AIB emerged from the “Munster & Leinster Bank” and for years it was dominated by men from Cork. There can hardly be a better place to write about AIB than from a small café in the pretty area of Cork known as Sunday’s Well. The unique Victorian and Georgian architecture echoes the mercantile past of the city, dominated as it was by the famous “Merchant Prince” families. Below me, the fast flowing river Lee is swollen by a few days of rain. Let’s hope the city’s river defences have improved since a few years ago, when the Lee broke its banks and flooded the Mardyke.
AIB recorded profits of over €1 billion in the past 12 months. This is a big number. To put it in context, it is just over half the profit that the bank was making at the top of the boom. Back then, AIB’s management was busy blowing the entire balance sheet by lending to everyone and anyone.
For a time, until these loans go bad, they are profitable and drive up the share price of the bank. To be making such high profits so early in the economic recovery suggests something else is going on. Understanding that “something else” is critical to appreciating what is happening in the broader economy.
What does the balance sheet of the bank with the biggest branch network in the country tell us about the state of the general economy?
More than anything, the AIB results reveal what a rising property market can do to the national balance sheet. This is both good and bad. AIB is a microcosm of the Irish economy.
In the period 2006-2011, like AIB, Ireland suffered massive destruction of its over-leveraged balance sheet – eviscerating much of the wealth of the middle classes.
On the “assets” side of the Irish balance sheet was property, houses and apartments, which collapsed in value. In contrast, on the “liability” side of the balance sheet, the debt that people incurred to buy these assets remained. Not only did this debt not fall as the value of assets fell, but the burden of this debt rose because interest rates were positive.
The impact of both these developments – falling assets and rising liabilities – caused the national balance sheet to implode.
Worse still, those people with savings were petrified and they began to save more. And people with debts were equally petrified, and tried to pay back the debts as quickly as they could. These twin processes sucked money out of circulation and demand collapsed, causing unemployment to rise dramatically and incomes to fall further.
This type of recession is termed a “balance sheet recession” and it is different to other recessions because it can only be cured by fixing the national balance sheet.
The only way to fix a balance sheet is either (1) to reduce liabilities – the outstanding level of debts – by introducing some debt forgiveness or doing debt deals, or (2) to increase assets – and that means making property prices go up again.
Ireland has chosen the second option. Although this is never stated, the objective of Irish macro-economic policy is once again to push up house prices. This will repair the finances of the property-owning middle classes, making them feel richer and therefore coaxing them to spend more either by spending savings or taking on more debt.
It is working. Consumer spending and consumer confidence are unambiguously related to house prices.
As house prices have risen, so too has spending, which drives income and job opportunities. We see this in tax revenue, retail sales, car sales and, of course, rents. Rising house prices have reduced negative equity and, as we see in AIB’s numbers, hugely reduced the amount of money the banks have to set aside for bad loans. In short, all over the country, to use a “Bertieism”, bad loans are getting gooder!
Therefore, what is happening to AIB’s balance sheet is a reflection of what is happening to the country’s balance sheet: it is being gradually repaired.
Where do things go from here?
This is where Europe comes in.
On the same day that AIB announced its results, the ECB gave details of its latest money printing venture – quantitative easing. For the next two years, the ECB will make €1,000,000,000,000 (yes, 12 zeros) available to the banks to lend out. That’s a lot of money.
But what will it do to the economy?
This money will drive up asset prices as it has done in the US. European stocks and property prices will rise because of the simple mechanics of too much money looking for a home. In political terms this could be described as hyper-trickle down economics because who wins when asset prices rise? Rich people of course! They own the assets.
In Ireland, all this new money will cascade into the banks and they will do what banks do, which is to lend the cash out. We already see AIB’s new lending in the last year is up 30 per cent.
Now here’s where we might learn the lessons from the past. Hyper trickle-down economics needs a hyper-vigilant regulator to police the banks. As well as regulating what the banks lend, we need to regulate what they borrow so that we never again get into the situation where “hot-money” (short-term foreign loans) finances bank lending. In the boom, the banks borrowed from foreigners to lend to us. This must never happen again.
This is where the regulator must step in. We all say it could never happen again, but it does because we have short memories and we convince ourselves that this time it will be different. But it never is.
As I look out over river dams shepherding the fast-flowing river at the Mardyke in Cork (named in the 18th century after the Meer Dyke in Amsterdam that protected the low-lying Dutch capital from the sea), I wonder how many times this river has flooded.
After every flood, the people say it can never happen again. The city council reacts and talks about new dams and sluices and yet every decade it happens again.
Could the same thing happen with the deluge of cheap cash flooding into our banks from Europe?
What do you think?
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I see the champagne tower at the tacky wedding starting to fill once again,……..
It seems that it is inevitable to happen again, but not in the short term. There will be some sort of regulation, which will eventually get eroded as we forget and get greedy, and an economist like Milton Friedman comes along and tells us that the market reigns supreme.
Hi, “In Ireland, all this new money will cascade into the banks and they will do what banks do, which is to lend the cash out. We already see AIB’s new lending in the last year is up 30 per cent.” I am not sure this tells the whole story: http://www.finfacts-premium.com/free/ireland/irish-mortgage-approvals-2014-rise-are-40-year-low To answer the question you ask at the end I think they will sit on the majority of the money they get through buying bonds of some description or other. regards, Michael. It would be interesting to see how much of the 30% is simply rolling over new mortgages… Read more »
It’s interesting that you use Cork and rivers as an analogy and miss the great irony of Cork city, it is a river. Virtually all the main streets in Cork used to be rivers, Patrick St, Grand Parade, South Mall. At some point in the past it was decided to build over them, but they are still there, this is one of the reasons why most of the old buildings on the South Mall have steps up to the first floor. When I was going to school there on days of high tides you could see the water bubbling up… Read more »
‘Ireland has chosen the second option. Although this is never stated, the objective of Irish macro-economic policy is once again to push up house prices.’
There we have it folks, that’s all you need to know. Ponzinomics 101. Together with the courts who are hell bent on not repossessing properties who have not made repayments in years, ghost estates left largely untouched from re-development, the meeja cheerleading house price rises in Dublin and property porn everywhere, the public sector clammering for pay increases etc… the situation is being engineered to take young people for a ride, again.
I hope that at least the young innocent families can maybe get a loan to give themself a jumpstart again. This loan can then be spent on plane tickets out of ireland. Once abroad they can get themselves sorted with accomodation, a job, transport etc. You have to get yourself out of there, less talk, less moaning and more action.
AIB is a “mirror to the Irish economy”. I would say that it is also a mirror to Irish society. Well connected plutocrats at the top, with mega pensions, telling the politicians how to run the country (and it is not the benefit of it’s people that is on their mind). The obsession with nonsense. The scandals. The corruption. The close connections with IBEC (whom nobody ever voted into power, but who influence state policy). The former big boys in AIB positioning themselves for roles in the EU. The CJH connections. Rugby and GAA sponsorship. Boarding school boys in charge.… Read more »
Just a viewpoint from a working class guy quoting Edmund Burke:Those who don’t know history are destined to repeat it.
I used this quote at the Engineers Ireland ball 2015, with the likes of IW contractors whooping it up.
“This must never happen again. This is where the regulator must step in. ” This is a typical statist attitude. Pile regulation on regulation. Many existing regulations are not being enforced. Even if they were they react to events after the fact so do not prevent the “event”! I seem to remember all the banks were bailed out last time. This time the “regulations” have been past and the resolution of the G20 is to “bail in” all the depositors. My solution is to be as much as possible out of the banking system altogether. The shysters can’t be trusted… Read more »
@ Tony Brogan
Don’t shoot the messenger Tony.
The following video is as good a counter argument I have listened to why gold isn’t going to save anyone. 3:30 to 10:00.
It’s an interview with a swiss billionaire Carlo Civelli.
https://www.youtube.com/watch?v=iJxWDs9TNKI
Let us know what you think.
Michael.
https://goldswitzerland.com/grant-williams-the-low-price-of-precious-metals-suits-russia-well-for-now/
Posted on Lemetropolecafe.com minutes ago to carole from trader rog hi carole, we are invested 100% in silver except for some portable gold. we’ve been True Believers for 20 years when silver was normally $5. the futures are merely a sideline. yes, i’m short futures, but buying physical this week. that sounds contradictory, but isn’t. futures are very short term. i will never trade futures again after silver goes up. this is only because i believe in silver so strongly- the most undervalued asset on earth. the big question is whether $15 silver will hold? will 150 HUI hold? friday… Read more »
http://investmentresearchdynamics.com/anti-gold-propaganda-in-the-west-at-an-all-time-high/
Interesting blog posting on the above Paul March 9, 2015 at 4:45 pm Let’s think about this. Just in the last week we had 4 events. 1. Apple announces the iWatch and says that they will be requiring 1/3 of the amount of Gold mined annually to keep up with demand. 2. 2. China supplies a billboard outside of Bangkok airport. One of the busiest airports in the World showing the RNB as the next World’s Reserve currency. And the “O” in World shows a Gold Coin. 3. HSBC the custodian for the largest Gold ETF ( GLD ) on… Read more »
http://www.gold-eagle.com/?utm_source=Gold+Eagle+Email+Newsletter&utm_campaign=04ad070f20-RSS_MON&utm_medium=email&utm_term=0_654d25a6f9-04ad070f20-116260009
A wailing and gnashing of teeth was heard throughout the land
Still want Euros in hand, or gold, Michael.
Maybe the price of property is not going up so much in Ireland as the values of the currency is depreciating. The definition of inflation is the expansion of the money supply. A debt based currency as is the Euro will generate a bust.
http://kingworldnews.com/big-picture-currency-wars-continue-rage-means-gold/
What do you think David?
AIB never would have been in in or become a problem if the world had not become corrupted by dishonest money but rather had been relatively uncorrupted by the use of honest money.
http://www.usagold.com/cpmforum/2015/03/09/will-the-shanghai-fix-fix-the-gold-market/
Is this good for the EURO? Black swans are numerous enough to look like black clouds!!
http://www.zerohedge.com/news/2015-03-08/black-swan-lands-southern-austria-ripple-effects-mini-greece-going-heartland-europe
“At the end of the day, the collectivist’s claims lead to nothing but political nooses around the necks of the citizenry with the end of the ropes in the hands of the political charlatans and psychopathic power lusters who want to break the spirit of the free individual and make him the implicit slave to self-selected “demigods” wishing to rule over mankind.”
– See more at: http://www.thedailybell.com/editorials/36145/Richard-Ebeling-Economic-Delusions-Political-Demagoguery-and-Ideological-Deceptions/?uuid=6F800609-5056-9627-3C5071902B060BF2#sthash.f144onpd.dpuf
http://www.thedailybell.com/news-analysis/36146/Central-Banking-is-a-Technocratic-Art-Form/?uuid=6F800609-5056-9627-3C5071902B060BF2
Exter’s pyramid and the rule of law
http://campaign.r20.constantcontact.com/render?ca=ad7f9e41-34a1-4907-bf97-f38841f693e0&c=877a32b0-427b-11e3-ad08-d4ae52a45a09&ch=8905dbc0-427b-11e3-ad3c-d4ae52a45a09#holter
http://kunstler.com/clusterfuck-nation/truthinesslessness/
“More galling and worrisome, though, is the failure of anyone even remotely in authority to stand up and publicaly object to the tidal wave of lies washing over this dying polity, actually killing it softly with truthinesslessness.”
“The more central bankers intervene in price discovery mechanisms, the more unable to reflect reality all markets will become. ”
What do think of this, David?
http://kingworldnews.com/andrew-maguire-stunning-update-hsbc-london-gold-vault-closures/
HSBC is also the custodian for the largest gold ETF called GLD. They are also the largest bare naked shorts, of gold, in the world.
“Greece is not the first to feel the noose tightening on its neck. As The Economist notes, in 2013 the ECB announced that it would cut off Emergency Lending Assistance to Cypriot banks within days, unless the government agreed to its bailout terms. Similar threats were used to get agreement from the Irish government in 2010.”
http://ellenbrown.com/2015/03/10/the-ecbs-noose-around-greece-how-central-banks-harness-governments/
“Beware of Masters of the Universe dispensing smiles. Draghi and the . . . ECB goons may dispense all the smiles in the world, but what they are graphically demonstrating once again is how toxic central banking is now enshrined as a mortal enemy of democracy.”
http://ellenbrown.com/2015/03/10/the-ecbs-noose-around-greece-how-central-banks-harness-governments/
For countries with a bit more room to maneuver than Greece has, one option is to withdraw public and private deposits and put them in publicly-owned banks. The megabanks are deemed too big to fail only because the people’s money is tied up in them. They could be allowed to fail if public funds were not at risk.
http://ellenbrown.com/2015/03/10/the-ecbs-noose-around-greece-how-central-banks-harness-governments/
Mein Kampf remains a best seller in the muslim world, so let them go to Berlin and let them say ‘Ich bin ein Berliner’, followed by allah ackbar ….BOOM!
http://wikiislam.net/wiki/Mein_Kampf
Excellent article. It’s a simple point, dealing with a balance sheet recession by reinflating the value of the assets rather than dealing with the debt, but I didn’t have it clear in my mind.
“Well, what I just want to talk about for a few minutes is the various efforts that are going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the markets…perhaps most important, there’s been–the Fed in 1989 created what is called a plunge protection team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges, and there–they have been meeting informally so far, and they have kind of an informal agreement among major banks to come in and start to… Read more »
Could the same thing happen with the deluge of cheap cash flooding into our banks from Europe? What do you think? Just how cheap is this cash? It is not given but comes with a price. It is constructed as a loan so must be repaid (Unless one expects to default and never repay) It comes with an interest charge.(Usury) All central bank money is the same in this regard.(that is 98% of all currency flooding into or swirling around anywhere it happens to be.) If 2000 years ago someone invested a dollar at 1% interest compounded annually the accumulation… Read more »