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.
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… Read more »
New management required. Both for the Irish banks and for the Irish state. Bring it on already.
Ger
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… Read more »
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
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… Read more »
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
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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’
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
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
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.
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… Read more »
“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… Read more »
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
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.
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?
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!
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,… Read more »
Shannon – a new medical company recruiting new staff had no Irish applications
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.
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…….
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.
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.
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… Read more »
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?
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… Read more »
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!
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… Read more »
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… Read more »
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
“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
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.”
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
“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… Read more »
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.
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »