Nobody’s lending. Nobody’s borrowing. Here’s what to do

Another lockdown will destroy the economy unless we change direction. It’s really that simple, and it is because the banking system no longer works as a distributor of capital in the country.

Our Government and ECB have approached the crisis in the same way: cutting interest rates to zero to coax businesses to borrow and to encourage banks to lend. As a result, banks are the critical intermediary between the Central Bank, the State and the economy.

However, because banks have a fear of bad debts, they are not lending, and because businesses have a fear of incurring too much debt, they are not borrowing. This is a classic “liquidity trap” as outlined by John Maynard Keynes during the Great Depression of the 1930s.

One of the best leading indicators for how people feel about the economy is consumer credit and loans for short maturities, such as a 12-month loan to do up a kitchen, buy a durable good or a short-term car loan.

Durable goods make up about 10 per cent of any Western economy. We are not talking about an insignificant sum here. Such loans are an accurate barometer of sentiment. They have completely collapsed in Ireland.

The reason is quite straightforward: the banks don’t know when the economy will recover, because we are experiencing a “pandession” not a recession. Exit from the pandession is determined by the pandemic, not by the typical economic cycle.

As a result, the banks can’t plug a recovery into their spreadsheets when assessing the credibility of any loan, collateral or borrower. So they don’t lend.

In addition, a new paper by the Bank of England released this week suggests there is a one-for-one relationship between unemployment and loan default. This means that banks are terrified about bad loans. In the UK, a one per cent rise in unemployment leads to a one per cent rise in loan defaults. Irish figures are bound to be similar.

The banks here expect unemployment to remain high and incomes to remain weak, and so they are not lending no matter how low the rate of interest.

In addition, small businesspeople have no idea what is coming down the tracks, so they are not going to take on any more debt now, again despite the fact that interest payments have never been lower on borrowed money. So we are stuck.


Unfortunately, the State and the ECB are behaving as if the pass-through from interest rates to the economy, via the banking system, still works. It doesn’t.

To make matters worse, the only people who will avail of very low interest rates are the already wealthy, who will take this opportunity of zero-cost money, leverage up, buy cheap assets and thereby amplify already alarming levels of wealth inequality.

Because rich people have the financial security to see beyond the pandemic, they can imagine the world in five years. Most people don’t have this luxury even if the banks would support them, which they won’t.

The way out of a liquidity trap is for the State to bypass the banking system and borrow directly from the ECB (via the secondary market) and actually put money into businesses’ accounts.

There is nothing radical about this idea at all. In fact, what is radical and dangerous is relying on banks to do governments’ handiwork. They’ve never done this and are not about to start now.

This is not a “bash the banks”“ article. It is not their job to feed money into the system, to maintain the balance sheet of small businesses and to effectively get money into people’s pockets. (Although it could be argued that as AIB is a nationalised bank and the State is the largest shareholder, it could be made an official ward of State to fight the pandession.)

Consider small companies that have managed to survive the past few months by juggling bills, deferring payments and doing deals with all sorts of creditors. They will not be able to conjure up the same trick twice, at least not with the present policies.

Let’s be clear: in a new lockdown, businesses will be ordered to cease trading. Capitalism as we understand it – buying and selling, opening your doors, selling your wares, paying your staff, paying your utilities and rent – has been suspended. If you suspend capitalism, you need to replace it with something that protects businesses until capitalism is recalled.

Business depends on income. If a business is told it cannot, by law, earn an income, then it is shuttered by decree. It is up to the State – if it feels its health service can’t cope – to explain to small businesspeople, who employ over 50 per cent of Irish workers, why they must bear the cost.


The recent guidelines on public gatherings mean the conditions of lockdown 2 have already been visited on the live entertainment sector, with catastrophic results.

Taken together, this sector sold 4.8 million tickets last year, generating income of €305 million, paid about €35 million in VAT and, based on an internal multiplier for the economy, drove about €1.8 billion extra spending.

(The multiplier captures the extra spending that goes along with the original ticket price and how it ripples through the economy. When you go to a concert/festival/gig you spend a lot more that night than just the ticket price.)

This huge part of the domestic economy is closed. If we go into lockdown 2, this calamity will be mirrored all over the economy.

So what can be done about it?

In a liquidity trap, the banks are out of the game. There is no point in the ECB saying that it is open for business, because the private sector will not borrow.

It’s time – as I have argued consistently – for helicopter money. It is time for the State to give money to small business to tide them over, as a gift. When the problem is no money, the solution is money.

This is not a long-term fix; it is an emergency treatment in the same way as the treatment applied in an ICU is very different from the treatment applied at your local GP clinic. Emergency economics is applied to avoid calamity.

In terms of macro-economic policy, helicopter money is exactly the same as a debt-financed budget deficit or a debt-financed tax cut – things we do all the time. The people who receive a tax cut are effectively given money they didn’t have yesterday by the State. Helicopter money is precisely the same, but it gets to people and businesses immediately without having to go through the palaver of tax credits, PAYE and the like.

The end result is more money, fewer defaults, less unemployment, less bankruptcies, less anxiety, and ultimately a smaller budget deficit than if the economy stalls, because spending and income will be maintained. The same will apply to debt-GDP ratios, because what caused debt ratio to deteriorate in a world of low interest rates is the slow growth rate.

As we face into lockdown 2 this winter, helicopter money might be our main bulwark against outbreaks of social disruption and political instability.

We need to totally reimagine economics

When events change, we change our minds. Old rules go out the window and new ideas are embraced. What was once radical becomes mainstream and what was once mainstream becomes redundant. In a crisis, you run out of time. You can’t wait; you must act.

This week, the Department of Finance acted with remarkable speed, implementing what might be called the “Danish model”, soldering the link between employers and employees by subsidising people’s wages to the tune of 70 per cent. The civil servants are to be commended in how quickly they turned this around. It should help enormously. Hopefully, we will see results in a stabilising of the rise in unemployment.

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The most critical objective is to keep businesses afloat

What can we do now to prevent this crisis getting worse? What can Irish policy-makers do to prevent company closures, militating against more mass redundancies? How can we buy time? Buying time is a critical way of looking at the crisis because in a crisis you run out of time, not money. It’s essential that actions we take today are designed to ensure that a temporary crisis doesn’t become permanent chaos.

The good news is that this will pass; the better news is we can do something to cushion the blow; the even better news is that it demands only courageous thinking and action. The bad news is that, up to now, there is little evidence of courageous thinking, and that includes the European Central Bank’s €750 billion mega-intervention.

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Why Central Bank must give everyone free money right now

We are in a crisis. The health panic will be followed by an economic panic. People will stop going out, stop shopping and dramatically reduce spending. This will have an immediate impact on cashflow. Without cash, businesses will go bust. Without cash, suppliers don’t get paid and they in turn can’t pay their creditors. The knock-on effect will be swift. Tax revenue will seize up. In addition, businesses without cash can’t pay their employees who will have to be laid off. This will exacerbate the slump.

Unfortunately, as cashflow dries up, those with cash will hoard it. Hoarding is the natural reaction to a panic – witness what is happening right now in supermarkets. The same will happen with cash. As more and more cash disappears from balance sheets, more and more cash will be hoarded. In fact, as always happens in a panic, more cash will be hoarded than is actually needed for the rainy day. That’s human nature; we overreact when panic sets in. There will be a run on cash as businesses try to stay open.

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The coronavirus loves shopping, hospitality and entertainment

The loud woman at the bar of the French Roast on New York’s Upper West side is agitatedly telling her brunch partner, and (given her operatic volume), everyone else in the joint, how her business in China has stopped working.

“It’s gonna happen here too,” she admonishes. “We’re gonna have to shut the place down.”

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‘I’m all right Jack’ politics has fuelled the rise of Sinn Féin

The excoriation of Sinn Féin in recent days seems to be directed from the top, with the intention of softening the ground for a Fianna Fáil-Fine Gael coalition. ABS (“Anyone But Shinners”) certainly gives cover to both leaders, allowing them to ask their followers to hold their noses and do the deed with each other, based on having no alternative.

A battle is raging right now for the soul of both Fianna Fáil and Fine Gael. Political parties are a bit like golf clubs: rules and sacraments that matter enormously to members seem silly from the outside. Members of Fianna Fáil and Fine Gael are agonising about purity rather than policy.

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Germany needs a new business model

The Metzer Eck in central Berlin is one of those traditional German bars – lots of beer, sausages and bread designed to fill you up. Nothing fancy, nothing elaborate, everything simple and, like almost everywhere in Germany, affordable. It’s a wonderful place to be the night Leipzig give Spurs a lesson in attacking football.

I’ve been coming to this spot for four decades. In the 1980s it was firmly behind the wall, and still has a bang of the DDR off it. The locals are in great form, discussing football and rent control, and later, after more pints, politics.

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Which coalition contenders are most economically compatible?

In keeping with the times, let’s quote Vladimir Lenin. The Communist leader, looking back on the October Revolution and seeing it in the context of what had gone before in Russia – from late 19th-century Tsarist reforms to the 1917 Bolshevik takeover – quipped “there are decades when nothing happens and then there are weeks when decades happen”.

Believers in the Leninist world view of big epochal moments might be tempted to conclude that Irish politics has just witnessed one. By this analysis, the previous status quo has been shattered, and a new paradigm is taking shape, whereby old people vote Fine Gael or Fianna Fáil, and young people vote Sinn Féin.

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You will be a victim of the coronavirus

While we are engulfed with the election and wondering who might form the next government here, spare a thought for the world economy. Given that we are among the most globalised countries in the world, it might be prudent to look up from our own political navel and take stock of the past week in global affairs.

After 10 years of a global economic expansion, against a backdrop of historically low interest rates, debt levels are higher than ever and the global economy is more integrated than ever, not just financially but also from a supply chain perspective.

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