. We need a new government consisting of new people (regardless of which party) to tell the truth. The Public Sector needs to be culled and cut back. We spent fifteen years between 1972 and 1987 pussyfooting around until things got so bad that the public sector employees had the rest of the economy squeezed to near death. But the public sector got the lifestyle they all aspired. It was absolutely absurd. It was also sad and irresponsible. There was one young male dying every week in Galway City from suicide, whilst towns like Dundalk were rocked with 30% unemployment. The countryside was in a state of complete deprivation, with the young people gone to London and New York.

    There is only one way of this mess. Drop all public sector pay by 10%. Eliminate management posts in the public sector by 30%. And introduce complete transparency to all state expenditure, especially with regard to professional fees. The professions are making exhortant economic rent from the state system. The two Brians and the two Marys are doing nothing about. We need an election. To get rid of the old politics. We do not need stability. We just need an admission as to the source of the problem. Only then can it be fixed. Our cost infrastructure is excessive for Ireland to stay competitive.

  25. B

    Seriously. Cowan and Lenihan are two lawyers. They haven’t a bulls notion.

    Look after yourself. Minimize your exposure to the banks and to the government. Every euro you give the bank goes towards buying the boss man a Ferrari and the more the State gets the more interpretive centres in the Burren they will want to open.

    We give them our hard earned cash and if we are lucky and with a mealy mouthed dance they will throw what ever they shat out this morning and call it a “service”.

    But we will vote for the same losers again. So we never learn and deserve the beating we get.

  26. Nagelz

    Irish solutions to Irish problems…aka lets sit on our Dail canteen supplemented asses and throw out soundbites and cover everything with an emerald green view.

    As before the country will mull along for a year or ten without proper corrective action, let’s face it folks…..things get brushed under the carpet here in Ireland with the end result being of little significance by the time it comes around.

    It’s been a total ballsup I agree, from the govt. mismanagement to the cozy VIP set who gained most from the present high anxiety of others who ended up getting shafted.

    Lean times are here, and they will be here for some time to come.The bugbear is that those of us who remember the eighties and it’s exodus are not in a position to do so again so easily.

    Look at the difference thus, in the eighties there was no great level of common consumer debt for the age group on the Potato Boat, if you were lucky enough to work you went hand to mouth every week…..if you had to sign on you managed somehow.

    The option of leaving the auld sod didn’t involve trying to get to grips with mortgage payments….credit card payments….car repayments……credit union repayments…I must say it’s a very hard pill to swallow to see the 80′s for a new millenium returning in spades.

    There will be bugger all done for those who are now carrying the burden of what the Celtic Tiger shat out before it jumped off the Cliffs of Moher.

  27. @ B , I don’t think we will vote in these gangsters next time too much has happened too fast here , taking the chaos factor and the butterfly to the next level.
    Just a few articles back David here was writing and warning about the banking sub prime crisis been in here in two years , which I posted would be here sooner ( and it was ! ) . There has been several events only in the last two months that are bringing our house of cards down , first the ‘slow down’ in construction which people in the real world know had already stopped , the rapid rise in unemployment , the rushed budget before yearly figures were in.
    Our Government is in a state of panic. Every thing was going fine for them when they could spend on the media machine and had the majority here believing the hype that ‘we had an economy the envy of Europe’ , then we voted No to lisbon !
    Now with bailing out the Banks with our money and not sacking the regulator or insisting on the CEO’s to step aside hitting education, placing a levy on every worker , taxing us for flying out of the country raising college fees and hitting the seventy year olds medical cards.
    While the executive jet brigade won’t pay this air charge or the blood stock stays tax free and the builders allowed keep their local council projects un capped. While they cut back on school teachers and don’t touch their crony quangos, the average Joe public is now slowly starting to wake up to the con we all have been spun.
    Every newspaper Editor in the country are also waking up as their revenue from the developers and estate agents has dried up and their cheques are bouncing , so the tide is now coming in too fast for the Government to survive a full term.
    It’s time for a major change here , for Ireland to wake up and move on from the ”free state’ parties as they have just bleed the country dry since the days of Charles Haughey and his protégé Bertie ( who never trusted the banks ! ) .
    You will see marches again on the streets here and they won’t be led by the socialist workers party, instead you will have child care workers, teachers, shop workers and our Grannies carrying the banners…..
    It’s going to be a fun winter , to make up for the damp summer we went through this year.

  28. dc

    With regards to the social elite and “New tack”

    I agree, however I would not give the Irish social elite the credit to really understand and manipulate the system that yields for them the prime grazing pastures of life to which they are accustomed.

    Which tips on the point made by B that the two boys haven’t a bulls motion.
    I see them as just more priviledged sheep, dining on better pastures but none the less even less likely to rock the boat for fear of getting kicked out of the pasture.

    The saying “Say Nothing and Keep on Saying It” comes to mind.
    They will tow the line just like most sheep, with the comfort of knowing that “some sheep are more equal than others”.

    In general, I think ignorance and apathy prevails the general populous most of the time and this is the root of the problem.

    Just look how long it took for that toll bridge to dissapear and look at the debocle and huge cost to the public.
    600 million to be paid, indexed linked over a 12 year period …. for something we already owned !
    Sheep stuck in their cars for miles long, both directions, 3 times daily, every day, well aware of the cause of the blockage and still when they get to the point of handing over the toll, they say “thank you” !?*! WTF, what the hell is wrong with people, are they so controlled and conditioned to bottle and contain their anger, that all they can muster is a “thank you” with a pissed off expression. Thank you for what! WAKE UP GOBSHITES OF IRELAND, YOUR ANGER IS A GIFT, USE IT!

    We need to wake people and shake politicians up, it’s gone beyond ludicrous.

    Sorry for ranting but that toll bridge really gets my blood boiling.
    I used to ring the toll bridge most times if it was holding me up on the M50. My motto was, if they are wasting my time, I will waste their time and make their life just that little less comfortable.

    I used to ask for Gareth, just offering his first name, most times they patched me through thinking I was a friend of his. Gareth was the manager of the west link and for the record he put up a good fight, even though, we both knew, that what he was defending was obscene. In the latter stages of my complaints, he used to just say we will be gone in August.

    My point is, every little helps, don’t ever assume someone else will sort it.

    However, we must not just learn to complain more often, if we are savvy enough to reason out the cause of the problem, we need to go the extra mile and offer some solution. This is the hard bit.

    Henry Ford said that “thinking is the hardest work of all” and it is very very true.

    @MK & B
    As worker sheep, it’s so easy for us to just keep on trucking, we have to make order of this world to shield us from the chaos of our environment. We are somehow happy to just toil in the Matrix.
    We are thought from an early age by our parents and teachers that chaos is bad.

    Chaos is the norm, and stability is certainly an illusion.

    So whats the answer, well maybe we need to create a world that progresses instead of going around in circles chasing our arses with the ups and downs presented by the manipulated monetary system.

    Imagine a world without money. A world that just progressed for evolutionary purposes, to master space travel, to master energy, for the benefit of mankind, for our fellow inhabitants and our environment.

    How could we create a world like that?, while keeping the motivation that so drives the Survival of the Fittest ethos for the Capitalist to achieve absolute greed.

    How can we create a moneyless world while still rewarding the capitalist / survival of the fittest gene.

    We need a “thinking revolution”

    Something to chew on and offer when waking people up to how the totally flawed current world monetary system works and how it absolutely controls us on this world.

  29. Philip

    DC, the waking up of the average citizen in Ireland will never happen as long as we have a situation where medical cards can cause a near revolution and financial collapse, toll roads etc is just seen as fate.

    You have to look at the Med card crisis, unpack it and see how it alarmed people. Look at the back benchers. They looked frightened. They saw their jobs going at the next election. Med cards hit all constituencies uniformly – big and small. Hence crisis.

    Now, take education – where not all constituencies are that badly affected and the minor complaint here or there can be managed by sugaring the pill with something real cheap – a street light extra here or there and that guarantees the TD salary until the next election.

    As for toll roads or bankers…that’s for them fcekers in the big smoke. Who cares! The constituency spread ensures all adverse back pressure is dissipated by the muffling process of our wonderful electoral system.

    If you have family, committments etc…you grin and bare it and keep the head down. Survival over principles is the intelligent approach. Falling on a sword so your cute hoor neighbour benefits is plain stupid.

  30. Fergus

    Some very interesting comments, as usual.

    David, you might be upset at clause 2.6, and you might be right, but what about clause 20? “The amount of the charge payable by a covered institution(ie bank) in respect of each quarter shall be calculated by the covered institution…..”

    So the banks set the charges to be imposed on them by the taxpayer for the guarantee given by the taxpayer to bail out the banks. Could this happen in any democratic country? Would it happen in a dictatorship? The Government, elected by We the People, hand over the family silver to the banks on trust and the banks have just bitchslapped them in return, with We the people destined to feel the pain now and down the line. Charming.

    What about clause 31? “…….A covered institution shall…appoint at least one but no more than two non-executive directors to its board from a panel approved by the Minister during the period of the guarantee.”

    So the banks look at a list of “untouchables” drawn up by the Minister and his advisers (the governor of the central bank, the financial regulator and all their golf buddies from the UCD BComm class of ’71) and they pick and choose which one or two of these “untouchables” is to come onto the board and “kick ass”, as it were? Reminds me of General Melchitt presiding over Captain Blackadder’s court martial for murdering the general’s pet carrier pigeon!

    A firing squad is too humane for these people.

  31. Furrylugs

    Big sentence.
    Since rating agencies failed to accurately evaluate the banks when they were enticed into sub-prime etc because they could insure the risk and this risk became a tradeable CDS beastie which caused runs on the banks by pirate hedge funds, now that all bets are off and credibility is shot worldwide, why are these same rating agencies still rating anything other than themselves?

    If regulators used this “expertise” to fulfil the watchdog function that explains Paddy ther Regulator here. Asleep at the wheel.

    Reverting to the fact that all credibility is shattered, what qualifications, accreditations or abilities do these ratings people need? Are they subject to controls or can they wake up in the morning and downgrade anyone at will, so their opposite numbers in the hedge funds can make a killing?

    The reason for this line of questions is that the ratings mob seem to be focussing on the insurance companies now, the banks being beyond the Pale(not financially but Politically).

    Is this relevant? Excuse my learning curve here.

    • Lorcan

      This is a very good report on international financial regulation,(or the lack of it). Well worth a read.


      The lack of regulation means there are no checks on what appear to be rather arbitrary credit ratings.

      • Furrylugs

        Thank you Lorcan.
        Much as I suspected.

        I am now setting up a Government rating Agency. I shall call it Boobys based on the level of boo boo’s committed per week.
        Herewith my first bulletin;

        Gov’t ROI – 3 banana skins for u-turning on the cards, 1% levy and being collectively ugly.

        Gov’t UK – 2 banana skins for spending the ROI GDP on unwinnable wars

        Gov’t Iceland – 2 pears and a plum for sueing the Brits

        Obviously well researched and no-ways subjective. I’ve embargoed these ratings till 1.00pm tomorrow so that my brother-in-law over in the Silver Lining Hedge Fund can get his s#*t together and cause a run on the banks funding the wars.

  32. Fergus

    Oi Moderator, where’s my comment??

    • Lorcan

      The one about the brilliance of engineers, or the more cryptic ‘well well’? (didn’t make much sense out of context)

      The both came through on the email alert about ten last night, but didn’t seem to make it up here.

      you could try emailing the mod.

  33. B

    WE borrowed the money.
    WE elected losers like Cowan, Harney, Ahern and Lenihan.

    This is OUR fault.

  34. Fergus

    OK, once more with feeling.

    Interesting analysis David, but what about clause 20?
    “The amount of the charge payable by a covered institution(bank)….shall be calculated by the covered institution…”
    So in return for handing over the nation’s silver and gold on trust to the banks that got us into the mess, the criminally reckless and incompetent bankers set the insurance premium that our government is to impose on them? Is there a more clear demonstration of the fact that We, the People do not run this country? Hang on, there is. See below.

    What about clause 32?
    “In order to promote the public interest (sic), a covered institution(bank) shall…appoint at least one but no more than two non-executive directors to its board from a panel approved by the Minister during the period of the guarantee.”
    So the Minister draws up a list of “untouchables” (they sure are David!!) and the bankers line them up and say, “ooh, I’ll have him, but not him or her”, pick one or two max to join the board in a non-executive, minority voting capacity. That’ll have ‘em shaking in the board rooms of our august banking institutions!!

    This is some kind of sick joke. But the joke is on us. The feeling in Leinster House is that FF want to get out of government, will call an election when this dies down, lose it and let others take the hard decisions. Before we know it, they’ll be back on the populist bandwagon they love and back in office in 2012. We the people, suckered again.

    • Furrylugs

      “The feeling in Leinster House is that FF want to get out of government,”

      They tried that last summer but Fine Gael didn’t really contest the election, knowing what was coming…….methinks

  35. Already, the government are discussing raising the taxes on those earning under 100k by reducing the threshold for the 2% levy. Not a mention or utterance of taxing people higher when they earn over 200k.

    I heard Jim Power on the radio today echoing the comments of several other economists that the governmental tax revenue figures are insane. We have high levels of indirect taxation in this country as we’ve flirted with the idea of tax on consumption. How is a recession and direct personal tax increases not going to reduce consumption substantially? The decline is well underway. Retail sales have been dipping for over 18 months yet our government insists on on a budget where they base tax revenues on stasis and in some cases INCREASES in consumption in 2009. Are they stone mad? I’m in retail and know other retailers selling everything from cars to clothes, jewellery etc. The market died a few months ago and most people are trading from reserves rather than generating profits.

    If the recession and associated depression continues we’ll end up with large increases in the number unemployed (10% by mid 2009?) and even greater shortfalls in expected taxation revenues. So when we’re having a mini budget next year, how much blood are they going to extract from the middle classes then? I’m not normally this angry but you can see this happening and I don’t think people should be appeased by a sop to elderly medical card holders. Their U-Turn was founded on fear rather than principle. The majority of PAYE workers in this country are probably in for another round of tax hikes next year as our rulers willing to do ANYTHING to stay within our EMU borrowing parameters. However, it’s looking more and more likely this is impossible?

    Perhaps we’re hoping the EMU will have to react to a Europe-wide recession with leniency? Are we “banking” on an ECB bailout?

    The most appropriate word I can think of to describe this mess is the one our former taoiseach attributed to the first media piece to discuss a housing bust; “irresponsible”…

  36. Philip

    Whom were the movers and shakers down the years that changed the mindset of this country for better or worse. What was common? Any ideas? What causes chnage (aside from recession and hardship?). Mick O’Leary of Ryanair and co. Anyone else? Am not looking for nice honourable people. Just those that caused serious positive change?

    It is clear from this blog that people want thing done differently…but how? How do you fight a media machine like FF? Is this even a correct approach? Thoughts?

    • Garry

      Nice idea Philip…

      The present crowd will be in office for a while longer yet, not a full term as they cant keep their backbenchers on message. They had an opportunity, and they screwed it up without really trying.
      The window of opportunity is gone for a while, how long depends on global events, a new crisis may turn up next week. By opportunity I mean the chance to address the banking crisis properly, and to address public sector reform… both from the perspective of value for money for the taxpayer.

      I think things are going to get a lot worse before the appetite is there to think about making things better….Sub prime Brian wont achieve anything, they tried a budget but were publicly forced down, so they are in no position to do whats needed, that is assuming they know whats needed. The most costly announcement in the budget was the multi billion builder/developer bailout disguised as homechoice, a state sponsored subprime mortgage provider with mortgages added to the national debt. The figures involved in this sham are multiples of the medical card fiasco.

      Every vested interest, every department with a threatened budget knows exactly how to play them, cut front line services and let the public force the govt to back down.

      Over the next few years we will go from having the lowest public debt in the EU with the highest private debt, to having the highest public and private debt. Its inevitable, with the lack of leadership. A shame, its back to the black economy; but dont worry about it, vote them out at the next election, FG/Labour cannot be worse than the current incumbents.

  37. Furrylugs

    History Lesson or Deja Vous?.

    “It ought to be remembered that, when the wisest government has exhausted all the proper subjects of taxation, it must, in cases of urgent necessity, have recourse to improper ones.
    It occasions a general and most pernicious subversion of the fortunes of private people, enriching in most cases the idle and profuse debtor at the expense of the industrious and frugal creditor, and transporting a great part of the national capital from the hands which were likely to increase and improve it to those which are likely to dissipate and destroy it.

    And when, in order to raise those taxes, all or the greater part of merchants and manufacturers, that is, all or the greater part of the employers of great capitals, come to be continually exposed to the mortifying and vexatious visits of the tax-gatherers, the disposition to remove will soon be changed into an actual removal. The industry of the country will necessarily fall with the removal of the capital which supported it, and the ruin of trade and manufactures will follow the declension of agriculture. ”

    Adam Smith
    An Inquiry into the Nature And Causes of the Wealth of Nations

    • There’s a reason why “The Wealth of Nations” is considered a revolutionary text and many aspects of it are highly applicable to the current crisis including Smith’s belief in utilitarian view of economic legislation whereby some forms of state intervention are required including “discriminatory taxation to deter improper or luxurious behavior”. I could imagine him looking at a CDS and being nonplussed at the liquidity that’s supposedly gained by not treating it as insurance with the prerequisite capital backing. Smith would not have been happy with the unregulated financial abuses committed in his name.

      Unfortunately, there’s scant evidence of economic philosophy in the Dail at the moment. It’s what that other famous moral philosopher Sir Alex Ferguson called “squeaky bum time” but without the promise of a cup at the other end.

  38. Deco

    Without any meaningful reform of the bloated, inefficient, overmanned, expensive public sector it is impossible to balance the state’s finances. The public sector expenditure is the Elephant in the boat, and the reason why we are all sinking. Our teachers are too expensive. Our gardai are too expensive. Our civil servants are too expensive. We simply cannot have 12% tax on the private competitive sector and continue to provide outlandish upkeep levels for public sector workers. And we need that tax rate to compete with emerging economies. So the 12% tax rate is non-negotiable. We have to make a choice between what is necessary and what is an unaffordable luxury. The longer we dither about, the more the debts will escalate, the more property prices fall, the greater the losses in the banking sector. We had 200 000 public sector workers in 1987 and it was too much. We have 300 000 public sector employees today, despite all the advances in office technology which should reduced the workload required to do the same work. We need to go back to 1987 and do two things. Reform the public sector, and energize the private sector again. This time we have a major disadvantage – our costs are simply too high. So we will have to try harder than we did back then. There will have to be a lot of deflation in the Economic Rent Infrastructure, soon. The people in the public sector are completely oblivious as to what is happening in the American multinationals and the sheer cost pressure in the private sector.
    Therefore we need two policies:
    i) Undermine the Economic Rent Infrastructure which has undermined economic competitiveness.
    ii) Cut the public sector expenditure by at least 30%.
    Without these two policies, this country is going to end up bankrupt. It is that simple !! It is of key importance that we acknowledge this now rather that fumble around in a drunken state and find out in five years time that we have wasted five years.

    Either we reform the public sector or the entire economy goes into a downward spiral. It is a repeat of 1972-1987. The public sector have been pushing agressively, since 2002, to ensure that they get as much of the national GNP as possible, at a time when the shareout for everybody else is declining. You will see all sorts of schemes proposed by Fianna Fail and the Labour Party to retain public sector voters. It does not matter who you put in the Dail, the public sector will still wield a ridiculous level of infleunce over policy decisions. The state expenditure level will be terrible. Lenihans budget is a failure, a fudge that would have done the Drumcondra ditherer proud. Forget bank economists – their views are worthless. The dogs on the street know that Lenihan’s budget will be a complete failure. Official Ireland (Dublin South East, the banks, the corporate elite, The Irish Times, RTE, Indo News) loves Lenihan. Lenihan is from liberal end of the political spectrum. And Lenihan the elite of Irish society. The rest of Irish society sees things in much more realistic terms. Lenihan is the wrong man in the wrong job. At the wrong time !! Lenihan himself is minister for Finance so that he will be the next Taoiseach. And D4 accepts this as necessary. Despite the fact that it is wrecking the economy. We have an ideological commitment from the top of Irish society which is about to destroy everything. And nobody is saying STOP.

    And the ISEQ market knows it too. The market has already factored in that Irish school tie networks will have the economy in knots for a decade. Afterall is that not the reason why within two days the market was below where it stood after the bailout. The market is factoring in that bureacracy will not be tamed, and that the public sector pay bill will remain out of control in an 1980s style state finances mess. The market has factored in that the Irish national debt will grow. The market has factored in that the political leadership will hobble around from one panic button to the next until they have all been pressed. The market has factored in that incompetence and waste are not criteria to cause a sacking in Ireland. The market is factoring in that silly element of Irish society will be in charge for the next five years as occurred for the last five years-regardless of which party controls the government. That the political parties will be out doing each other to appeal to the public sector. The market has factored in that there will be no Tallaght strategy this time around, and no McSharry-Reynolds partnership to nurture the private sector at the expense of the obese public sector. There will be no attempt to control the Economic Rent Infrastructure. It is a case of the disease growing while the patient continues to party and sustain delusions. We will continue with delusions, debt, disception, dithering and dumbed down versions of what happened last week as the news.

    Now we could prove them wrong. But in all likelihood people will sheepishly take their instructions from the media. Remember the reign of Ahern started with an article titled “Payback Time”. Ahern’s ambition to become leader of Fianna Fail started at the end of a relentless campaign by D4 to undermine Reynolds. D4 gave Ahern a leg up. And without that conscience of Liberalism, Eoghan Harris, Ahern would not have got back into power in the last election. The D4/Fianna Fail alliance was still strong in the Lisbon Referendum. D4 said that the economy was still strong. The people in large proportions were getting steadily sceptical.
    The only hope we have is a significant proportion of the population will have realised that the whole media representation as fact is a facade. And will act accordingly. Maybe in the internet age, it might just be possible.

  39. Philip

    Deco, fully agree with what you say even though our public service as a percentage of population is one of the smallest around. That said, efficacy is another issue. Objective and comparitive measures of same seem lacking and so the PS can go on with their mantra that they are still woefully underresourced.

    The financial crisis seems to have passed – media coverage has dwindled and the world here has moved on. It’ll be boiled frog syndrome for now. We will all be too busy busy busy in our daily commutes doing nothing new and surviving looking for some consolation in the form of a cheery piece of news and FF, Bankers etc will go unchecked.

    I think the change will come in the form on pressure from newly first time unemployed and retailers not making any profit no matter how they manage their costs. Cowen and Lenihan are showing their imcompetence with the latest blunder on the Med cards. They managed to show what the cold winds of change would bring about a tad too early. This is all happening very quickly. And I also think we are no way out of the woods on the financials.

  40. MK

    A lot of good points being made here.

    Public Sector
    I would agree that the public sector is a monster that “we” have expanded to unsustainable levels during the ‘good’ times, and We will all pay for that. I’ve been bleating on about it long enough. The problem for any government is that the public sector actually vote, so I would envisage FF allowing the public sector to slowly deflate by natural wastage. Its a nettle that should be grasped but so far they havent touched it nor do they want to. Even some smart people have gone into the public sector over the years as they saw it as a safe haven, despite the mind-numbness that can ensue.

    We Get What “We” Vote For
    This is true, no matter how much people complain about the incumbent government, our so-called democratic system (which clearly is a democratic deficit system when analysed) has put the current people in power. If Irish people collectively want to blame someone for the mess that the current government has allowed to happen, it should look at its fellow citizens.

    School Ties
    This may be exagerrated somewhat but I agree that connections and knowing people in ‘parish’ Ireland is a big problem (It must be worse in Iceland). Of course, we still have private schools that are fully supported by the state, a two-tier school system. There are still more schools in some areas which are boys-only/girls-only than co-ed. We reap what we sow and we are still sowing the school tie problems. Ireland still has a class system supported by the state. State schools are still religious rather than state. We are well behind the curve. If the social aspect of our education system was marked it would be “Must do Better”.

    Over 70′s Medical Card
    This has ended up being a smokescreen and has deflected attention from other aspects that we face. I have much sympathy for Over 70′s having a medical card taken away, and we all know that old folk (and we ourselves when it will happen) can worry unnecessarily about such things. The fact that it was costing so much in the 1st place was the mistake. But it also throws up some aspects about competition. First, neither level (161 per normal med card, 640 per O-70 med card) should have been negotiated as it breaks competition laws. Yet another case of our government breaking the law.

    Of course this and other aspects touch on lack of competition in our market/country. The professions are a semi-closed shop, from doctors to solictors. Also major utilties such as the ESB. Until we break these systems up, these quasi monoloploies where at the end of the day people get paid more for the effort they put in than they should, we as a country will always be held back. A credit-fuelled binge labelled ‘good times’ was rightly called by David Mc as a mirage and a facade. It was.

    As for forming a new political movement, the time for that is ripe at the moment. The PD’s demise has created a ‘vacuum’ fopr alternatives, small as it was. The Green’s cavorting with FF and reneging on their principles could see many leave them. The Green’s may do okay though as some FF voters move to them. But the chinese proverb of opportunity now applies.

    Of course the old people god bless them will likely still vote FF and FG as they and their parents have always done. And this FF u-turn on their pension has kept many thinking of moving voters where they were.

    But I would think that the people who comment on this blog are not representative of the people at large. So whilst the mood for change and the mistakes of the past can be clearly highlighted, discussed and reasoned on here, it does not mean that a new movement could be that easily created form the obvious levels of common sense. Obvious things are not necessarily ‘common’. And new partioes can sometimes take on radical aspects and policies, either too mkuch from the ‘right’ or too much from the ‘left’, although I prefer to analyse politics in terms of quadrants.


  41. coldblow

    Deco, you have hit the nail squarely on the head. In fact I’d agree with more or less everything written here over the last few weeks (I know that sounds contradictory!).

    I think the Irish don’t trust either the state (I don’t) or each other (I’m not sure) and in the end act out of fear. Get on the property ladder before your neighbours price you off it. Get a secure job so that when it all crashes down (as everyone knew in his heart it would) at least you won’t be the worst off. I think that’s why the medical card issue touched a nerve. It’s like the lights being switched off and the big fear is that when they come on again you’ll be among those left holding nothing. It will take a leap of faith and imagination to change that centuries-old mindset to one that can accept that wealth can be fairly generated for the good of everyone and not at the expense of others. I was just talking generally with a colleague who, before I said anything, told me that the problem with this country is that it is carved up by vested interests all the way through. Where we disagreed was that he thinks this is human nature and the case throughout the world.

    This is why people they have voted the way they have — to maintain a relative advantage — the losers could just emigrate. I’m not talking about the inner Golden Circles here but your ordinary Paddy. At the lower end of the scale there was only so much you could do and families were split with many emigrating, but those were the rules of the game — you pulled whatever strings were available and used whatever influence or cunning you had. That’s why so much of the rhetoric fails to convince, eg the unions’ talk of workers’ rights (even if individuals may take it at face value at a group level the reality is different) as their raison d’etre, in Ireland that is, is exclusively to protect their own members’ rights.

    Years ago as a teenager over here on holiday I once got a lift into Ballaghaderreen and for a whole half an hour the driver listed off an endless list of people he knew. At the time I thought this was extremely odd but not now. Have you ever seen the Irish together abroad, say at an airport when something unusual happens – while others try to reason out what to do the Irish all immediately look around to see what the others are doing.

  42. Great posts here.
    “nice story…and nice analogy….but predicting the future race winner is very difficult nigh impossible..except to say..the 2 brians will not tackle the public sector issue after the lambasting they got over the medical cards…so how much longer can a struggling private sector ..support a bloated public sector ? Next year is going to be 10 times worse than this year unless somebody fixes the race and gets us out of this mess!!”

    Succinctly put by Sue. Deco is like a biblical prophet. He has enunciated the cold reality of the Irish dilemma all too well.
    The current crisis is a death sentence for a political party in hock to too many vested interests and powerful unions. It all comes back now to haunt them now,-their venality & corruption,at a singularly unique moment in time.
    Not that their counterparts represent any form of hope. Mr Gilmore has recently refused to break the link with the semi state unions and create a party which could be a real alternative to the two mirror image fraudsters- Fianna Fail & Fine Gael.
    The RADICAL plan to allow first-time buyers to purchase new houses with a mortgage part financed by the State,as recently unveiled in the Budget, appears to be nothing more than a naked attempt to prop up prices for the Fianna Fail coterie of developers whose half finished building sites now lie abandoned countrywide:
    “Open, unto the fields and to the sky”
    This latest rescue plan will (should the young people of Ireland fall for it) allow new buyers who are now struggling to meet strict and proper conditions imposed by banks and building societies, circumvent these limitations. It will lay a double yoke around their necks. 1. the bank loan for re-payment during their own lifetime; and 2. the state loan, to be eventually paid off by their descendents.!
    “Woe unto you,politicians, for ye lade men with burdens grievous to be borne, and ye yourselves touch not the burdens with one of your fingers.”
    Fianna Fail´s last desperate throw of the property market dice strikes me as very similar to Mary Hearneys “claw back from the dead” scheme for recovering funds from the estates of the small number of old folk who will need-but cannot afford- private sheltered accommodation during their last years on Earth.
    The ends this government will go to, in order to prevent the property market reaching a more normal level are truly incredible.
    The biggest developers have now withdrawn from the schemes which offered them free sites in superb city locations (O´Devaney Gardens etc.), on condition that they would provide a small amount of social housing cost free for the poorest in our society.
    The fire sale of building machinery currently taking place is an indicator that the builders have little faith in any new schemes to use taxpayers funds to prop up a corpse. They have already packed their suitcases and moved on and-deservedly- left the banks with the debris from the whole debacle on their hands, to dispose of at their leisure.
    The current share prices of the banks indicate that they may not have as much time left to do so..as they think.
    Will our Fenian dead be removed next, from the finest building site in Ireland´s capital city,one wonders, to make way for the JCB´s ? Is Glasnevin Cemetery itself safe from the predations of the Soldiers of Destiny.?
    Unthinkable you say-but why not.? Impositions, claw backs, and U-turns, on the old, the sick, and the handicapped reveals that we are truly at the pitiless mercy of a government of ghouls.

  43. Garry

    A potentially huge story in todays FT,


    “The Irish government has bowed to pressure from its two biggest banks and dropped an insistence that the industry as a whole help to pay the costs involved in settling the debts of any insolvent bank.

    To minimise the cost to Irish taxpayers, the original plan envisaged that where the guarantee is called upon, and the creditors repaid, any cost not recovered from the bank in trouble would be recouped from the other covered institutions “over time in a manner consistent with their long-term viability and sustainability”.

    Can anyone clarify if this article is in fact true? and if so why there isn’t a word about it on the news here, its 500,000,000,000 i.e. 5000 times more important than the medical cards

  44. Malcolm McClure

    Well spotted Garry. I said above 19/10 that the government was putting itself at the end of the dominoes line and thought this quite a clever move. The big banks have taken fright at this and moved their dominoes out of line. What we are left with is a recipe for financial chaos. If the Irish government have indeed bowed to this pressure then we all, (except foreign shareholders in the big banks) will become liable for paying the debts of any bank that fails.

  45. [...] taxpayer by shifting the cost on to the banks.  But the hapless Minister must have been reading David McWilliam’s demolition of this provision in the Sunday Business Post.  So the Government rowed back- banks participating [...]

  46. dc

    zeitgeist …. “the spirit of the age and its society”


  47. [...] that was put in place lies fairly and squarely with those who framed it and implemented it. Bank guarantee will mean survival of the weakest | David McWilliams Sign in or Register Now to [...]

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