May 17, 2009

Why bail out our bust banks?

Posted in Ireland · 227 comments ·

Last Wednesday morning, the dole queue on High Road in Letterkenny extended for about half a mile, out past the social welfare office, up past the Mace supermarket and on up towards the roundabout and De Valera Road. Up to the right is the ghost estate of empty houses which will never sell and will be used to house welfare recipients – locals and immigrants.

This is Letterkenny, or ‘‘Letterkenya’’ as one person described it tome, formerly the commercial hub of north Donegal; now, judging from the traffic, the gateway to Strabane.

Walking through ‘Little Britain’ – the retail park in the town which is home to M&S, Top Shop, Tesco, River Island, B&Q, Currys and Oasis – I wondered what the Long Fella, Eamon de Valera himself, would make of this ‘big box’ imitation of Middle England, populated by lads in Celtic jerseys, located at the bottom of Padraic Pearse Road.

The background noise is the roaring rev of pimped-up, third-hand Honda Civics bought in the North. The boy racers – fondly referred to locally as ‘shams’ – cruise with their ‘shamettes’ up and down Main Street. They proudly display their latest spoilers.

Initially, you think there’s no one driving the car, until you see the reflection of the white Diadora hoodie and the gelled hair brushed furiously forward, peering out just over the steering wheel.

This is the way they like to drive, sunk low into the customised driver’s seat, accelerator revving, Jay-Z blasting out of the boot’s massive sub-woofer, which makes the vehicle look like a cross between a Provo car bomb and the 2FM roadcaster. The Tango’d shamette in her ‘going out’ pyjamas is oblivious to the racket as she focuses on her quick-dry French manicure.

At the overwhelmed dole office, the staff stare out of the cubicles like petrified sentries. People in the queue look lost. They examine the countless forms, puzzled. These folk have never been here before; they are shell-shocked. These are Ireland’s ‘welfare virgins’. Like all first timers, they are a bit flummoxed by the experience. Young men and women who, up until Christmas, had good jobs, good prospects and good lives, are now faced with losing their homes – and, possibly, losing their hope.

Across from the dole office, the local credit union- the only financial institution to come out of this mess with any credibility – is self-consciously open for business.

This is our country. This is Ireland: a fragile nation of unemployed young people, clinging on to existence in ghost estates, driving cars bought in the North for half the price and competing with immigrants in British retail colonies, which are positioned like garrisons on the outskirts of our provincial towns.

Unlike the banks, these people are not being bailed out. They are fending for themselves. There is no Nama that is going to ask the taxpayer to pay for their mistakes. Their businesses were not considered systemically important. They are the ‘outsiders’ and, unlike the ‘insiders’, they will not be rescued.

This brings me to the question of the banks. I listened to Michael Somers’s frank and honest account of the situation last Thursday. If he doesn’t know how the bank bailout will work, who does?

Let’s pose the big question: why are we bailing out insolvent banks? What economic model tells us that we should tax people who are struggling to pay for the mistakes of bankers who are now prevaricating? Could we not just let the banks go – guarantee the depositors and let the rest of the banks’ creditors experience the market? After all, these investors were very happy to take profits in the good times. This is what they did in South Korea, Thailand and Taiwan in the late 1990s.

This market-based approach was also the logic of the guarantee. Last September, the idea was that these banks would raise capital from the market. But they can’t do that because they are insolvent. If they are insolvent, they will recover only if we taxpayers pay for their mistakes. But why should we?

Banking, after all, is a simple business. If these are not good banks, then we will put our deposits in the new banks which will emerge. When you think about it, the issue with our banks is an institutional problem, not a systemic one. No institution, no problem.

Allowing the banks to go would mean limiting the scope of the state guarantee.

This is not only possible but advisable because, despite the guarantee and the state’s injection of capital, the banks are still broken. There is no convincing reason why we should keep insolvent banks afloat. But that’s not to say there would be no problems in re-ordering our financial system.

The bondholders of the banks would have to take a haircut. They might have to settle for 15 cent in the euro, or wherever the defaulted bonds fall to. But if they hold on, the price of this debt is likely to rise as the economy turns around in the next five years. Equity holders would be wiped out, but here again, a debt/equity swap might give them some hope.

I realise that this sounds radical, but think about the alternative. The alternative is to turn the nation into a large ‘debt servicing machine’ in order to bail out banks that we don’t need and which made basic commercial mistakes. The market will solve the problem, and the banks could work through their debts themselves. They lent the money, after all.

Unless you think that a new bank with a clean balance sheet would not emerge, then there is no reason to believe that a new Bank of Dublin, Bank of Cork or Bank of Galway will not replace the old banks in double-quick time. Credit would begin to flow through these banks with their clean balance sheets and new depositors.

The upshot of the Nama approach will be huge bank fees for years as the banks try to raise the money to pay for their bad loans. This alone will hamper the recovery. And government injection of capital means higher taxes. Madness.

At the moment, all political opinion believes that we should breastfeed the banks in some shape or form Fianna Fáil and Fine Gael believe that the weak child should be fed from one breast, half private, half public. The Labour Party believes that both breasts should nourish the child through full nationalisation.

So the right wing believe that the market’s not up to the job and should be supplanted by the state, and the left wing believe that it is right that the poor should subsidise the rich. Either way, we have the same outcome.

Confused? I’m not surprised. But when you see Sinn Féin voters in Celtic shirts with ‘Saor Eire’ tattoos, feeding the British exchequer by popping over the border to evade Irish taxes by shopping in Asda, Strabane, you know we live in a confusing world.

  1. noonep

    F&F for peasent class politics for peasent class people with good clean nepotitic value and b*gg*r meritocracy, competence and capability.

    Cosy, consensus self delusionary group-think will not drive us forward, Mr Cowen find your voice like Susan Boyle or GTFO the stage,

    “A dream with courage is innovation…A dream without courage is a delusion”

    We need leadership not bogsnorkelers!

  2. “Up to 20 years ago we used to have the hunt around our way. The ex gentry liked to chase foxes on the ex tenants lands and pretend nothing had changed… Till they got told we expected to be able to hunt on their lands in return, or dogs and horses would be shot

    The people doing the hunting werent the worst, the worst were the local gobshites who followed the hunt… They would open neighbours gates and drive around after them. Could never figure out why, it was obvious they were looked on as gobshites by both sides.

    Spot the pattern,”

    Great observation above, particularly the bit “it was obvious they were looked on as gobshites by both sides.” I see this everywhere today

  3. Just wondering why David doesn’t consider running for election as an independent, After all George is running for election and he is in my opinion a complete gobshite, he spent years talking up the economy instilling false confidence in people who are now stung with mortgages they can’t pay. He only started talking about recession long after the dogs in the street knew it was upon us. At least David predicted both the boom & the recession several years in advance of their occurance. Still not sure if I would trust David as a pollitition, he doesn’t stand up for workers rights in is articles.

  4. pera

    I wanted to reply to the question posted by John Allen concerning the comparison between Tromsø and Letterkenny, but somehow I was not able to post it directly under his comment.

    I have never been to Letterkenny, but I have been to Tromsø a couple of times. I think there are several reasons for differences between the two towns/countries. Deco is right in some of his points and the same goes for Malcolms points.

    I am not sure the comparison is completely fair. There are cultural and ideological differences between the two countries, which I think has strongly affected the politics, systems and institutions in each of the countries. It took me a while to fully understand how much your background affects your thinking and expectations. But I am sure we can have a longer discussion on this later, more to the point. Norway was at one stage during the 90s referred to as the last soviet state, byt the swedish trade minister, and I think he might have had a point. At one stage a lot of the politics was driven by ideology, and this ideology is part of the reason why you would find infrastructure in the strangest of places, and the same services in all parts of the country.

    - There was a political goal to maintain settlements in all parts of the country, to do this infrastructure was necessary. There are tunnels and bridges in Norway which are never going to be economically viable even if the toll was 100 euro for each crossing. Another reason to maintain settlements in the north of the country was also for military strategic goals during the cold war as well. So economy was not the driver in these projects, but more the perceived social benefit
    - Tromsø is a university and hospital city which generates a lot of activity. So even though the public sector is very large, it does to quite a large extent generate quite a bit of activity
    - Tromsø has had quite expensive house prices, but I do not think the prices are or have been at Irish level, but Tromsø probaby has had the biggest bubble, but the bubbles are usually deflated a little bit every 5 years or so. A lot of people still remember the property decline in the early 90s.

    A side note: The level of transparency is considerably higher in Norway which I think in some way hinders the crudest methods of corruption and nepotism, but at the same time the amount of power at local level is higher, so there is probably more “soft” and indirect corruption than most norwegians would care to admit

  5. wills

    here’s a breakdown on a possible ‘sovereign default’ afoot for us here in ireland as the German’s economy slipping further and further south. If it’s the case worries about NAMA will be over and perhaps a new opportunity will emerge through the smoke and flames of such an outcome of cultural shifting potential.

    • “Finally, efforts by governments to maintain their credit ratings and to control deficits by slashing wages and imposing other deflationary measures will push down house prices and the ability of local borrowers to service their debts, a process that is already alarmingly visible in Ireland. The ultimate result is that the European economy will be caught in a 1930s-style deflationary spiral of deteriorating credit, deflationary government policies, falling wages and even further declines in credit.”

      @ wills,
      We would appear to be leading the Euro Pack on this one. Many people here are convincing themselves that the worst is over when it seems we’ve just come over the top of the rollercoaster. A very big rollercoaster.
      In this article Prof Stiglitz sounds cautionary words about current stimulus thinking.

      Is this developing scenario why David is pro cut & run from the Euro?

  6. wills

    stiglitz ‘..the downturn is complex,… the model’s broken down,.. household wealth devastated,.. zombie banks gambling on a resurrection,.. usa gov betting on muddling through,. and………………………………………………………………. this is a synchronous global downturn ‘,,,,,,,

    Lookslike fair game to me. Perhaps ‘black swan’ is in fact this synchronous global downturn itself. Certainly its the first time a downturn has some much spread and maybe it will ensure the germans keep going south until ‘sovereign de-faults’ occur across europe, which maybe David i agree furry’ was onto a while back and just kept schtum, he doesn’t want to jump the gun,.

    And just maybe a good ‘ol sovereign de-fault is exactly what will eject Ireland out of this crony debt trap cul de sac.

    • Not being an economist, I’m not sure if one can have a “time-out” rather than a default on ones debts.

      We need to make more money. Quantitative Easing Irish style. Here’s a few mad ideas.

      (1) There’s a huge territorial claim event going on globally at the moment. The Brits have moved on Rockall. Everyone wants the Arctic. Couldn’t we claim the Celtic Sea Basin as an asset as we’re doing with the Porcupine Shelf? The ECB would then pay us off for peace sake.

      (2) No international economist seems to agree with the bad bank theory due to the accuracy of setting fair value on worthless assets. If the ghost developments can’t be rented at Davids American model, ie 14 times annual rental value or even an Irish rental model of 20 times(because everyone loves us and wants to move here to learn the fiddle), then they’re valueless until things pick up. So park them. Or level them before they turn into sink estates and breed a whole new generation of lawlessness sprinkled around the country. Rubbish build quality in any case. Use the energy efficiency tests to assess if they were built to standards and if not, sayonara. The banks should have put inspectors in place to check that their money was being correctly spent in the first place. The framework is already ready for expansion.,18898,en.htm

      (3) Concentrate on tangible money making assets like SME’s who have passed the crucial 3 year trading stage. Give those companies 3 free apprentices. Just pay the dole and let private enterprise train the people, not some quango polluted with theory. The SFA are making similar noises.

      (4) Establish a Chinese city in Ireland modelled on the best of Chinese culture and governed by the Eire-Sino Authority. An outpost to attract huge FDI.
      The Aer Rianta-Aeroflot relationship worked very well in the past. If the people of Gort can react well with their Brazilian neighbours, I’m sure ceding a portion of Ireland to China would work very well. If Sarkozy gets sarky thats proof it’s a good idea. Try Foynes. Massive under developed port with a local international airport. A gateway city home away from home.

      (5) Sink a freight tunnel between Rosslare and South Wales except do it properly with tunnellers who deliver on time, on budget. Then pump fresh water through a separate conjoined tunnel to the South east of England. The Scots are about to do it, why not us? Turn the Western seaboard into one giant rainwater harvesting machine. Massive sustainable infrastructural employment. Huge profits so no bother getting investment.

      (6) Use every disused mine in the country as a Compressed Air Energy Storage (CAES) facility powered by wind turbines. Retrain and re-employ all the miners with local knowledge.
      Nice clean efficient and cheap form of power.

      • Malcolm McClure

        Furrylugs: I’m all in favour of blue sky thinking and you provide examples that stimulate thought.

        1. Extending territorial waters to the maximum is important. Even if hydrocarbon bearing rocks are absent over most of it, there is the possibility of harnessing geothermal energy in the Porcupine Seabight.
        2. Any house that did not have a Homebond guarantee on completion should be brought up to standard or demolished.
        3. Pay the unemployed only if they upgrade skills or improve their community by collecting litter, steam-cleaning chewing gum etc.
        4.Many more hard-working Chinese in Ireland would provide a role-model. The Irish are great workers when abroad but at home will work hard only for exorbitant wages.
        5. I use this route a lot, but what is needed now is a decent motorway 40 miles from Fishguard to St. Clears. I don’t know why the EC cannot put pressure on UK to provide this essential Euro-motorway link (Not to mention the Chester to M6 link and Stranraer to Dumfries and Stranraer to Ayr links.) Ireland is not only and island but an island plus 40 miles of country lanes in every direction.
        6. Sorry but compressed air storage in mines is totally impractical.
        7. Alternatively, raise revenue by charging every flight across Ireland and its territorial waters a milage co2 pollution charge. The quantity of con-trails is desecrating the very blue skies themselves.

  7. Tim

    wills, we are not even close to the bottom yet.

  8. Furrylugs | 19 May 2009 2:14 am Your comment is awaiting moderation.

    Never got moderated before. I must be onto something?

    Nite all.

  9. jim

    Its a real game of cat and mouse going onn with a few catch 22′s thrown in for good measure.It work’s a bit like this….1 Irish Banks cannot raise Capital because their Collateral is marked down in value through its property loans(loss in value)…..2.The Banks ability to repay loans is in question because of impaired loans and under performing loans they made in the last number of years…..3. The government is running a large deficit because of the property slumpt and lack of consumer spending etc.4.Ireland’s loss of compettiveness in terms of exports etc. is causing unemployment to rise even though imports are cheaper, because of a strong Euro,(cheaper imports should reduce production costs in terms of materials etc.) ..5 .Ireland cannot devalue the Euro because the ECB controls Monetary policy pretty much…….So the game plan seems to be this..The Government issues bonds to cover its day to day spending which the local Banks buy a good chunk of, helping to solve point 3 above.Next the Banks offload their bad loans to the Government which the Gov,pay for in more bonds helping to solve points 1&2 above. Next the Banks take all these Bonds to the ECB and use them as collateral to raise money to lend and free up credit for Buisness etc.helping with points 4&3&2&1 to varying degrees.So depending on how the ECB values these bonds in terms of collateral against money it is prepared to lend to the banks,will in fact lead to a pointing of a finger by the rest of the World as to the extent of Quantitive easing the ECB is involved in with regard to its lending policies towards Irish Banks and the Irish Government indirectly through its Bond issues.Now under normal circumstances quantitive easing should result in a dilution in the value of the Euro against other curriencies but the catch 22 for the rest of the World is ,if the Euro is Devalued it hands the compeditive edge back to Europe in terms of its exports,particularly Germany and France our big guns so to speak.If the Euro maintains its present value it makes imports cheaper thereby helping China ,US,GB etc…So while the Politicans outside Europe might want to throw a blind eye on the Quantitive easing in Europe,how does the market view these measures both inside and outside Europe.Well were now back to the cat and mouse in Europe with all sorts of bets being wagered on defaults,insurances,etc.Various media and commentators and all sorts of agencies are raising rumours one way and the other trying to have their bets pay off,trying to cash in basically and generate profits as that is the lfe blood of the Markets.The Germans are concerned about QE because of their inherent fears of inflation and hence the banging of their drum politically,but the German Banks who loand a lot of money to Ireland want to get their money back and hence their favouring of these measures.So does Ireland take out a big mortgage with the ECB on low rates now and decide that it can repay over an extended time frame this money as the Economy recovers and Europe moves back gradually to some growth with even a hint of inflation.My guess is that this is pretty much as Cowen and Linehan are reading the situation,what other options do we have at the moment given the various constraints ??????

    • “Its a real game of cat and mouse going on with a few catch 22’s thrown in for good measure”

      A sublime understatement jim.
      Good comment.

    • Tim

      jim, I think this is PRECISELY where we are right now:

      “My guess is that this is pretty much as Cowen and Linehan are reading the situation,what other options do we have at the moment given the various constraints ??????”

      You have it, jim.

    • Garry

      Watch from the effort to raise 1 billion today….

      Where is Lenihan? Why is he there? Who buys it, and who ultimately buys it…Whats it for

      Youve got it in one

    • wills

      brilliant synopsis jim, i’m downloading it, one thing though, if it’s true and this is the score right now this synopsis keep’s open the door on a property re – inflation,…….?????

    • Philip

      The problem I see is that all of this re-scheduling of loans and monkeying about with exchange rates and QE all depend on one thing..European Recovery….US recovery … you name it. Since we have no indication that anything is recovering at the moment, it seems to me that investors will become more and more nervous and will withdraw.

      Then what?

  10. Tim

    Folks, look at this:

    “and (3) there is some scope to and good arguments to allow equity/subdebt bondholders to take pain – these are not guaranteed by the state and the secondary market pricing implies a default. But even here we need to look at this case by case and remember that it is the same pool of investors from which we are fishing and we need to do a hell of a lot of fishing over the next years!! The shareholders and management should take the pain – becareful how we go with the rest.”

    … from JSpain, above.

    I am particularly interested in:

    “remember that it is the same pool of investors from which we are fishing “……..

    So, there really ARE two sides to every biscuit!

  11. DID I JUST HEAR that Bank of Ireland (who are being bailed out by the government and who’s profits are down 97% on last year) were one of the major buyers of government bonds recently??

    are the government bailing out the banks while the banks are bailing out the government??

    • wills

      it seems like the gov are keeping the banks alive to have a means through which to sale bond’s to ECB for liquid cash.

    • liam

      So I guess this would only work for our ‘small’ deficit problems, with less risk of inflation for the Eurozone over all. It seems to me to be kind of smart, if utterly dishonest.

      So basically the ECB is printing money on Ireland’s behalf in order to prevent the country from defaulting, and the price the “Government” pays in the short term is having to keep the banks alive, and in the long term having to somehow pay all this back when the bonds mature.

      This sounds remarkably like McWilliams’ idea of going to the ECB in the first place, just its been done under the table.

      • liam

        sorry, all of that was a kind of a question.

        Also if this is the case, then the major upside for every one in Lenster House and in the banking sector is that the status quo remains, which is what FF have been trying to do from the start.

  12. wills

    BoI are buying up self owned debt…??? lndependant article vague on substance explaining what the hell is the debt they own they are buying back to re – fix tier 1 capital. Then goto link below which explains the debt, it’s ‘international debt obligations’, less vague,… question,,, is this the same thing as CDO’s…….

  13. wills

    Also mentioned in above link is the reason for NAMA, it’s too avoid a nationalization of the banks in trouble to keep the deficit down. NAMA is away around making the deficit worse,,, so keeping the deficit as low as possible means gov bonds are easier to sale into market, is that right..???

  14. liam

    wills, yes, I think that sounds about right. Interesting stuff. As I said above they have probably come to some similar conclusions as our host did here:
    The central message was we can threaten the ECB with default and I guess that’s what Lenihan did. Only the difference is (stage 2) the discount rate can be set by the state at a level that keeps the construction and banking sectors from taking too much of a haircut, thus maintaiing the status quo, keeping house prices artificially inflated and leaving the cost of all of this to the taxpayer. Somebody was awake in the Dept of Finance when this article was published for sure.

    I’m beginning to warm to your conspiracy theories…. :)

    • liam

      oh and it goes without saying that this would require cross party support… (nudge nudge, wink, ya cute hoor ya!)

      • Deco

        ….jobs for the relatives first….then the backers in the constituency office…party workers….meritocracy Irish style….the one who works hardest for the party gets the job in the health services, NAMA, IFRSA etc….Oh, yes – it has happened. And it is still happening.

        We need to do as Pera advised …..we need more transparency….embarrass the urine out of these power magnates.

  15. cozzy121

    Every evening I pass a bit of graffiti on Gardiner St. It’s message is simple and becomes clearer every day this government stays in power.
    It says “Wake Up! The Rich Are F*cking You!”

    They are you know

  16. G

    Today I came across a booklet from J. P. Morgan filled with glossy photos of people from a variety of ethnic backgrounds looking very intently out windows from skyscrapers – top drawer in its efforts to come across as ‘totally PC’.

    Interestingly, on page 8 in a statement drawn from a letter to shareholders in 2007, the Chairman and CEO at the time (not sure if he is still there) says and I quote “We have an outstanding strategic position, a great brand, strong character, fantastic employees and a remarkable future. I am priviledged to lead this company. I don’t think we know yet how good we can be.” (this may need to be updated)

    On page 65 under the heading: ‘Risk Takers Required’ there is a section on ‘FantasyFutures(TM)’ – which apparently is JPMorgan’s online trading game, which ‘allows you to play the markets to win great prizes’, playing with – wait for it – ‘fantasy money’.

    If you play well enough ‘weekly winners’ are brought to JPMorgan’s offices in London for dinner with ‘our senior traders’ – if you are really good with ‘fantasy money’ you may even secure a week’s work experience or place on the summer internship programme’.

    Now if only our banks had come up with something as imaginative as that!

    Now its not like we’ve heard of ‘fantasy money’ or ‘fantasy futures’ now have we?

    • Philip

      I am a bit puzzled. We are getting a lot of noise in the news about issuing bonds to keep the country running of about 1Bn…hurray. The thing is that the gap we need to fill this year is 28Bn. Now, can someone explain how we are going to engineer this little challenge? Is the ECB going to have to come out into the open and fantasize 30Bn out of thin air?

      As the CFO in some of these big companies say…people, we have 2 choices…grow the the top line or manage down the costs below the line becasue our investors want some action and soon. Usually that means cuts. Big ones.

      I cannot see how the capital projects and the PS are going to hold out any longer. Becasue, I cannot see how we can close this big gap by raising bonds from nervous investors.

  17. Malcolm & Pera – Malcolm , you described the mindset of the Norweigens very well and Pera your subjective opinion is invaluable .My point is how you both perceive their mindset and is an interesting matter.Norweigens think their ways from their scriptures and because of who they believe they are.The Icelandic language for pratical reasons is very old Norweigen ( Pera try this: Gledijeg Jol og Faersaelt Kommandi Ar – if you dont make it out ask your mother ) and both use/ used ð & þ in their letters .These letters were first used by Irish Monks when the first German Bible was written.The original laws written by the monks then was The Brehon Law that has since found itself induced into the respective National Laws in those Nordic Countries.
    The monks included Brandane , Columba , Cronane , Muola , Molaga , and these letters were hacked out in Co.Limerick. New Litany Forms have recently been found known as The Regenburg Fragment, a single page recently aquired by UCC following a years long negotiations initiated by Dr. Timothy Bolton of the Western Manuscripts section of Sotheby’s in London.
    The interest of UCC was aroused by emeritus professor Dr. Padraig O’ Riain and his wife Dr. Dagmar O’ Riain – Raedel , both specialists of the history of medieval Irish Missionaries in europe.This document is in UCC’s Boole Library .
    You can read more of this from a recent article in IT by Mary Leyland dated may,16 th 2009.

    • Original-Ed

      The Norwegians can afford to sit around all day and think – they’ve a small population and lots of oil fields. We on the other hand are in a different category, like the Japanese, we’ve got nothing but our hard work. So, therefore, we’ve got to be sharp if we’re to survive as a nation – for us ,education has to be a priority, otherwise we’re on a one way ticket back to the stone age.

  18. Tim – I wont go either .

  19. noname

    McWilliams , good article but your starting to get on my nerves with the flip flopping. Was it not your suggestion a few articles back to create a government entity which would remove the toxic assets from the banks at a substantial discount and then the idea was to sell them on in the future at a profit. So if i ve got my figures right, 90 billion of bad loans would be bought up by the tax payer for 24 billion, and then fenced of down the line for hopefully more than 24 billion Now your saying bad idea because the banks are basically insolvent , no shit sherlock do you really think so, because I’ll tell ya what brainiac, thousands of joe soapers had that one figured out last september when there was a run on the banks. Now your saying create new banks with a clean balance sheets and cut the old ones
    loose. David your making things more complicated than they need to be. The simplest thing of all would be to put all the existing banks
    in receivership,guarantee the depositors only and with the 24 billion you had for the bailout ,let it be used instead be as a fund for direct lending into the economy with a priority for loans to fund projects
    related to the NDP. Also with the banks in receivership you have all
    the existing banking infrastructure and banking functions already in place something which a new bank would have to create from scratch. Also government should consider the issuance of a non
    convertible note to circulate along side the euro as a means of easing up the credit tightness. Such a note would have a fixed exchange rate with respect to the euro and would be only convertable in the sense that it could be converted for the importation of certain essential goods. For this to work a conversion fund(Euro reserve fund) would need to be set up and the new notes
    issued in a ratio of perhaps 10 notes for each euro in the fund, if
    it was assumed that 9 notes out of ten would begin and end their
    lives without an attempt being made to convert them. The beauty
    of this ‘euro reserve system’ is that stability and liquidity are simultaneously achieved with the use of a relatively small number of
    Euros, with the bonus that a dampener effect on the inflationary tendency of the new note due to the limit of the reserve fund. This
    is basically the system that Lincoln used to finance the civil war when
    he uttered the zero interest greenback rather than borrow the money
    in dollars at high interest from the wall street speculators. It was also
    the basic architecture behind the Breton woods system which was
    a ‘gold Reserve’ system and not a ‘gold standard system as many
    claim. In the Gold reserve system the dollars had a fixed value
    with respect to gold (35 dollars/ounce ) but were non convertable
    except for the importation of goods. But since only a fraction of
    the dollars were used for imports , many more dollars could be issued than the dollar value of the gold fund, giving both the advantage of liquidity, a cap on inflation and stability. In a Gold
    standard system the currency would be convertible at a fixed rate to gold upon the demand of the currency holder, which would mean only as much paper currency could be issued as there was gold, Stable but non liquid.

  20. Original -Ed _ I agree we have nothing or at least we are seen to have nothing .We need to ask ourselves why do we have nothing .There is an Atlantic Ocean that we have made a significant claim to .We have not tried hard enough to look and find anything there .Maybe we should really say ‘we did not try hard enough to have anything like the Norweigens ‘. Maybe if the Irish Banks had invested in Sea Energy Research & Developement we would have ooodles of OIL & Gas etc .Perhaps then Letterkenny would then be the Venice sur Atlantique .

    • Thats exactly what I described at length last night John but Ronan moderated me due , apparently, for inserting too many links to back upmy argument. Pity it’s lost but hey ho.
      We’re surrounded by vast natural resources. We’ve claimed the Porcupine Abyssmal without argument. Just hope this mob don’t sell the rights before they’re turfed out.

      @Original -Ed ;
      I had the same problem you have but when I checked, I think David mooted the Toxic bank under a given set of parameters by which the Gov’t took control. I think I’m right in saying that leaving the guarantee in place shafted the original toxic bank plan in giving a win-win to the banks.
      Might be an opportune time for Himself to dip in here and clarify??

    • Tim

      John ALLEN, I agree: “We did not try hard enough to have anything”; or, perhaps, we allowed corrupt leaders to try hard to make sure that they got everything and we got nothing.

      Shell got our oil in the North West;

      Kinsale gas?

      North sea oil and gas?

      Fishing rights on the Continental shelf?

      Irish Steel?

      Irish Sugar?

      Zinc mines?

      Limestone deposits galore?

      The Golden Vale/fertile soil? (EU “setaside” policy, for Heaven’s sake!)

      “The beating down of the wise,
      And great art beaten down”. (WB Yeats)

      Saints and scholars – thieves and robbers.

      Original-Ed is correct: “education, education, education” must become the new mantra to replace the mistaken, property-bubble mantra of “location, location, location”. That re-prioritisation of education should lead us to reclaiming the WEALTH of natural resources our little country has. It should lead us to rest control of these from those who have annexed them.

  21. USA NEWS

    This morning, we learned that the real estate crisis – the meltdown that triggered America’s economic nightmare – has just entered a catastrophic new phase:

    April housing starts and building permits plunged to new all-time lows. Duplexes and other multi-family housing were the hardest hit, with building permits falling 19.9 percent and building starts collapsing a mind-numbing 46.1 percent!

    Meanwhile, the crisis has now spread to the commercial real estate market, threatening the very existence of every bank and other financial institution that holds corporate mortgages and leases.

    MAKE NO MISTAKE: There can be no end to this crisis and there can certainly be no long-term rally in stocks with the U.S. real estate industry still reeling … with mortgage defaults still soaring … and billions of dollars in bank loans still turning sour.

  22. It must not be forgotten that there is a simple answer to all the nations financial problems .The real problem is who tells us their solutions .

  23. G

    will I ever live in a mature, even handed Ireland. We seem to be in this perpetual struggle with the con artist, the bogland way of doing things, I am simply astounded at how our towns and cities look, many have changed little since the ’50s – I could never understand the bluster and propaganda over the last 10 years.

    We now know we have the politicians, bankers and politicians to match this appalling vista, there are a few, some on this blog who are reaching for a better country, a better vision.

    But I have to say, now that the posters for the political candidate are up, I am even more depressed, few of the faces I have seen look remotely like they have any answers. Meanwhile, the new ‘American’ breed of irish politician is one who knew to get their teeth whitened and have a few bob either through accountancy, the law or from daddy – there isn’t a visionary among them.

    I watched the Ard Fheis speeches from the ‘next generation’, and I thought to myself, I just want to make my money and get the hell out of dodge, there is not a chance in this world that I will be living in Ireland when I am older, there is no way I am taking that chance with my health. It’s the sun for me, any room in the Caribbean adamabyss???

  24. wills

    watching farmers storming TESCO.s mangers club get together and it is a vivid illustration on the mood out there despite the masters whip..!!!

    • I mean to say like, and say it I will. Importing spuds into Ireland. What the hell did they expect?

      Anyone see any mention of the thousands in donations undeclared by Feelin Failed during the RTE news over the last 24 hrs?
      Dobbo will be the next to quit if he’s nobbled like that.
      He’d make a fine new DG given the chance.

      • Robert

        Yeah – All the thick Farmers probably walked out of their local Fianna Fail Cumann meeting to march in on a Tesco meeting . . . .such an irony would be lost on them.

        • Howld on there a minute. I’m the cynic round here.
          But therein the comment lies an essential element of regaining some intellectual base in the country. A little self examination wouldn’t do any of us any harm. We’ve become too self obsessed. Ask any foreign single female. We’re notorious for it.
          Me, Mé Féin and Mise. A kind of Keltic Jung Syndrome.

        • wills

          feelin failed not the only bunch of sell outs….!!!!

          • Fine Ghouls haven’t exactly covered themselves in opposition hostility either. And Labourious were nada till Gilmour took over.
            What a choice.

          • Robert

            Can’t say I entirely agree (with regard to the main current opposition parties. How can you be a sell-out when you’ve been in opposition since 1987 (apart from a Dec 1994 – Jun 1997 gap).

            The reality is that when you’re in opposition you make your own tea . . . . Never mind implement your policies for the governance!

            So Wills to state that “feelin failed not the only bunch of sell outs….!!!!” sort of let’s FF off the hook.

            For years in the 19th Century Punch Magazine & various Tory Governments used to depict the Irish as thick and completely incapable of self-governance . . . . Not far from the truth in the 21st Century if people are going to keep voting for FF.

        • Tim

          Robert, not all farmers are FF supporters – in fact, the majority are probably voting for Fine Gael.

          Not everyone is one-dimensional.

          My father is a retired farmer who voted for FF all his life, though he never revealed that until he learned of my involvement. He has determined to never again vote FF as long as he lives, since the current crisis arose. That said, the majority of the farmers he knows support Fine Gael and think that the gambling-boss of Celtic bookmakers is a great fella, alltogether!

          • Robert


            Farmers vote en masse for FF. It’s one of the biggest myths of Irish politics that they vote for FG.

            In fact FF for years liked to meddle the nonsense that they protect the working class downtrodden peasant tenant in reaction to the rich FG farmer.

            Look at the predominantly farming counties in the west of Ireland and the very high percentages in which those counties vote FF. These folk don’t even look at past perfomances or track record when choosing who to support (the drafting in of “The Cope” in Donegal is further evidence of that).

          • Robert

            “peddle” the nonsense . . . of course . . . typo error

      • paddythepig

        What is so bad about Tesco stocking a British spud?


  25. Tim

    “For years in the 19th Century Punch Magazine & various Tory Governments used to depict the Irish as thick and completely incapable of self-governance . . . . Not far from the truth in the 21st Century if people are going to keep voting for FF.”

    I am not terribly happy with FF right now, either; but will you answer one question, please?

    What party(ies) do you think would have done better and why?

    Please, set-out your stall?

    • Robert


      Well it would certainly be a start if the Irish people started to elect men and women of experience and character. Politicans in Ireland are elected on who their fathers or brothers are. It happens in all parties but it is rife in FF (look at the two by-elections . . . FF don’t even bother to hide it any more)

      Look at the last general election. Nine months prior to the election perjurer Ahern went on RTE News with Bryan Dobson and threw the poor man sob story . . . . .and the 42 % thickos in this country went out and voted FF (probably cos they were SSIA bribed – bribed with their own money!)

      Your question as to who would have done better in the past is not really relevant. They weren’t elected. Period. You can only judge people on their past performances. Perhaps none of them would have done better. Who knows? It certainly wouldn’t be difficult to do better than this crowd. In fact put a traffic cone in the Taoiseach’s office at the moment and it would do a better job.

      Regarding setting out my stall . . . . It is ironic that you ask me this today . . . . when earlier today Cowen was asked if he would consider any form of apology. He said no. . . . . They’ll never apologise or show any humility for the hurt and damage caused to so many . . . . . as they feel they don’t have to . . . .because they’ll look after their own chosen few . . . and, Tim, they’ll use your money to do it.

      I look forward to the day when the Irish people adopt a mature attitude to electing its leaders (regardless of what party they come from).

      Apparently only one FF politician in the Dail (Sean Haughey) speaks to the man you canvassed for (Joe Behan). The rest shun him . . . . . a man of substance and principle shunned by cowards and charlatans . . . . . Sickening these people are considered “leaders”!

    • paddythepig

      The Raving Monster Looney Party
      The Silly Nitwits Party
      The 5-year-old children’s party

      Reason : Because none of them would have a leader as thick as Ahern, and as subservient as Biffo. None of them would be thick enough to hammer down the accelerator as the bus was careering towards the cliff.

      Though you have a point ; the 07 election proved that Enda and Rabbitte were just as thick as Ahern.


    • Garry

      It doesnt matter… Any change of leadership and filter change down to leadership positions elsewhere.
      So while I have very little time for Labour, I would welcome them in power. Or FG on their own….

      That 1B raised will pay public servants wages, dole and banksters for a few weeks, then the next auction. Thats all the current shower are doing, borrowing from all our children and now grandchildren…so they can live on the hog for another few weeks… Selling future generations into debt slavery, so they can keep their lardy arses in leather seats. Traitors…

  26. Tim

    Robert, the “Big farmers” are not in the west; the land is not sufficiently fertile in Connacht. They are in Munster and the Midlands. Dairy and Beef. Not the sheep in the west.

  27. Malcolm McClure

    Even a big FF hitter like Pat the Cope Gallagher reduces the size of his party’s name to the miniscule on his election posters. Brazenly, Fianna Fail seem to have adopted the nation’s flag colours as their brand identity, to flourish instead of their currently repellent name. However, this banner looks more like the India flag than he Irish one, so perhaps they are looking to that sub-continent for financial salvation as quid pro quo in exchange for our call-centre jobs.

  28. htzSdLSkV

    I was delighted to read you article, thank you. I agree that we should not bail out the banks. Mortgages balances should be adjusted so as to maintain the previous level of equity and even more assistance should be given to those who lost their income.
    Perhaps it is time to adjust the way we run out affairs. Is our current capitalist system an evolutionary stable strategy? We elect our ‘leaders’ on a national or EU basis but we allow multi-national corporations grow with limitless power. Those who are very rich seem to wield enormous power and influence. They are un-elected but they dictate the rules to those we do elect. I feel that the buck does stop firstly with the heads of our financial & corporate institutions. Next our elected representatives and so on down the food chain. We each share some responsibility. I too was delighted to watch the value of my home soar. The point I make is that the whole population of Ireland is only a small player in this sorry mess.

    We should not waste too much time in hind-sight debate. If one lives in a country where everyone else wares straw hats then each of us would tend to adopt that same style. So our politians did as those in other developed countries, same for the heads of business institutions.
    I feel that our current plight was not all our own fault. There is something wrong with the world’s financial and corporate system. This is a one world problem with only a one world solution. Take a moment and look beyond your own immediate problem. We don’t have the time to be blaming each other. There is no limit to how bad things can get. There is worse to come if we don’t act now. Change — yes we must.

  29. wills

    Robert, i’m not in politics and am doing my utmost 24/7 in all area’s of my life to blow the whistle on the debt – slave monetary system that run’s POnzi Rep,. and i ain’t seen or heard Laborious or Fine Ghouls or green Goblins or even sham pain utter one pearl of wisdom on.

    • Robert

      Granted Wills . . . It would also be very difficult to agree with your view on any of the parties.

      The problems that we are all grateful for you for constantly highlighting stem for the complete corruption at all echelons of society which goes on Ireland. It seems that you can’t be Irish unless you’re a complete f’kin chancer!

      All of this stems from our joke of a political system and the general lack of political nous and cop-on among certain sectors of society.

    • G


      I haven’t seen Gilmore in Ireland’s second biggest city (with 40,000 unemployed) – it’s so obvious and yet never happened??????????????????????

  30. wills

    Been delving into mortgage machinations last coupla days and some may find this link interesting in the unravelling of this somewhat nebulous area.

  31. Tim

    “and, Tim, they’ll use your money to do it.” I know it! I am losing about €500 a month right now.

    “I look forward to the day when the Irish people adopt a mature attitude”….. don’t worry, Robert: the Irish people are smarter than you give them credit for.

    Joe Behan: “a man of substance and principle shunned by cowards and charlatans”. Yes. But he is strong. We are strong. We will rise again. The grass-roots sit in the long grass.

    • Tim

      Robert, yes: Joe O’Toole’s brother in law used to own Thornton Hall and sold it to the Dept. of Justice for €30 million.

      But Joe knew “nothing” about it.

  32. jim

    Given that Europe will invariably bail out Ireland,and later onn Ireland will ratify the Lisbon Treaty,it seems to Me that the Dail per se will be downgraded to the level of a glorified County Council in the eyes of Europe.As it stands at the moment the Dail has all the appearances of a County Council at work.Look at the evidence,it has boosted its own staff(Public service),It seems totally oblivious to the outside World, which includes everything in Ireland thats not Public Service.It feels no obligation to interfere in any way with what it refers to as a small open Economy run at the behest of the Free Market.Cowen himself shows no signs of Statesmanship but looks more comfortable as a type of Chairman of this Country Council.They obviously dont trust their own to make decisions or at least be seen to offer solutions to problems but prefer to hide behind a plethora of Outside Consultants et al. or prefer to wait for some diktat from Europe to tell them what they have to do….They pack up the numbers employed in the Public Service with their own Party Faithfull,therby giving the hardcore support evidenced in the recent polls.This Government have no clue no more than any County Council around the Country on how to create jobs,run an Economy outside of the Public Service etc…..It took Me awhile to get My head around these People,but when I did it was easier to understand their thinking and actions when I looked on them as glorified County Councillors….Ive watched Cowen and His frontbench as the Banking crises unfolded and they just seemed mystified as to what people expected them to do,they just seemed preoccupied with their own jobs of running the Public Service,it all seemed like a huge intrusion into their normal functions…..When they did speak it was like they had just left their local clinic and had just been informed by some developer that all was not well and could they make inquiries on their behalf with the Dept.The recent Budgets were more of a book balancing excercise that you would see by an Accountant for a County Council,extra levies,extra taxes…I was just waiting for Linehan to say something about bin charges or sewarage connections fees,it was that bad from an Economists point of view.The problems of the Country did not interfere with any of the public Holidays,and Cowen Himself was of swanning about Japan on a trade junket when He made the call to put the Country up to its tits in guarantees,it was like as if it was someone else’s money He was deciding onn,and anyway they would get their Budget next year from Central funds after a bit of a row,and life would boogie onn regardless.Let the ECB worry about the Euro’s, He was busy running the Irish Council.Im sure the Members of this forum do not want Me labouring this point because ye all have yere own bits ye could throw into this mix on this point.Thats how I see it ,were being run by a bunch of County Councillors,and Governed by Europe….Free State me arse,free lunch for the chosen few more like.Goodnight Ireland,sleep well.;-)

    • That just about sums it up jim. A whole country proving Maslow’s Hierarchy of Needs where no-one demonstrates the ability to think beyond their own box.

  33. MK1

    Hi David,

    I agree with you on the banks. I have been asking from day 1 (back in September) why we are bailing out the banks, and by consequence their debtors. We shouldnt. We should let them fail, in an orderly manner of course, pick up the pieces at rock bottom values (if no-one in the private sector will), etc, and reform their operation and the sector. Get banking to work for the economy and businesses, not to live/leech off it. “Lance The Boil” has been the mantra and it makes sense.

    These banks are not Irish banks anyway! They lived by the (credit) sword and have been affectively killed by the (credit) sword, so we should not give them sustenance or live support any longer. They do not represent Ireland in international markets, although some people do get confused that brand Bank of Ireland is akin to Bank of England, a central bank. It wont matter a jot to Ireland if BOI actually went bust apart form the pain being felt by the people that deserve some of the pain. Although it is true that many in such a scenario would also feel pain, but that is what capitalism is all about, even a social-capitalism system such as ours. Banking is too important NOT to allow it to fail!

    > Letterkenny – This is our country. This is Ireland

    I do have some sympathy with the Letterkenny representative on here that David’s article was particularly ‘nasty’ towards Letterkenny and painted it in a bad light. Yes, David did say this is our country and he was implying I think that Letterkenny is a microcosm of the general state of many towns and burbs across the country, but some of the colourful description had nothing to do with the economy and a reader could easily interpret it as malign on Letterkenny. I’ve been in Letterkenny and its a lot better than loads of other places so I dont really know where David was coming from.

    @Philip: that 1 b euro auction during the week was one of many that will be done this year. There is over 12 b already brought in via the regular monthy and extra auctions I understand. So we are half-way there. But note that for 10 year money we are paying 4.4%, which is about 100bps above what Germany is paying. Ireland’s bonds are thus priced at a riskier premium. And also what is more disconcerting is that the “international” buyers of these bonds have been approx 50% the government-guaranteed Irish banks. This is perhaps unwise and a way to build “a house of cards” and it has the potential to unravel.

    My suggestion several months ago but unheeded was to go to the markets when Ireland had a good rating, was only so many bps above the bund and get in the full wad of 25/30 b or whatever, in tranches so as to not spook the market due to the funding size.

    In general, we’ve gone from a situation where a credit bubble was not supported by actual production/GDP and now governments across the globe are having to borrow finance to fix the ‘broken banks’. This money doesnt grow on trees however, and is a movement of debtor rather than a ‘magic bullet’ solution.


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