Watching the bank bosses during the week reminds us all that the Irish banking crisis is still with us. The banking crisis started in 2000, not 2008 as is often stated, and is still crippling us. The Irish banking crisis began when the banks began to blow their own balance sheets on wild property lending. Every time they lent money for some developer or other to build a new shopping centre or a new development, they were destroying wealth, not creating it. But in the effervescence of the boom, this process of gradual bankruptcy was recognised by only a few people.
The destruction of wealth and the banking crisis began tentatively, but ultimately turned into frenzy as the banking herd copied each other. While much attention focuses rightly on the behaviour of Anglo Irish Bank, it did not act alone. If you want to get a handle on just how reckless the lending was, AIB and Bank of Ireland doubled their total loan books in three years. Bank of Ireland took more than a century to build a loan book of €63 billion and then, in three years from 2003 to 2006, it doubled it.
By 2008, it was all over. The damage had been done.
Back in 2003, when it was neither popular nor profitable, this column argued that, without dramatic remedial action, the coming property crash would impoverish us all and pointed out that the banks and bank lending, not supply and demand or a rising population or all the other nonsense spewed out, were the epicentre of the problem.
Fast-forward nearly a decade to this week and we listened to the bank bosses being evasive, indignant and, in some cases, haranguing politicians, despite the fact that none of the banks would be open if it weren’t for taxpayers’ money.
And it looks like they have once again shown that damning combination of arrogance and incompetence because, reading between the lines, it’s obvious they need more cash. Once again, they have underestimated the extent of their losses and, once again, they will expect someone else to cough up the cash.
Looking back over a ten-year history, the behaviour of the banks in Ireland has been nothing short of extraordinary.
In the period of 2000-2008, they behaved like pyromaniacs in a forest, playing with fire and laughing at anyone who warned of the dangers of a contagious inferno. Once the market peaked and reversed, the banking system’s implosion would be a financial forest fire that would engulf all around it – deposits, good businesses and people’s livelihoods would all be incinerated.
Once the fire caught hold and spread, the government – who should have been on top of this via the regulator and the central bank – had a choice, either to put it out using everything it could or to let the fire burn (let the banks go) and see what happened.
Anyone witnessing the evisceration today of Cypriot deposits, or the total collapse of economies in the 1930s, or during the Asian crisis, as a result of just letting banks go bust in an uncontrolled fashion, knows the authorities have to act to prevent a contagious bank run. There are many who argue we should have let them all go under, or that we could have isolated the bad banks and let others go. But they were all bad; every single Irish bank was bankrupt in 2008.
Those who started the fire continued to lie about the extent of the damage, and the firefighters – the regulators and central bankers – who were supposed to be in control sided with the pyromaniacs until it was far too late.
We know that the banks lied to the government about the extent of their losses in the panic of 2008 and only began to ‘fess up after they had Nama in place by 2009.
The bank guarantee and Nama were the consequences, not the causes, of the Irish banking crisis because, without a banking crisis caused by reckless bank lending, it’s clear no action would have been necessary.
The guarantee ought to have been in place only for two years at the most in order to prevent the bank run that was well under way. However, it was extended, apparently because, having lied about their true losses, the banks couldn’t keep going without an extended State insurance policy. As the losses mounted, the insurance policy itself bankrupted the insurer even though, by the time the troika walked in (November 2010), the original terms of the insurance policy had expired.
Once the IMF was here, the banks incompetently calculated how much fresh money they would need in the worst-case scenario. They emphasised that only in the worst-case scenario – if the economy continued to contract, and if defaults continued at a certain rate – would they need more capital. You may remember the line “the best capitalised banks in Europe” which was doing the rounds in 2011.
It transpires that not only were they not the best capitalised banks in Europe, but that they mightn’t have enough capital to deal with today’s mounting mortgage arrears. We can see that the ten years’ sorry history of the banks and the Irish state has been one of mendacity, incompetence, deceit and entitlement. Now, I realise that banker-baiting has become a type of national pastime, but I write as someone who was pointing this out when many of today’s most aggressive banker-baiters were actually cheerleading. What interests me is not vengeance or political point-scoring. What interests me is how has all this affected the Irish economy and our ability to compete in the world.
Last week, we received evidence of the deleterious impact the banking crisis is having on the Irish economy. Each year, the World Economic Forum publishes its global competitiveness index. Ireland was ranked 28th in the world. On most metrics, Ireland does well enough. For example, in primary education, where we have been making cuts in both general expenditure and in the conditions of younger teachers, Ireland ranks eighth in the world, just above the Netherlands. In contrast, when you examine banking, where no expense has been spared to keep the banks afloat, you see that under the indicator of “the soundness of the bank” out of 144 countries, Ireland ranks 141st out of 144.
This is the legacy of all that corporate high-fiving in the boom and it affects all parts of the economy because, when you look at the problems Irish businesses face as they try to grow, by far the biggest problem is access to financing.
No proper funding is a function of dysfunctional banks that are still broken, haven’t enough capital, and continue to operate as if they are part of the solution when they are still very much the problem – and the roots of this problem go back well over a decade.
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I thought it was current episodes of Coronation Street I was reading and finding the culprit who set fire to Rovers Return. Its deep stuff this article proclaims .
Ivan Yates has introduced a chapter in his new book with the heading :
Arrogant Ignorant Bastards ( A I B )
It would be interesting what he might say were it to have been :
B O I
K B C
P T S B
The banks didn’t simply decide to bet the house on housing all by themselves; unwittingly we contributed to putting them up to it… It is worth noting that modern economies have very little group representation (in the absence of mass unionisation) and that one of the few places where we are in fact mass represented is via our collective pension contributions. Pension contributions mass in the hands of a few key managers who in turn have a massive impact on corporate decision making and absolutely on the banking sector in the early naughties. With Anglo shooting the lights out shareholders… Read more »
David says the beginning of ‘ to blow ‘ period is the year 2000 . I disagree emphatically on that year . It was 1998 when the National Crime Forum under the aegis of the Dept of Justice issued a report under the chairmanship of FF and Minister O’Doherty . This report ignored invited professional oral and written contributions made at various appointed official centres around the country relating to Irish Banks and their deceitful practices . This report was the ‘Green Card ‘ to allow the ‘ Green Jerseys ‘ exploit the public with a mindset of a ‘… Read more »
What’s needed now is a clear path to finance for the struggling SMEs looking to grow their businesses. Lets get real – the main banks are not interested in lending to SMEs, only in liquidating housing stock and maintaining the Status Quo of their historical salaries and bonuses by padding their balance sheets. While letting them go bust would surely have a calamitous effect on thousands of depositors, it always strikes me as odd how the depositors would lose their savings but the debtors (Mortgage holders and those with loans) would have their debts cycled on to a new Master… Read more »
Hi David I have concurred with your comments since the noughties when you warned about the housing boom and its subsequent fall. I was in a weird way lucky to be in England during the early 90s and observed the devastation of the property crash there and I saw the same signs in Ireland occurring. I knew the crash was coming as did you (maybe not the extent of it). It is why I did not buy a house, I could have got a loan if I cooked the books a bit, did what the banks did but I knew… Read more »
David, you should have this piece etched onto brass plates and nailed to the doors of all the culpable state institutions and bank HQs.
I love the effervescence bit – it sums up the whole period when the light weights in charge were surfing the bubbles.
What ever happened to Dr Dan ?
You are probably right that it all started around 2000 in Ireland because it had already started a few short years earlier in the United States. I had been a U.S. Realtor (estate agent) and Mortgage Broker throughout the ‘80s and the ‘90s. The National Association of Realtors enforced very strict standards of professional practice. That policy had served us well down through the years in that lawyers were hardly involved in real estate. Unlike in Ireland your local Realtor did your house transaction from end to end without a lawyer. That required great trust by the people. We had… Read more »
Allow the banking system to collapse and risk destroying the economy. Rescue the banking system and risk destroying the economy. The only question worth investigating is who is responsible for going with the latter decision rather than the former. Was this epochal decision made by legitimate representatives of the Sovereign Irish State of The First Irish Republic? Or not? A very powerful article, David. Hope to visit Kilkenny and finally try to meet you, if I can get through the throngs of admirers that stalk your every move. I hope you’ll sign an autograph so I can impress everyone at… Read more »
Banks generally were allowed to get too big. Worse, they where allowed to integrate cross nationally and worst of all they were allowed to mix risk based on bogus and nonsense economic forecasts. Governments are also too big and too centralised making them trivially lobbied by super big banks using economic forecasts to justify claims. By the way I believe many economists have blood on their hands and should be shamed for lending credence to nonsense. DMW was brave. Only way forward for Ireland. 1 disband senate and fail and have provincial government. Own currency if they wish. 2 one… Read more »
That article constitutes “required reading” for all PAYE taxpayers in this country.
The second massive issue, is the scale of Ireland’s mounting Ponzi debts – in large part due to an overextended insitutional state, but mostly due to a massively mismanaged banking system that is a millstone around the people’s necks.
The banks are bankrupting the entire economy. Some “bailout”.
A lot of people had lots of money in the banks, whether they were bond holders, pensioners, or depositors. Certainly a good proportion of that money in those banks could have been earned off the high standard of living which existed in Ireland due to the boom in the property market. Of course some of the money would have been earned having had nothing to do with property. Nevertheless, the crash comes and yes it is desirable to protect people’s wealth, but can someone please explain, why the ordinary Joe Soap, who has no savings, is not a bondholder, has… Read more »
David you wrote here: “The guarantee ought to have been in place only for two years at the most in order to prevent the bank run that was well under way.” This reminds us that you did in fact advise Lenihen to give a bank guarantee, albeit for a limited period. This shows that you did not understand bundled securitization, the wellspring of the banks’ lending. What was happening in 2008 was not a bank run. Still calling it such shows that you still don’t understand what happened. You still think the problem is the Euro. If economists like you… Read more »
BBC4 “Requiem For Detroit?” broadcast last night. A historical documentary about the city’s rise and fall. Although presented as a Big Baddies vs Little People format, the piece inadvertently cast everyone in a bad light, by their actions or inactions they were all perpetrators in one way or another, just that those perpetrators with less power are referred to as victims. How can you be a perpetrator and a victim at the same time? But you can on a time scale, you destroy the city and then you cry foul. By pointing the finger of blame at Greed, Selfishness, Intolerance… Read more »
Oct 1983. Suicide bombing of U.S Barracks in Beirut.242 dead U.S marines. 58 French paratroopers also killed on same day in 2nd suicide attack.This attack was carried out because of U.S support for invasion of Lebanon by Israel and the shelling of a Mountain top by the U.S Sixth fleet in support of Lebanon pro-Israeli Militia/Army in which innocent civilians were Killed.. U.S & french peacekeepers withdrawn. Oct –Dec 1983 invasion of Grenada Dec 1989 31 January 1990 Invasion Of Panama 1990/91 First Gulf War 1993 Somalia “Black Hawk down” World trade center Bombing…. 1995 Alfred p murtagh Building Oklahoma…..destroyed… Read more »
I left out Carters failure in the Iranian desert “Operation Eagle claw” i think..to rescue U.S Hostages
The Iranian Embassy siege in London 1981
The Falklands War 1982
Libya’s Bombing of a nightclub in Berlin Frequented by U.S servicemen
Reagan’s Bombing of Tripoli in retaliation.
The Lockerbie Bombing
Reagan’s Iran-Contra debacle in South America.
The Bosnian/Serb War,Clinton
The 1 million people massacre in Rwanda [ nobody bothered with that ]
Amazed at the Jig, Reel, and Ceili around the issues here. Only thing missing is music. The Jig and Reel may make the discussion look Irish, but anyone with even a glimmer of sunshine can see that a tsunami of loose cash flooded the entire transatlantic after 2000, after the repeal of Glass-Steagall, lending legitimacy to “securities”, etc, with an implicit guarantee now playing out as the Bail-In, official policy of the EU, Swiss, USA, Oz. Each can put this to their own favorite choice of music, from flamenco to tap-dance, all together now! The result is a cacophony, unbearably… Read more »
Larry Summers is a poster child for Diet Coke! Loves extolling its virtues…
Nothing can be solved until the current banking system is disbanded / destroyed/ collapsed etc. Currently there is no physical restriction on the amount of money that can be produced. All money except coin is issued as a loan which means it is an iou , a debt. As all money is a debt there is a constant drain on the economy to pay the interest on that debt. When a loan is taken out and the money loaned only the amount of the loan is issued into existence but not including the interest to be paid. The interest to… Read more »
AIB. Morally insolvent at the time of the million punt loan to CJH. “It’s a great little country”. Intellectually insolvent when they bought the insurance company that nearly finished them in the 1980s. Then there was the first Bailout. Media coverage was scarce, and soft. “support our advertising sponsors”. The Irish media was bought up. Don’t challenge gombeenism. Did they sack anybody ? No. Did they learn anything ? Probably not. BoI were morally insolvent when they started donating to political parties. In 2004 they had 30 grand ready for Mrs. McUseless, in case of an election for the Aras… Read more »
This is not just an Irish problem but one that has happened or is happening in all Western countries. What has really failed is our system of central banking who are supposed to control the commercial banks. Banking should be a relatively simple industry where deposits are stored on behalf of the public and that money can be then loaned out but only if the depositor agrees to it. Having central banks to backstop this industry simply encourages the fractional reserve banks to start taking greater and greater risks in the knowledge that the central bank will step in if… Read more »
The evidence of the Irish Banking Deceit began in 2000 but the cause began in 1998 after the failure of The National Crime Forum to include in their report then that banking be included as a location of crime or potential crime .
In the absence of their stewardship and direction where real crime does matter their abject failure gave a printed licence for all the leaders in banking to play casino money with the nation and knowingly they would get away with it and to employ their skills in deceit by stealth .
Enclosed Debtors Prison We in Ireland have created a Gulag for enforced slavery at home with polarisation of communities scattered .For those who have decided to remain at home will in good time record the misery and pain of broken families and loss of national identity .This deep sense of loss induces a deflated morale that is only designed to worship the Gods of Banks and Plutocrats from Europe . This new cult will have their own regulated enforcers and where the meek are destined to an eternity of remorse and sadness .Their tunes will continue to display a veiled… Read more »
http://www.independent.ie/business/personal-finance/property-mortgages/a-solicitor-should-have-a-bigger-house-than-a-paye-worker-even-if-insolvent-29568257.html A LEADING financial expert has claimed hospital consultants and solicitors are entitled to live in bigger houses because of their “professional status” – even if they are insolvent. http://www.broadsheet.ie/2013/09/10/a-solicitor-should-have-a-house-that-accords-with-his-status-in-society/ “In practice, the PIP will also have to assess the type of house that might be needed for a professional person such as a solicitor, accountant or a hospital consultant as opposed to a house that’s needed by someone who is in the PAYE sector for example, so that, as a PIP, I would be making a very strong case, for example, that a solicitor should have a bigger house… Read more »
DMcW is spreading the “helplessness” angle, I wonder why? No mention of FDR in the 1930’s and how he dealt successfully with the Wall Street problem. No mention of the Reconstruction Finance Corp., Glass-Steagall, the Shannon-inspired TVA. All of this is well understood. Many here play second fiddle too. Afraid of playing “second fiddle” Mr DMcW, in the recovery about to begin. Playing first fiddle on a rubble heap? That is really second fiddle to the British imperative to loot us all back to the stone age. Of course each satrapy mired in the rubble heap needs its allotted fiddle.… Read more »
My last glimmer of hope for Ireland shrivelled up and died inside me when I read this :
Apparently the Personal Insolvency Bill is just a bailout for the “insiders” at the expense of ordinary, solvent, working people, and Ireland is still a banana republic, and shows not the slightest sign of changing, ever. I don’t think I can bear the thought of spending the rest of my life here.
Ireland’s tidiest town… and the award goes to. . . Moynalty, Co. Meath… Yayyyyy,, awarded by Phil “Septic” Hogan. Yayyyy-
Oh no that doesn’t sound quite right?
Dollop of irony there gan dabht! :D
Some mildly connected truisms and emerging findings 1 in 3 are getting tired of social networks. People are now starting to realise that things get done only when the doers are eye-balling one another. This simple fact was well understood by those used to power. The advent of the one stop shop OR the bill aggregator OR any form of packager mechanism where you and companies are invited to leave your brains at home and let others leverage their economies of scale has left people powerless, helpless and incapable of changing without significant cost – not just monetary. Aggregation is… Read more »
It’s beyond laughable at this stage…
‘Happy’ Gilmore is socking it to the austerity hawks!! Biff! Pow-socky! Blam!
HELLO!!!! You’ve been up to your oxters with them for nigh on 3 years man!
He’s defo reminiscent of that character from the Adam Sandler flick ’50 first dates’, an affable chap named “10 second Tom”, only diff is his medium term memory seems to be afflicted aswell!
101 degrees was reached but the high temperatures don’t make a he stuff of Mary Wilson.
Extreme anything based on beliefs, opinion and fads does exactly the same thing. Why do people fall noise and empty promises of extremism? It comes from an idiotic fear of uncertainty.
Can anyone see the green shoots?
EC chief Barroso: ‘Ireland’s economy is improving’
The End Is Nigh – Bernanke’s Last Hurrah in the Last Chance Saloon
“US Fed’s wind-down of QE expected to begin next week”
David, I have being following this column for years and really enjoy your pieces. I have even read all of your books. This is only my second ever reply to one of your articles. It amazes me that you find the need to continually bring up the fact that you were right about this (property crash etc) in 2003. We all know that. Get over it and move on. When you talk about possible solutions the articles are generally a much better read. Also, it is very evident that you defend your part in the bank guarantee at every opportunity… Read more »
[…] A heavy price for banking failure – David McWilliams – Sep 9 – 2013 […]
[…] bright. 'A lot done, more to do' springs to mind. A model bank. But according to David McWilliams A heavy price for banking failure | David McWilliams 'In the period of 2000-2008, they behaved like pyromaniacs in a forest', 'We can see that the ten […]