November 30, 2008

Banking on future growth

Posted in Banks · 54 comments ·
Share 

The sight of Ireland’s top bankers traipsing in to meet finance minister Brian Lenihan last Friday with their lawyers in tow indicates just how far we have come since the chest-thumping of a few weeks back, when the bankers said that they could go it alone.

The most important guys in the delegation were not of course, the bankers, but the lawyers, on hand to advise on the structure of whatever deal might be considered. Given all the spin and the many conflicting stories that have been written about the banks, their bosses and the financial system, this fog sometimes obscures what’s at stake. If we get bank reform right, there is a chance that the economy will emerge quickly from the recession. More importantly, we can put the overblown and narcissistic concerns of the banking system behind us and focus the energies of the country on building for a future where Ireland makes things, fosters innovation and creates ideas which other people are prepared to pay for.

The dead wood of banking needs to be forgotten and the domestic banks need to be seen as boring utilities, which get on with the dull and reasonably straightforward job of extending credit. With this mindset and policy shift, one of the main incentives for getting this right would be that we could stop worrying about banking and concentrate on real growth industries, which are consistent with our desire to become a exporting nation once again.

This transition from a bank-dominated, housing-driven economy with its attendant property boom, to a technology-focused, innovative, outward-looking economy should be Brian Cowen’s and Lenihan’s medium-term prize. The banks and their travails are just something we have to deal with, rather than the be-all and end-all. The recapitalisation is all about the most expeditious way of moving on, rather than any overly important commitment to a sector in decline. This is why the next few weeks are important and the goal should be clear.

On the other hand, if we make a mess of the recapitalisation, any plans we have to alter our economy dramatically will be hostage to the banks. A messy, inconclusive recapitalisation will see us drip-feed precious national resources into this low-growth industry at a time when the rest of the world will be moving on to another phase of industrialisation, using brainpower and technology.

In order to think straight and make the right choice, we need understand that – no matter what happens. Inevitably, banking in Ireland will shrink as an industry. Indeed, the banking industry worldwide will shrink dramatically in the years ahead. It will shrink because it has to. It bloated itself over the last five years, gorging on cheap money and everything associated with banking. Credit and finance expanded ridiculously. AIB, Bank of Ireland and Irish Life & Permanent practically doubled their total loan books in five years, at a time when the real economy grew by about half that here – and much more slowly globally.

Let’s be clear about it, we are helping the banks, not because they are so crucial to the future, but because their travails prevent us from hard thinking and we want to put their troubles behind us. Yes, the banks are important for their credit function in lubricating the economy, but above and beyond that, the domestic banking system is an industry in decline – and certainly not one that a country trying to compete globally should be too concerned about. The banks are a distraction from the real business of planning for the next ten years of the economy.

This fact seems to be lost on the bankers who are still shamelessly swanning around as if they were the custodians of a growth business, which they are not. They lend money. There are no great technological breakthroughs associated with banking – no patents, no innovation and, ultimately, very little reason to believe that, in the future, this will be anything other than a functional dull business – much like a gas or electricity company. Returns will be in single digits and bonuses unusual.

In the global game of competition, the country that moves most swiftly to execute a recapitalisation can move on quickest. If you doubt this, just compare the two charts above. One shows the experience of Sweden after a massive banking crisis nearly felled the economy. The other shows what happened in Japan.

The Swedes moved swiftly. They fired the boards of the banks and, in a very unScandinavian move, culled the guilty top brass. The state injected its own capital – having borrowed to do so. The terms of this capital gave the state a share in the banks, which were converted into equity and which the state resold when the banks had recovered.

By acting quickly, the Swedish state got the banks to work for them, while the country focused on the real business of exporting, brand building and innovation. As you can see from chart 1, the Swedes suffered a modest, but short, recession in 1991, 1992 and 1993 – despite having bad debts, a bursting property bubble, a currency crisis and massive capital flight. By 1994, the economy was growing strongly and unemployment falling. This is the ‘biting the bullet’ option, where decisiveness is key.

The second chart traces the ‘muddling through’ scenario as experienced in Japan. Instead of a clean policy move, framed in the context of a long-term plan, the Japanese government and central bank sought to protect their friends in the banks. They tried to save every bank, kept the same management and, by guaranteeing deposits and reducing interest rates to zero, created zombie companies that were ostensibly open but doing no business. As you can see from the chart, Japan lost a decade with weak growth followed by recessions, then had anaemic growth and recession again.

Why did the two countries experience such divergent outcomes? The main reason is this: recapitalisation has to provide as much capital to the bank or the banking system as it needs to deal with its bad debts quickly. If there is enough new money, the bad debt provisions can be raised and the bank will still have a significant buffer on its rather arcane tier 1 ratio capital to allow it to lend freely. Therefore, at the first sign of life in the economy, the banks will be ready to lend.

In the Irish case, this crucially means that the multiplier effect of government spending increases, so that, for every euro of cash spent by the state, the positive amplification effect is significant. This is important for us, because the only demand in the economy in the near future will be from the state – and the state needs as big a bang for its buck as possible.

Once we understand this, we can focus on what’s really important for Ireland in the new, post-banking age.


  1. sue

    The Swedes moved swiftly. They fired the boards of the banks and, in a very unScandinavian move, culled the guilty top brass. The state injected its own capital – having borrowed to do so. The terms of this capital gave the state a share in the banks, which were converted into equity and which the state resold when the banks had recovered.

    This is exactly what needs to be done but from performance to date, I cannot see the 2 bozos we have implementing this. Too many vested interests have to be protected. What are the odds that they will make another hash of this sitation. If past performance is an indicator. What we need is a public campaign to make the government act in our interest. It would be nice to see a strong leader emerge from the debris. But I for one cannot see one . Can you David?

  2. Ger

    New management required. Both for the Irish banks and for the Irish state. Bring it on already.

    Ger

  3. David said:
    “The second chart traces the ‘muddling through’ scenario as experienced in Japan. Instead of a clean policy move, framed in the context of a long-term plan, the Japanese government and central bank sought to protect their friends in the banks. They tried to save every bank, kept the same management and, by guaranteeing deposits and reducing interest rates to zero, created zombie companies that were ostensibly open but doing no business. As you can see from the chart, Japan lost a decade with weak growth followed by recessions, then had anaemic growth and recession again.”
    Surely the blanket guarantee on borrowed funds given to all the main financial institutions by Brian Lenehan has already brought us down the Japanese path.?
    How can a government which is rewarding its own parasitical public sector with wage increases during the greatest crisis in the history of the state; increasing VAT; taxing free movement ( airline tickets) within the European Community-be expected to “think outside the box” as it were, and also act decisively as the Swedes did?
    The bankers who orchestrated this mess must go certainly.The arrogant political party whose principal expertise lies in calculating -to the last vote- the exact number of supporters/ vested interest lobby groups it requires to maintain a stranglehold on the national Treasure Chest-must also go.
    One wonders if the Tanaiste Mary Coughlan, on here recent “Trade Mission” to sell sand to the Arabs in Dubai-also approached our busy expatriate property developers now happily beavering away on new developments there, and begged them to repatriate a few billion of the vast fortunes they made in Ireland under her party’s patronage during the past two decades, and give the banks a Bertie style “Dig-out”?
    While Martin Cullen was on his own “Trade Mission” to Bejing recently,(happily coinciding with the Olympic Games) did he ask the Chinese Premier Wen Jiabao (if he actually met him) if he would be interested in recycling a sizable quantity of scrap waste which has been stored in various locations around Ireland for the past decade,at a cost equal to the expense of storing Plutonium in Sellafield.!
    These are the Muppets who will see us through the Dark Night of recession?
    Interesting times ahead.

  4. John ALLEN

    new management ….what a hope……the two b&b’s are …plastic politicians ….and not originals ………they are from a political incestual paradigm…….and only read from the same old hyme sheets on a sunday ……….and produce screen plays that hold the umbilical chords under …B&B’s Tomigochi Shows

  5. David,

    Good article. Though given our current banks have proven they cannot assess risk, or divert money towards productive purposes, what faith can we have that the Irish banking community can fulfill the role you set out for them? Personally, I have no such faith.

    Can the change of culture required come about with the same incumbents at the wheel? No. Can it come about with a forced cull of the top brass only, with the institutions broadly staying intact? I very much doubt it ( our esteemed institutions will simply promote people of the same ilk from the management layers below, and it’ll be back to square one).

    This is where the market would have served us well. The institutions that deserved to fail would have been gobbled up, and their failed business models would be extinct with them. After they would have been carved up, only the productive elements of the business would survive.

    Le meas,
    Paddy

  6. David,

    You know which one of the two options the Irish Government are going too choose. The Japanese one, so yourself strap in, it’s a long ride too the bottom.

    Thanks again for your insight.

    david

  7. johninmunich

    Contrary to popular belief, there are boring banks out there in Europe who did not get on the gambling gravy-train.
    The German Volksbanken are largely untouched by the crisis and businesses are reporting no great problems getting credit from those banks. It was some of the bigger commercial guys and the Landesbanken (half owned by the individual states such as Bavaria etc.) who really screwed things up.
    There must be some European bank out there with a history of supporting businesses which can be encouraged onto the Irish scene. Only their entry will force a loss of market share and change in thinking and culture in the Irish banks. Otherwise it will be more of the same. Why is this option not being looked at? Am i missing something?
    The other option is new banks. I heard Angie Merkel the other day saying she didn`t see the need for it yet, but if necessary new banks would be set up if credit is squeezed to a threatening level. From what I read and hear, Ireland is a lot closer to that level. These are times when rulebooks can and will be thrown out the window. All options need to be explored.

  8. Something that may not yet have been thought through is that because of problems further down the road baby boomers may in fact be placed in a position where they HAVE to sell their illiquid assets to provde them with any chance of a decent pension.

    The Sunday Business Post reports that in a confidential memo to the Irish Government from the Social and Family Affairs Minister Mary Hanafin it was revealed that pension deficit of between €20bn and €30bn could mean that tens of thousands of workers could have their pensions wiped out over the next six months.

    More than 90,000 of defined benefit schemes are expected to report a deficit to the Pensions Board.

    The memo predicts the public collapse of a number of schemes over the next six months and warns that it would be impossible for the Irish Government to pick up the shortfall because of budgetary constraints – no matter how strong the pressure might be.

    By 2020 there is likely to be 28,000 baby boomers reaching 65 per year and rising to over 40,000 by 2040. So more than 500,000 boomers coming onto an under funded social welfare and pension system. It is estimated that perhaps no more than 20% of them will have the ability to sustain their existing lifestyles but the remainder will be seeking to supplement their meager pension and health insurance premiums from alternative sources.

    Without the cushion of a reasonable pension the alternative the remainder will be faced with a choice to retain asset ownership or liquidity as they reach the end of their careers. Over the next 10-15 years as baby boomers retire state support will have been burdened by the collapse of tax revenues and debt pressures. This could mean that second or holiday homes and even larger family homes may well return to the market as children fly from the nest.

    The impact of these changes in home ownership and income will be a big increase in demand for low cost rental accommodation (under €700 per month with utilities), a portion of the market that is largely unavailable today.

    If taxes are raised inevitably the Irish economy will slow. If benefits are cut, a large portion of the population will have to raise their savings rate, sell assets, and cut spending. Whatever way this issue is resolved it will have a big major impact on the housing industry for the next decade, and on the Irish economy for an even longer period.

  9. fourth edition

    these bankers in their greed gave money to any one to buy anything; hell my dog would have qualified for a loan with them. there is still this lingering respect that should be crushed; as these short sighted fools gave money too freely in what could be termed misconduct and lack of over sight. Clear them out and get a damn good regulation that has teeth and bring in some common sense. Politicians placated by increasing tax returns, bankers with rising stock prices and a docile regulator have more that contributed to this mess. It’s time to act, get them out and implement new stiffer practices. If this happened in my profession they would have been disgracefully removed from register and not allowed to practice or use the title hence forth. If this fate befell bankers they might have behaved with more restraint.

  10. b

    I offered my dog to replace the financial regulator.

    We gambled with our homes. We did everything we could to pretend to afford them and we insisted that we could sell on the shoeboxes and move to a bigger house in a leafey suburb with the rest of the rich folks. We thought that we had beaten the system when in fact the system was gaming us with cheap money and the promise of everlasting gains and unlimited riches.

    Speaking as one who has worked in the non-boom part of the economy doing real stuff that brings in an income and provides a few people with an income to put food on their tables it disguists me that we may have to close because the bank fu*ked up and not us. We don’t borrow and we pay our bills and yet we are under threat. The banks acted like casinos and those of us who were not sucked in are not protected from them. Farcical.

    If the funny money people are allowed to take out those who actually work and have a tidy business then evolution has finally gone backwards and we reward failure and hold the idiots high. Some drug dealer with 25 apartments is not what you build an economy on. Thats anarchy and no better than a Banana Republic in Central America.

    We need money to run our business, to pay the staff, and to survive. We do NOT deserve to be cut off when we pay our bills, don’t over borrow and are long term good customers. These bankers are the scum of the earth. They pissed everything away. All the money, our pensions, our fuel security, job security and our food security. There is nothing left. The cupboards are bare. So much for the army of MBAs running Wall Street and our banks.

    And nothing will be done. We will get on with it and then at the end of it all we will vote in a FF majority AGAIN! Give me strength.

  11. Malcolm McClure

    David : You hit the nail on the head when you said: “The dead wood of banking needs to be forgotten and the domestic banks need to be seen as boring utilities, which get on with the dull and reasonably straightforward job of extending credit. ……bankers…are still shamelessly swanning around as if they were the custodians of a growth business, which they are not. They lend money. There are no great technological breakthroughs associated with banking – no patents, no innovation and, ultimately, very little reason to believe that, in the future, this will be anything other than a functional dull business – much like a gas or electricity company.”

    In my youth, bank managers were large middle-aged men with moustaches, thinning hair, arm-garters on their shirt sleeves and waistcoat covering the corporate paunch. They were the very epitome of financial responsibility. Their uncool minions were harrassed little bald men wearing bare-finger gloves, whose accounts had to balance to the very last penny every day.
    I began to be aware of a big change in their public image in the 1980s when I saw a group of sharp-suited youngsters in their early thirties surging through a Middle Eastern airport, attended by dolly-bird secretaries who carried their briefcases. ‘Who are those guys’, I asked someone. ‘Oh, they’re bankers’, was the response. That’s when I finally realized that banking is more about front than substance, (which of course, if I had been more curious about their reality I should have known had always been the case.)
    What is it, anyway about being a good rugger player that qualifies so many of them to rise quickly to the highest echelons of banking, where they become responsible for gambling millions of other people’s money?

  12. Donal O'Brolchain

    I agree with David’s view that we should “focus the energies of the country on building for a future where Ireland makes things, fosters innovation and creates ideas which other people are prepared to pay for. The dead wood of banking needs to be forgotten and the domestic banks need to be seen as boring utilities, which get on with the dull and reasonably straightforward job of extending credit. With this mindset and policy shift, one of the main incentives for getting this right would be that we could stop worrying about banking and concentrate on real growth industries, which are consistent with our desire to become a exporting nation once again. This transition from a bank-dominated, housing-driven economy with its attendant property boom, to a technology-focused, innovative, outward-looking economy should be Brian Cowen’s and Lenihan’s medium-term prize.re. moving on past the banks recapitalisation”

    As a perspective for working our way out of the self-induced drivers of our current economic situation, can anyone corroborate the following statements, preferably with sources;
    1) At present, Irish businesses employ as many people in the US as US multinationals employ here;
    2) At present, Irish businesses employ as many people abroad as multinationals employ here;
    3) At present, Irish manufacturing businesses employ as many people abroad as multinationals employ here;

    4) During the period 2004-2007, Irish non-property businesses invested as much abroad as there was Foreigh Direct Investment in the Republic of Ireland;
    5) During the period 2004-2007, Irish manufacturing businesses invested as much abroad as there was Foreigh Direct Investment in the Republic of Ireland.

    What about the employment and investment performances of Irish non-manufacturing entreprises (eg. Riverdance, musicians, film-makers, other entertainers, finance eg. FEXCO?

  13. Stephen Kenny

    Donal O’Brolchain

    One example is from FORFAS:
    http://www.forfas.ie/media/forfas071103_outward_direct_investment.pdf

    “While a broad range of Irish enterprise is now investing overseas, the bulk of ODI is being undertaken by firms in a relatively small number of sectors. The ‘Business & Financial Services’ sector is the largest source of Irish ODI, accounting for approximately 21% of investments. The ‘Food & Beverage’ sector is the second largest source of ODI from Ireland, followed by the ‘Property, Tourism & Leisure’ sector.
    These three sectors alone account for approximately 57% of Irish ODI.”

    ODI being ‘Outward Direct Investment’

  14. John ALLEN

    primary banking began at local levels since before the formation of the state and held local names and regional names until they all eventually became conglomarates as we know them now to be …..maybe its back to basics again we should go and sevice the local wealth producers in the various regions in the country

  15. John ALLEN

    Donal – ODI’s are directly related to Inward Money Flows to Ireland from North America without it there would be no ODI’s …read book – da wu yu code

  16. Stephen Kenny

    Malcolm McClure,
    I couldn’t agree with you more! My first bank manger frightened the life out of me, I wore a suit, and called him ‘Sir’.
    My current manager? After sitting through a hard sell on the vital importance of dental insurance for my cat, I check my wallet’s still in my pocket.

  17. David our two Brian’s are more interested in looking after their friends within the banking fraternity than the general population you are fooling yourself if you think there will be clear thinking within the next few weeks. The whole Govermental structure here of croynism and looking after their supporters is more important to these two than resolving this Irish banking mess.
    Every state agency, board and recently established public body is full of political appointments not done on merit , but on who they are just look at FAS and if you look at its Top man walking away with his 500000 handshake instead of facing a Dail committee last week , he will of course be sending a Christmas card to his cousin Biffo’s wife in a few weeks and will probably meet up with Biffo to play a few holes over the Christmas season.
    Unfortunately due to our weak character and a built in gene for pulling fast ones and looking after number one Our elected officials will not copy the Swedish model, as they simply have too many vested interests involved. We are no better off than the Romanians were twenty years ago with the leadership they had at the time.
    The majority of our politicians on either side of the House are more concerned with their expense sheets for travel and committee membership than they are about the betterment of the economy with a fairer and honest system , when you see the pension fund holders of the banks coming forward to reinvest into their banks , why aren’t the politicians objecting to this racket ? They aren’t because they are more interested in feathering their own nests.
    Our banks shouldn’t have as much influence as they do for the function they should be providing , but the reality is they do and because we are all so self centered they are able to play off this.
    No doubt in a few weeks when again out side investors step in to take a share of our Banks , our Government will no doubt set up another tribunal to find out why these same banks over borrowed and gave out such loans to developers when our real economy was slowing down.
    We will no doubt go down the road of Japan as from the very top of our Government and Cowens two hundred office workers threw every other state backed agency we will not see any change.
    And sadly the general population will not demand change or if they do , our State controlled national television will not allow those that demand it the space to air their views.

  18. Johnny Dunne

    “With this mindset and policy shift, one of the main incentives for getting this right would be that we could stop worrying about banking and concentrate on real growth industries, which are consistent with our desire to become a exporting nation once again…..This transition from a bank-dominated, housing-driven economy with its attendant property boom, to a technology-focused, innovative, outward-looking economy should be Brian Cowen’s and Lenihan’s medium-term prize.”

    Agreed David we need to extend to businesses now which can trade locally and expand internationally adding value back to the Irish economy. But unfortunately the ‘establishment’ in the banking and government have seen these developing businesses as high risk. Although, the ‘safe as houses’ debt driven economy is obvious to all now was much riskier. But unfortunately there is not a ‘tier’ of management willing to understand these businesses.

    The spin might lead one to believe there is enough money available but not enough quality projects – €175 million allocated by Enterprise Ireland 3 years ago for VC funds. To date only 5 funds have closed with about €100 million drawn down and less than €20 million invested. There is €400 billion in private sector debt, the vast majority in residential and commercial property loans but less than €40 million raised in BES funds for non asset backed businesses. If we are going to grow GDP by over €10 billion per annum again we need more than ‘millions’ invested in ‘productive’ businesses – we need billions of real invetsment in business not buildings or FDI ‘capital transfers’ for low employment MNCs, the IDA created 9k jobs in 2007 but MNCs lost more. We are now losing more 3k jobs a week.

    Donal O’Brolchain highlighted the comparison between Irish MNCs and FDI MNCs and their relative strengths in employment home and abroad. Another consideration which is not often recognised is while GDP is inflated by foreign MNCs our GNP is ‘inflated’ by a small number of very large companies which book all their revenue and income through Ireland (ie CRH, Kerry, Kingspan, DCC, Dimplex, Fyffes, Smurfit etc) , without these and the debt induced spend and the picture is very different on how much we have grown in ‘real’ terms.

    So future employment and national income must come from Irish non manufacturing entreprises otherwise known as Internationally traded services companies. The government recently announced they targeted €11 billion in additional exports from this sector, assuming most besides a €1 billion or so is from the ‘transfer pricing’ MNCs. Maybe it’s private equity backed Riverdeep as EI have backed their ‘€350’ million R&D initiative while they announce only €1 million per annum for three years to their “Going Global Fund” for for services companies successful in Ireland looking to move into new markets. An example of questionable allocation of resources where it is required.

    Recapitalising the “Big 4” will not drive more credit where it is needed for the future growth of national income (consumer spend, investment and exports being greater than imports). Instead there will be a slow write down of ‘property assets’ at the expense of business and consumer lending. In the meantime, the unemployment rate will shoot past 10% and national income will nose dive by significant single digits per annum (could even be more ?).

    Do we have the management in the Government or Economic departments? It seems semi states tasked with Enterprise development don’t seem to grasp the magnitude of the problems and where the resources (which are still available — eg €1 billion allocated to SFI ) should be focused to provide a platform to revive the economy and develop sustainable businesses. I noticed EI announced a new program to spin out research but only providing ‘€20k’ to an individual to work on commercialising research which will cost the state €8.2 billion under the current NDP. An OAP or an unemployed person would get the same amount of support, but would not be responsible for developing the future!

    Today the Taoiseach and the Head of the IDA were ‘breaking ground’ on a new ‘manufacturing plant’ for Coca Cola in Wexford which will create 100 jobs within 5 years! Coca Cola made redundant nearly 300 people in Drogheda last year. This ‘flavour factory’ has been in the plans for many years (project was pulled in 2005). It’s scary when you need to issue press releases, photo shoots with the top brass — to announce the start of construction of a building.

    As for exports the MNCs have €50 billion of profits but Indigenous export oriented companies would be lucky to have profits of €1 billion this year. There is a hell of a lot of work to do unless the IDA ‘open the flood gates’ and allow all international especially European businesses to trade through Ireland generating new jobs and filling up properties.
    No one has developed a coherent solution for getting growth back into the economy besides those that say we will ‘benefit’ (but not how) from the eventual global market upturn. Question how we can do this when we have an oversupply in all major domestic markets and government spend will contract due to level of required borrowings.
    The Government need to change, capitalise a bank(s) which can provide credit to international businesses as well.

    How about establishing a new banking model – “ICC” the ‘Innovation Credit Corporation’, which could provide support to ALL companies trying to develop in Ireland but trade in international markets with €1 bn in state equity, leveraging €10 billion investment in productive business creating €1 billion in sustainable profits and 10′s of thousands of jobs ?

  19. roccor

    When (if) we hit off on this innovation thing, let’s remember something. Because a lot of our current problems are due to stupidity regarding the epistemlogy and etymology of ‘innovation’…

    “We must beware of needless innovation, especially when guided by logic.”
    -Winston Churchill

  20. Ha! Hahahahahaha.

    You know the rules, look after the mates first and let the little fella sort himself out.

    Sure if he ends up swimming in his own faeces what of it?

    The politicos and the vested interests will still be able to stuff their gobs with various tid-bits wrapped in parma-ham.

  21. philip

    I’ve had enough of this moaning and whineing! If any of you believe that the 2 B’s are not going to fudge a deal that essentially looks after all the vested interests and cronies that have always backed FF then you are not living in the real world. In my view we have two options – put up and shut up or roll up our sleeves and dig ourselves out of this mess ourselves. Lets just get on with this and stop looking for the Government to sort this out – when did they ever do this before for us?

  22. McGoo

    When I first moved to the UK (late 1980′s), there was a housing and credit boom happening, and financial whizz-kid yuppies with brick-like mobiles were seen as the epitome of modern, progessive go-getting-ness.

    When it all inevitably crashed, the finacial services industry was exposed for the bunch of chancers that they are, and public opinion consigned them to a slot just below 2nd-hand car dealers.

    We need that shift in public opinion in Ireland now!

  23. Philip - Version 1.0

    Spot on David. Banks are utilities for keeping the economy oiled. Nothing more or less. Malcolm McClure’s observation accurately pinpoints where the rot started. Utililities are supposed to be boring and somewhat invisible. ESB, Eircom etc are supposed to just hum along delivering a reliable service with a published service level. Service outages are guarded against.

    I would tend to agree with Philip that we are living in lah lah land hoping that the current Government will do the right thing. It will not. Anyway, the whole thing will blow wide open with a Government collapse. Pensions are in meltdown, Michael O’Leary is trying again to buy Aer Lingus – just how much more hassle in trying to keep former promises can this Government take. Greens must be be kicking themselves now having lost all cred. The longer FF keep pussy footing around, the sooner their demise and then we really do have ourselves to blame or a real chance to get things back on track. I am optimistic.

  24. John ALLEN

    Shannon – a new medical company recruiting new staff had no Irish applications

    • Colin

      John,

      A bit of background info would be handy about shannon. i know the river, the airport and the rugby club but alas not the medical company.

  25. People need symbolic gestures to help them move on, to help them look to the future. We are in dire need of the government to pull down the banking statue so that the issue is no more about the banking war but now about the rebuilding of a nation. They have the support of the people and the power to do it. Do they have the political balls? Time will tell.

  26. John ALLEN

    Shannon – my sources inform me that it is an american medical company for body parts not yet commenced in production and awaiting revenue clearance before they do…….

  27. ger

    What have written is interesting – the Swedish moves in particular gives food for thought but for us such ‘bold’ moves will never happen. The Banks (with lawyers) will defend their interests, Lenihan will give them what they want, and it will be business as usual minus around 4000+ employees – ‘rationalised’ banking in Orwellian parlance but nothing rational about their activities, future or past.

  28. Simple, get Declan Ganley to run the banks. He’s always waiting to be called into action; no questions asked.
    He knows all about investment, you can ask them in Albania.

  29. MK1

    Hi David,

    I agree with most of your article. Indeed, I thought I was reading myself in the leading paragraphs!

    > They (Japan) tried to save every bank

    I dont see the graphs, but the difference between the Swedish ‘saving’ (or lancing of their boil) of their 114 banks (wasnt it?) and Japan’s drawn out slowdown, was cultural perhaps, but also perhaps the extent of the problem was a factor. The bubble in Japan was very severe as you know. The Japanese culture is also to save face, bankruptcy is akin to suicide or murder – yes, really. In the US, its just another day at the office. Japan is still feeling the affects and still has very low interest rates today.

    I do take your point though that swift action and the type of actions that you take can have a long-term bearing on what way and how fast the country ‘comes around’. But problem depth is a factor that no magic accountants “trick” or printing of new money and giving out of new credit will solve. Indeed, Sweden and Japan had perhaps more access to credit back then than some Governments have today. We have, to our credit, plenty of borrowing headroom as a country. We just have to make sure we dont waste it and use it wisely. Our powder is dry and we have some.

    > the banks will be ready to lend.

    Any bank will lend if it is prudent to do so. As I overheard one banker say, its not that we dont want to lend, we do, as long as its for the right project. But 1000′s of recent ones were not the right project. Now, we all have to pay while many of those are worked out of their loan book, as LTV’s adjust and are clawed back. In case people havent realised it, property values are still dropping. Banks money has to be kept for the current loans. And thats what will happen with recapitalisation money and its where it would be used. If a government wants its capitkl to be used to stimulate an economy, it should capitalise a NEW bank with no dead-weight t carry. Thats how to create a proper firewall between the old crud and the new. Lets turn over a new page.

    > because the only demand in the economy in the near future will be from the state

    That is a frightening vista and I hope that certainly doesnt come to pass because at that stage all hope will be lost. An economy cannot survive long-term on its incestuous self, and least not to the same level of prosperity it could have. The private sector is needed and badly. Its not a dead duck, yet.

    MK1

    ps: havent read other people’s comments yet …..

  30. Garry

    Interesting title “Banking on future growth”

    but in the text ………… Inevitably, banking in Ireland will shrink as an industry. Indeed, the banking industry worldwide will shrink dramatically in the years ahead.

    so the trick is to predict and invest scarce ‘common’ resources into areas that can grow ……… whether growth in revenue or growth in employment is more important is a good question

    The entire financial services industry may grow or shrink? What about industries that service this industry, there may be short term growth (we’ll take any) for companies that specialise in merging such systems.

    What others?

  31. Has the bubble burst?
    Nov 27th 2008 | DUBAI
    From The Economist print edition

    As the sheen comes off glitzy Dubai, the other Gulf states are getting nervous too

    “THEY said you couldn’t create islands in the middle of a city,” shouts a property advertisement over a jammed Dubai motorway. “We said, what’s next?” The range of answers has become gloomier by the week, as the debate moves from whether the Dubai property bubble will burst to just how bad it is going to get. Some nervous bankers think property prices could fall by 80% or so in the next year or so. A few months ago, rich foreigners who had bought villas in Dubai were complaining about the quality of the sand on their artificial beaches or the difficulty of getting water to circulate around the twiddly fronds of the man-made island shaped like a palm. Now prices for some smart developments have been cut by 40% since September, shares in property firms have lost 80% of their value since June, and big developers are laying people off.

    The region’s banks will suffer too. Gulf policymakers are still making cheery statements about the region’s limited exposure to subprime loans but are quieter about heavy investments in inflated local property markets by regional banks, particularly Islamic ones. But worried banks are sharply reining in their mortgage lending. A series of arrests of senior businessmen as part of a fraud investigation is also making people twitchy. There is even talk of a coming “Gulf Enron”.

    At least we (in Ireland) may not be alone..

  32. shtove

    I think the Swedes started out with a general guarantee, just like Ireland has done. But then they let the shareholders of the banks take the first hit, and provided capital only to those banks deemed viable. And they sifted the viable from the non-viable by using a uniform, politically independent system of valuing assets at realistic prices.

    So there’s still hope!

  33. MK1

    johninmunich > There must be some European bank out there with a history of supporting businesses which can be encouraged onto the Irish scene

    Ja wohl. I totally agree ein hundert prozent. There are certainly banks left in europe that could lend money to Irish businesses (that need it, deserve it and are viable).

    There are a few things people need reminding of, David included:

    – The so-called Irish banks are NOT the only way of providing a banking function on this island we call Ireland. We do NOT need “oirish” banks.

    – There are many businesses which have availed of the credit binge which also need to de-leverage. So banks providing loans using pre-boom conditions is a good thing even if it hurts some ‘businesses’. This will alas mean jobs lost because but only because they werent viable jobs in the first place. This distinction needs to be made and unerstood. These jobs and businesses were, like the property boom, a facade, a ponzi scheme. Their level could not be sustained, just like construction jobs couldnt.

    - this type of investment, see link (http://www.breakingnews.ie/ireland/mhididqlkfql/) IS NOT education, its our government supporting the construction industry – in this case, lets call a spade a spade. Is it possible for our government to support “education” WITHOUT spending our money on bricks and mortar, and glass and steel ?!?

    We are still in the throes of collective understanding of the problems out there, as the best rise since 1932 on Wall St last week and the -7.7% drop today exemplifies. In our case in Ireland, there is still a lot to learn I feel ……..

    thoughts ?

    MK1

    • I’d argue that the Maynooth library project is supporting education in the medium to long term. However, in the short term it’s supporting builders. We certainly can’t afford to invest all of our limited funds for education in projects which don’t give any short term benefit in terms of either better education the workforce or improving R&D. As I’ve said a few times in previous posts you can buy world class R&D. It comes from hiring great researchers from Ireland and abroad and giving them the tools to do the job. It’s also about picking niches where we think we can be successful and backing them for the long term. Most of our current R&D is carried out by institutes directly associated with universities. I’m not convinced this is the most efficient way to implement R&D. I’m inclined to believe that independent research institutes would give better and more focussed results faster. However, once these institutes are setup the government needs to back them for a number of years. This would challenge current research funding bodies and allocation strategies which operate on 2-3 year cycles.

      • Donal O'Brolchain

        re. Shane Dempsey’s comment about independent research institutes being backed by the government for a number of years.

        I do not believe that our governmental system likes independent research institutes and thus cannot be relied to fund them properly, whether they are attached to universities or “free-standing”. I remain to be convinced that our governing class has learnt from how successful RD&D has happened either in Ireland or elsewhere. They know it is critical, but do not appear to like what that means, in practice

        We have had some examples in this Republic eg. An Foras Taluntais(AFT)/Agricultural Institute, Institute for Industrial Research and Standards(IIRS). Both of these were funded, at least partially, with Marshall Aid money after WWII and did some excellent work. Both have since been merged into other bodies (Teagasc and Entreprise Ireland respectively) and have clearly lost any shred of the independence needed for RD&D.

        There were other examples funded from non-government sources that certainly had some success. Dr. V. Barry of the the Medical Research Laboratories based in TCD and backed by the Welcome Trust found a leprosy treatment drug. In the 1950s, TCD’s School of Genetics was orginally funded by the then Irish state owned Comhlucht Siuicre Eireann(CSE) – to improve the varieties of sugar beet, I believe and was refounded by Dr. David McConnell in the late 1970s, with limited funding from Government then.

        Some of the great US research institutes were founded by private industry eg. Bell Labs by ATT, PARC by Xerox. Among the inventions of these laboratories were the transistor and the Graphical User Interface for IT.

        RD&D is one step in the cycle of innovation. In practice, what is needed is the freedom to try new and different ways of thinking and doing with a well-informed “audience”, of which private industry and business is a part. Our government does not like that kind of thing eg. An Foras Forbartha was closed during hard times just as the Combat Poverty Agency is being closed now.

        • Donal: I agree wholeheartedly with your assessment. I’ve been working in this area for quite a number of years as contract researcher and an entrepreneur building a business. I’ve taken a lot of positives from this experience. Enterprise Ireland actually do quite a good job of giving lots of academic institutions a chance to participate in research. This is largely beneficial. SFI is a bold venture which needs more rather than less funding. SFI showed vision! By providing larger amounts of funding for longer scientific programmes it’s attempting to meet the requirements I outlined. However, a substantial issue is that research institutes which are attached to academic institutes become embroiled in the competition and politics between those institutes. Ireland is simply too small in my opinion to support this. The government needs to pick the leading academic research centres and fund them to the hilt as independent entities that work with everyone inclusively to maximise Irish research potential. We’re known for our creativity in Ireland and we’re genuinely respected in my experience. However, the only investment of world class scale in research so far has been Tyndall in Cork. If you want to compete with the best in academia and industrial R&D you need to spend around 100 milion per center. Value for money is subjective but it can’t be measured over 2-3 years. So that’s the benchmark for investment and we’d be better off, in my opinion, earmarking a few hundred million to create a few more world class research centers than the piecemeal approach we have now. Dev had the right idea when he hired Schrodinger for his Institute of Advanced Studies. We can become an applied R&D powerhouse and we already have many of the firms we want to engage with either based here or looking at Ireland as a possible destination.

  34. talk of a coming “Gulf Enron”

    “World Enron”
    “No understanding since 1932”
    I thing there is quite a sensible understanding, but most blatantly refuse to take it on board.

    I heard someone say ”capitalism is the best system we have,” so was the industrial revolution, landlordism-Serfdom, back in the middle ages.
    We have been looking a modified repeat of history in America and European countries, while in other parts of the world are only going through their ”dark ages.”
    Slaves are (not captured anymore, they are tricked into the idea of bettering themselves/a better life, wealth and the pursuit of happiness) now called illegal immigrants, abused and used to do what nobody else want to do, subject to loathing by the public at large when they should be loathing their government who together with business perpetuate the slave trade.
    Only last week it was discovered: ”””””an illegal immigrant had been employed as a cleaner in the House of Commons.

    The understanding since the Great Depression/collapse is that banking does not work and Roosevelt straightened it out. Then along comes the Muppets Thatcher and Regan, and right up the idiot Clinton who destroyed what little regulation/protection there was.

    Pure and simple business and banking must be regulated and like government kept within the control of the democratic process.

    The one good thing about this massive collapse is: nearly everyone will get a taste of what it’s like to live on less than you really need for a full healthy life.
    I hope it’s long enough to bring home why society at all times needs a good social safety net when circumstances go beyond our control.
    People must realize this can happen to some even when the economy is healthy and most are doing well.
    “Some people do well some of the time, and some people do well all of the time, but all of the people can’t do well all of the time.”

  35. Malcolm McClure

    As though things were’nt bad enough already–now Moriarty’s been gagged.
    http://www.guardian.co.uk/world/2008/dec/02/ireland-corrruption-tribunal

  36. “Tribunal of Inquiry Into Certain Planning Matters and Payments”

    25 000 copies of a newspaper. Could be worse.
    You could die in Moscow in a car crash.
    http://en.wikipedia.org/wiki/Declan_Ganley

  37. Malcolm McClure

    In the context of David’s articles about the banks it will be of particular interest to see Moriarty’s response to paragraph “n” of its terms of reference:
    “And further in particular, in the light of its findings and conclusions, to make whatever broad recommendations it considers necessary or expedient:-
    n. for enhancing the role and performance of the Central Bank as regulator of the banks and of the financial services sector generally.”

  38. Ger

    http://www.davidmcwilliams.ie/2006/10/01/a-warning-from-deserted-ghost-estates

    I just re-read the above article from David in 2006. It is remarkable in it’s accuracy. Frighteningly accurarate. Excellent article David.

    Ger

    • Furrylugs

      To add to that Ger I looked back trying to find the comments after the last budget. The deficit announced today was almost to the million what one of the lads here said at the time. I don’t know was it Lorcan, MK1, Brendan W or mea culpa whoever, but I remember it was right on the money, literally. It’s gone beyond belief that occasional contributors to a blog site are forecasting the States deficit more accurately than the organs of the State itself.
      I commented previously that Leaving Cert basic questions would have forecast this scenario.

      Now I ask the question;
      Given the percentage error in the States forecasts since Jan 2008, allowing for the incremental deterioration, what will be the exchequer deficit at the end of Q1 in 2009?

      Shall we revisit the answers in April next year to compare the sites forecasts against the probable March 2009 “Patriotic”budget?

      My figure is a E12bn deficit.

      Takers??

  39. aidan

    “In order to think straight and make the right choice, we need understand that – no matter what happens. Inevitably, banking in Ireland will shrink as an industry. Indeed, the banking industry worldwide will shrink dramatically in the years ahead. It will shrink because it has to. It bloated itself over the last five years, gorging on cheap money and everything associated with banking. Credit and finance expanded ridiculously. AIB, Bank of Ireland and Irish Life & Permanent practically doubled their total loan books in five years, at a time when the real economy grew by about half that here – and much more slowly globally.”

    So the whole financial services sector is going to contract, the city of london is also going to be badly hit, so much for all the hype about finance being one of the new growth sectors, it is merely a service which requires real industry and real innovation to operate on not an independant industry in its own right, it grew so big because of all the financial shenanigans that occurred since the eighties and more so because of the liquidity and cheap credit which flooded the world since the eighties

  40. Did anyone read this in the Irish Times?
    http://www.irishtimes.com/newspaper/opinion/2008/1202/1227910466671.html
    The complete absence of remorse made me feel sick and angry. So many of these developers seem to think they’re “self-made” business gods who through pluck and cunning can ride out the storm, courtesy of their friends the bankers who lent them the money that banjaxed the rest of us. Maybe, it’s just me but when you take a business risk it should be just that. Some bail-outs aren’t in the national interest.

  41. Garry

    Reading that article, the sense is there’s no remorse because there’s nothing to be sorry for; this is just a speed bump, the decisions to buy those investments will be well justified soon.

    Certainty is a strange beast, you need to have an amount of it to achieve anything, too much can be dangerous if it leads to discounting warning signs …. The boom was many years in the making, the certainlty bred from those years of success will take a little longer to wear away with some rather than others. As a counter example I know several people who bought property at the peak after years of being sceptics purely because whatever the theory, the price rises seemed inexorable.

    I think articles like this are useful as they show the mindset from different quarters; always good to learn something, It may help explain some of the decisions in the budget…

    That Declan Ganley article is also very interesting, wonder how much of it is true.

  42. mishko

    I feel the same, Shane Dempsey, when I read about these characters, and there are many more like them whom we all can name.

    I would just like to ask, will we be condemned to repeat this debacle and produce simialr property shysters when the next generation grows up and starts wanting a suit, a car and a house?

    Or will we exercise a little bit more gumption as parents and try and educate the kids to be more careful with their money and spot the chancers before it’s too late? Just across the border the schools are introducing materials to help support the parents in these efforts. Look at this website: http://www.pfeg.org/.

    A lot of their materials are free. Maybe they could be added to the shopping basket when everyone piles up North for the booze this Christmas.

    Who knows, there may even be a few teachers here who could apply pressure on the Ministry to introduce similar materials into our school curriculum, before it’s too late and the whole cycle repeats itself.

    Focussing on “the real business of exporting, brand building and innovation” which David rightly advocates begins way back here, with the young kids. The short-term answers are what we all need right now, but let’s not lose sight of the much longer term also.

  43. Re: Shane Dempsey

    Bail-out for the boys, is what it simply comes down to.

    My father used always say: ”stick to the Union, and always pay your dues,
    and continue/stress, ”the members make the Union, and not who runs it.”

    That’s exactly one of the major problems, most don’t know where to turn to now for guidance.
    This may seem irrelevant to David’s post, and comments, but it seems to me everybody’s repeating the same thing over and over.
    Research institutes are what should be in place and – backed profusely – interweaving with business during boom times. Too late when there’s no coal in the shed in November. You thought you’d never see the day, but there you are taking the doors off inside the house (while you still have one) to keep the family warm. Culling rabbits wont be necessary, and the pigeon population will diminish. Poaching will be back (if not already) in fashion, and a lot more besides.
    Simple bad governance it is to allow the banking sector be – the countries number one earner – too big, especially a couple of bank for the size of the country. The problem was they thought they could get bigger on an international investment gamble. Had things worked out and the financial collapse never happened the Irish banks would be just about starting to claw back something tangible. But things as we know went the other way, and now it’s simply in the red and everybody along with it will be hit badly, the poor the most.
    The country is unofficially bankrupt, small businesses will now more than ever depend or illegal immigration to keep it ticking.
    “Business as usual.”

  44. MK1

    Shane Dempsey > We certainly can’t afford to invest all of our limited funds for education in projects which don’t give any short term benefit in terms of either better education the workforce or improving R&D. As I’ve said a few times in previous posts you can buy world class R&D.

    Buying in R&D doesnt work, at least proof of that is with the SFI. What happens is that our 3rd level institutions hire in foreign researchers who stay here for 1-5 years only to vamoose afterwards and take their knowledge, patents, etc with them. SFI talks the talk and ticks some boxes but it doesnt produce, at least so far, nor is it looking likely to from those that are ‘in the know’ on the ground.

    Its well-known in business circles that the supports going into academic-led research/innovation is largely a black hole, with only published papers in dust-gathering journals being the output in the main. Academics by and large just want to go in for their 22 hrs each week. They have not been subject to commercial reality for decades, and some never have! There is a very large disconnect between 3rd level research and commercial industry in this country and there are no signs that the gap is being bridged. Academics should be forced to work in the real world for at least 5 years at a time. It could be a qualifying criteria for senior lecturers, heads of depts, professorships , etc.

    furrylugs> My figure is a E12bn deficit.

    We can only guesstimate at best as there are too many variables: eg: how many people will be out of work, how many will leave the country, how much reform and cost cutting is carried out in the public sector, how much tax the private sector and consumer produces, etc, etc. If its 8 billion this year, then 10-16 wont be far out next year. Its a big wad. Ok, I’ll guess 13.246 billion smackeronies.

    One thing Lenihan has got right, yes, we are living beyond our means, but its not when the proverbial hits the fan that it should be realised. This ‘news’ was comihg down the line like a freight train for all to see.

    MK1

    • MK1: Turnover in research staff is inevitable. Foreign researchers can’t take the patents with them if the institute is doing their job properly. The main thing I’d criticise here is the assumption that you can (UNDER)-fund a 2-3 year research programme into a particular topic then wonder why you’re not getting the results. I remember doing some research on the US system in around 2001/2. They had hundreds of thousands of essentially foreign (immigrants or 1st generation americans) researchers there yet they were producing meaningful outputs for US companies. The investment figures were staggering however. In the order of hundreds of millions for centers. If we’re not going to do it properly then…

      I’d say that your comments are true for some institutions engaging in research but not for all. It depends on the balance of lecturers versus professional researchers. I’m a professional researcher and work around 10-11 hours/day by choice at something I love doing. I’ll happily research stuff on weekends. I have NO baseline government funding or lecturing hours to rest on and the knowledge that if I don’t bring in more funding then I and my colleagues may lose our jobs. It feels pretty damn “real”.

      I’m not alone as there are many hardcore “geeks” working as contract researchers. In many respects the funding bodies need to make up their mind about what they want. There’s an assumption that publications, IPR, products etc. are all necessary for each project. This is bunkum and, it comes from both issues in the funding bodies’ own R&D programme evaluation and the contrasting requirements of the institutes they’re funding.

      Lecturers and professional researchers are different beasts and we need to stop pretending they’re the same. Most lecturers are incentivised to produce more publications rather than patents or commercial spin-outs. Having worked in the area for around 10 years (started early 99) my experience suggests that independent research groups which are not directly affiliated with any academic institutions are the way to go. They can be more focussed and industrially driven with fewer academic-related compromises. However, they’ll require a strategy rethink and that’s proving difficult.

  45. RJD

    I notice many of your comments are Cowen/Lenihan negitive. We live in a democracy, we voted them in so we must live with our decision. I’m also glad we voted them in because from what I have seen from Enda Kenny since the begining of this economic crisis is pityful at best.

    Here’s a man who during his electoral campaign promised he had Irelands best interests at heart. He lost, so what does he do? Does he take his loss gracefully? No! He sits in the dail apposite our taoiseach and moans. He critices every desicion made by Cowen and Leniahn, and in my view very unfairly so. Does he make suggestions to the dail on how to, for instance, make cuts backs in spending without taking medical cards from the elderly? Absolutely not.

    You see my biggest beef with Kenny is he claims to put our intersts first but really, and here’s the inside scoop, all he cares about is climbing the political ladder and it doesn’t matter to him at what cost.

    Just had to get that off my chest, thanks for reading RJD

  46. noel

    Just a couple of things to reflect on after reading.

    A lot of interesting points made, and why not we are a well educated people. What are our options now in the current environment

    Many of us immigrated in the 80s and 90s is this still an option, where can we now go. Now we have houses and are committed to stay, it makes this current recession so much worse.

    You might say we should stay this time, and force those in government to make our country work, but they havent in the past and wont in the future. They will slowly bleed us down untill in dribs and drabs we leave.

    How much political remorse was reallys shown in the 80s when we haemorhaged, not much. I hope this time they dont use the safety valve of immigration.

    Next option we stay, job losses occur, the government decides to pay our mortgages and adds billions onto the national debt.

    Further option, we by some miracle, decide that now we have no money we decide to invest in RD and produce wonderous products.
    We as a people achieve nationally what many of us individually have provided to other nations….success.

    I really dont wish to be cynical, but our leaders like 99 per cent of all politicians dont care, they have no need to because we lack the leadership we require to change our leadership catch 22.

    There is no logical reason why we can not be successful, we know that. We need a bigger national plan than just surviving the credit crisis.

    Pardon my punctuation etc, I am using a foriegn character keyboard.

    • Malcolm McClure

      noel: I feel your pain. You seem to realize that things could get much worse and can’t see a way to make a living in Ireland. There is one possible stop-gap solution if the country really gets stuck in a depression. That is to use your initiative to band together in Co-operative Societies.

      Study what Paddy the Cope Gallagher did back in the 1930s. Get together with several friends. Buy or rent a large van, drive up each week to Newry, Lisburn or Enniskillen and buy the combined family groceries, clothes etc. at sterling prices, fill the tank cheaply before you come back and when you get home sell the goods out of the back of the van at a fair price.

      If enough people follow this example your local traders will soon petition Mary McAleese to call an early election. Then you will get the government your collective enterprise deserves.

      Money spent in the Black North talks, and perhaps is is the only language that FF understands.

You must log in to post a comment.
× Hide comments