Why should we pay now for the sins of our bankers? Why should we cough up any more to support these institutions that have, through their own greed and outrageous misconduct, brought the economy to the brink?
In recent days these are the sorts of questions people are asking, not just here but all over the world. Before we sort out the mess, we need to go back to basics and define what exactly it is that a bank does. This might appear obvious but, given how the present management of Irish banks turned them into casinos, it is not always clear.
One way of looking at the banking mess is to divide the banks’ role into two functions. The first and most crucial is to provide credit to us, in the same way as an electricity company provides electricity. This is the basic business of banking, it allows us to pay bills, to set up accounts to do our day to day financial stuff without too much hassle, and for this we are prepared to pay a fee.Let’s call this the “utility” side of banking.
The second part is the one which has got us all into this mess. We can call this the “speculative” side of banking. This is the weak link. The banks used our money to double up and bet on the property market and all sorts of other assets. Now that the bet has gone sour, their balance sheets are in tatters.
So what are we to do? How do we quarantine the bad loans so that the core business of banking can resume? And how can we minimise the cost to the taxpayer, making the banks — not us — responsible for their bad decisions? The stakes couldn’t be higher. If we get this right, we might lay the foundations for some recovery. If we get this wrong, we are doomed.
One approach is to decide whether we can avoid taking the hit now. If you believe that we have not yet seen the bottom of the property market and that when that point is reached, the property market will very gradually recover, not to the ridiculous levels of 2006 but to somewhere above today, then it makes sense to borrow today to tide you over. The reason this approach has value is that it avoids the taxpayer getting caught buying assets today from the banks that might be even cheaper tomorrow.
At the moment, there seems to be a consensus emerging in the Department of Finance to buy everything from the banks today, put all the stuff into a “financial skip” and then, over the course of the next 10 years, manage these properties as an asset management company. The aim is to buy the distressed property today at “market” prices and to pay for this by issuing a government bond. Given that the calculations of just how bad the toxic loans on the bank’s balance sheet varies from €40bn or €50bn to €100bn, this is going to be very expensive for the taxpayer at a time when we do not have the cash. And nor do we know where the floor in property might be.
This is known as the Swedish or “bad bank” model. However, as this column has pointed out in the past, there is one seismic difference between the Ireland of today and the Sweden of 1992. The Swedes underpinned their banking bailout with a huge 40pc devaluation of their currency, allowing inflation to rise and so the resulting uplift in property values was swift because it was facilitated by a new softer currency. Their “bad banks” offloaded properties in the recovery and paid back the taxpayer, at a profit, reasonably quickly.
Without the devaluation of the currency and the printing of money in Sweden, the bad bank idea might not have worked so well. In fact, the risk is that it does not work at all and we, the taxpayer, end up not only bailing out the banks but bailing out the bankers and developers; they’d be off the hook and we’d be left carrying the can. So without a devaluation to ease the pain, what can we do now to ensure that we don’t end up with a bunch of toxic assets that an asset management company can’t sell?
Maybe we should think about getting the banks to actively work for us, locking them in to clean up their own mess.
Let’s say the worse case scenario comes to pass and there is close to €100bn of bad debts in the Irish system. Instead of buying the assets now and risking buying too early and too expensively, we could set up the asset management company with a contract to dispose of the banks’ assets over time.
The State could borrow the €100bn from the ECB at 4pc but charge the banks 10pc for this money and a 0.5pc fee, payable to the asset management company to enable it to function. The 6pc difference between the rate at which the State borrows from the ECB and the rate the banks pay the State to take the assets, goes straight into the coffers to build roads, hospitals and the like. This is €6bn that the banks pay the State from their profits over the lifetime of the asset management company.
Now we are moving towards a situation where the State doesn’t need to nationalise the banks and thereby take on more liabilities. It actually gets paid for looking after the bad debts of the banks. It can also take warrants, if it wants to, in bank shares, so that we the people get paid twice.
Therefore instead of costing us money, we could actually make money by getting the bankers to work for us.
In essence all we are doing is using the ECB, as the guardians of the European banking system and ultimately the controller of the monetary union, to show financial solidarity. We joined a monetary union in good faith and now we should call on the monetary union in the spirit of the European family of nations for a bit of help. This won’t cost them or us a cent.
wills, whaddya think?
David, “Therefore instead of costing us money, we could actually make money by getting the bankers to work for us.” Now, I like the sound of that! However, for this to work, we would have to fire all the current bank bosses and there does not seem to be the political will to do this – au contraire! This idea seems a bit like the one where the County Councils mortgage the council houses to its tenants – the agree a price for the house the tenant is living in and allow the tenant to purchase the house over time.… Read more »
David, I like how it reads. This is a continuation of the Irish guarantee by pushing that guarantee further up the line and rightly using the strength of the monetary union to clean up our debts while maintaining the strength of the nation state. This is a crossroads for the nation state and the monetary union. Do the corporations win out or do they take the rough with the smooth like the rest of us? This is sellable to the Irish people. This, alongside a future levy partial refund for those who prove they had no property loans in these… Read more »
Ruairi, “David, this is the PD fee market virus that has stained Irish politics considerably since its birth and PD wannabees in FF have allowed that ideology to continue to punch above its mandated weight by using left of centre and traditional FF votes to push through this failed vision of Western society.” I agree; our problem soon, however, is that this is the same ideology that the Lisbon Treaty sucks us into: globalised free market. Articles 113-118. So, do we vote yes to get the ECB to save us from the damage this ideology has conspired to cause, or… Read more »
David , I’m not sure that I’m following your argument when you say: “Instead of buying the assets now and risking buying too early and too expensively, we could set up the asset management company with a contract to dispose of the banks’ assets over time.” I was under the impression that these “assets” were in fact the toxic debts that the banks had been unable to securitize. It’s whistling in the wind to think that these will recover substantial value any time soon. It’s simply unrealistic to think banks would pay 10% interest a year to encourage the government… Read more »
The first man that came into my head when I read about the 6% charge to the Banks over the 4% rate from the ECB plus 0.5% admin charges was none other than Henry George (1839-1893).Henry believed that a single rate land value tax should be introduced,thus replacing all other taxes.He concluded that this would reduce the impact of the Economic rent paid on land and free up Capital to be used for more productive and innovative uses.Now while the global Economy has moved onn from Henry’s day, the idea he proposed has merit,if it could be implemented with other… Read more »
In conjunction with the above I would recommend that proper Regulation be put in place for Banks that are systemically important to the Irish Economy so as to prevent the Emergence of other gambling to replace the land roulette wheel.The Banks have enough on their plates supporting Enterprise,Industry,SME’s.Science etc to justify their existance and viability without the misplaced greed that panders to the wrong type of shareholders.Im sure there are enough speculative “Banks” out there to cater for the foolish amongst us who like to gamble with their personal wealth.These type of Banks should be regulated to the point where… Read more »
DMCW – David assumes that the ECB is the guardian of the European banking system .I totally disagree .If I want to make a complaint to ECB about any Criminal Irish Bank or their paid Managers they dismiss the claim because it is outside their remit and lies solely within the ‘Irish Political Cartel and The Golden Circle’.
Why not use the money to set up new Banks. Why not allow the current lot go to the wall, It would provide the devaluation you want and with little fuss. All we are doing at the moment is filling gaps for each call made and providing good Euro for devalued dollar.
David McWilliams, What I love about your writing is the clarity. And the way in which you present your ideas in the form of a story that we can buy into. This time you tap into one of our core experiences: we’ve put money into the banks in order to get the economy moving again and, instead, we’ve got no such result. So it feels like money down the drain. So why would we want to put any more into the hands of the same people? For this reason (and others) we are all looking for a different way. You… Read more »
[…] I’ve written this to David McWilliams… PaulOMahonyCork | 02 Apr 2009 8:08 am […]
I keep hearing arguments that being in the EU and having the euro is the only thing that will save us from this economic mess in the long run. I have always taught that if we had stayed more independent we would not have gotten into this mess in the first place as we could regulate our own currency. The ability to fix our own interest rates and devalue the currency compared to the rest of Europe would make economic life turbulent but a lot easier, in the long run. The complete mismanagement of our finances by the Government has… Read more »
Where do the banks get the money, or from whom, to pay the 10%? The ordinary peasant of course. Wind them up, let the state buy the assets, or whoever, at knockdown prices. Start a utilities bank with the savings now guaranteed, which won’t be guaranteed after September 2010, then what. The banks and developers must take the hits, not the ECB, nor the peasants.
If you were to accuse any of the government or its associates of anything which amounted to a whiff of corruption or incompetence you’d be sued for libel, defamation , the works. So in the eyes of the law, our government have never ever been involved in anything dodgy or of rigging the market to suit their friends. If you must know, the taxpayer is their friend and the current mess is caused by factors completely beyond their control. The media cannot engage with the government in any direct manner. All questions have to be prepared and handed over to… Read more »
The key to Sweden’s recovery was it’s ability to devalue it’s currency.When we devalued in 1986 and 1992, the economy made a quick recovery.An English economist speaking on yesterday’s (wed) news at one said that Ireland will suffer a permanent depression due to present policies and that we must start taxing land.The social welfare system will bankrupt us within 18 months.Ditch the Euro-it is the only way.Wake up people.
Unemployment – I have been informed that the monthly increased figures for Limerick are : Jan 2009 Feb 2009 March
6,000 11,000 20,000
( projected )
I dont understand how ditching the Euro is going to help. There was a huge borrowing by the banks in the interbank market between 2002-2008, so that the rate is now 1.6 in loans to deposit. So you might be tempted to conclude that all the money that entered this country in those years came from foreign sources. If you want to ditch the Euro and devalue, I suggest we all check if the there is a loophole in the terms and conditions on the loan agreements the banks signed, or in reality the government guarantee. That will allow the… Read more »
Property Taxes – I believe there is some merit in this with a proviso that you are given services in return .In France the average annual cost per building is €2,000 60% by the owner and 40% by the occupier .
The problem is we are not seen as a nation of law makers and consequently we like to break down what is not built properly .Trust as a nation has broken down .
The Government are ignoring all ideas from this site and hold their own political agenda with a poisoned sword pointing to the masses .
Euro Devaluation – I believe the ECB will devalue the Euro ‘in their seperate entities ‘ , this means that the Irish Euro will take the lowest value but so will our loans …………now that would not be too bad and we then might be allowed to restore our competitivness once more .This sounds like a pianless option .
Garry – thats a good point .In France people who had property and who had little or no cash to pay their tax bills had to sell their land to pay their bills .Remember for fiscal practical purposes France is an operational Communist Machine …..and we are heading that way too .
We have to pay our debts. That’s the end of it. Squirming out of it by offering fluff for real cash is not an option. A NeuPunt would be fluff. The problem facing us is who pays. Government want the taxpayer to pay. Odd. Surely it needs to be the guys who incurred the debt. DMcW is offering an option – he’s really playing like a bank that wants to avoid a foreclosure of a house. Me? I think foreclosure is the only option. Bankruptcy admin asap, flog the assets as best we can and move on. It may be… Read more »
Devaluation – My point is the Irish choice of devaluation if chosen properly or better still decided for us by ECB will initially happen with the minimum of damages .Essentially , our spending power and loan commitments devalue together at same time .The point is that we can continue to repay our new devalued loans in ‘Irish Euros’ not ‘Euros’ or new punts .Seperately I believe the Euro as we know it now will have to devalue ‘in seperate sovereign pieces ‘ so each find their true market price .The US $ and Chinese will force that to happen no… Read more »
Sorry pals – been snowed under with work, and I missed being able to provide comment. @severelyltd – you hit the nail on the head. “What is so special about us ?” We have constructed a mental model that tells us we are special. That mental model is built on arrogance, and little much else. Irish pride needs to be put in it’s place – now that it has brought about a massive calamity. We had a generation of pride – now it seems we have had the fall. The fact that the country was delusional was bad enough, were… Read more »
Devalue – I also said that the ECB could decide to allow each soverign state to allow The Market to decide their prices ie ‘ Irish Euros’ – like all markets the money markets can be dictated and in this case by The ECB . Some one Wins and Loses …we will win win win here ……..and therafter a new paradigm must be sorted out …from a new position of Strength.
Philip – I agree .My point is if we( as taxpayers ) can Devalue our cash asset and our loan liabilities the ordinary tax payer wont be penalised by internal loss of purchase power due to say a Euro Loan to repay .And if the Gov Toxic Debt can be traded out by another mechanism .
Garry – dont be surprised …he just might beat the Publican . Someone always wins .
One of my friends just handed me a ‘Banana Dollar’ and said it is the new Irish currency. Someone, with too much time on their hands made up fake notes, with bananas on them. I suppose you just have to laugh at this stage, if you didn’t you would cry. On an unrelated subject, I just sold my place, for a reasonable price of 120k, this is the price it should have been selling at for the last six or seven years, so I am happy as I am making a couple of grand, which is nice. I bought it… Read more »
G20 Summit Les dirigeants des principales puissances mondiales se sont entendus sur un certain nombre de points visant à refonder le système financier. Les moyens des institutions internationales seront accrus, les rémunérations des traders mieux encadrées, la réglementation financière renforcée, et une liste des paradis fiscaux sera publiée. Une victoire pour la France. Monaco…..what happens next ? ——————————————————————————- Before and after the introduction of the Euro we in Ireland had another currency that we traded in Europe and only in the agricultural commodities .We had identified a segment of the trading community that was in danger at the time and… Read more »
Prime time Part 1 finished on a final note that rhymed ‘bankruptcy’….the ending silence was deafening .
Prime Time Part 2 commenced with ‘a tear’ on a pending pension crisis for everyone.
What’s next?…..Indeed.
Can a soccer match be arranged in the future with North Korea?
Hi David, > Why should we pay now for the sins of our bankers? Why should we cough up any more to support these institutions that have, through their own greed and outrageous misconduct, brought the economy to the brink? We are already paying for their ‘sins’. But our problems are not the sole responsibility of a few nefarious banking miscreants. That is misleading. The problem is endemic, instutitionalised, systemic, regulation and government. Its equally as valid to ask, why support the bankers as to why support the government responsible. These ‘sinners’ are equal. Ironically, we now have the political… Read more »
We have been taking the wrong approach here. We are buying shares which have a high risk of tanking. Rather than buy banks that are completely shagged but Iceland and buy a huge interest in their geothermal plants. Let’s bundle Iceland and Ireland together. Have them buy our assets at knock down prices. Then let us keep our Euro and they their Kroner and we can buy for all using Euro and export for all using Kroner. The small matter of the treaty needed to make this happen?? This is a synergy agreement that could dig us out of a… Read more »
Another idea would be that ireland declares war on America. We get invaded and we surrender. That way Obama gets more kudos for saving the world from the emerald peril and the dreaded diaspora (which to be honest sounds like a bad cold).
Gobble or Wobble – there is a simple way for the Electorate to show example to the elected government ‘How to Govern’. It is a practice in France known as ‘ sequestration ‘. To understand it better you imagine a ‘Creche’ and if your babies are not happy there then you ask the management to leave or place them in a re-education room while you run the show and when and if the management have shown process of good management then they are allowed to return to normal duties .
In France Company Management have been sequestrated in recent weeks.
Handel – the Germans love the Symphony Musical Octaves and believe that their sounds resonate better within a purpose built building as in an Opera Husse and preferably in Berlin .It’s tradition does not die neither do they want it to .Their mindset is perfect nothing less is acceptable.Their wood is hand picked and is finely crafted to precision and accuracy to allow the breath of the instrument express only the best and bring out a life that before was never thought possible. The ECB is liken to their Opera Husse and they will not allow Die Deutsch Euro (… Read more »
How do you ‘manage’ a toxic debt? If you take for example an apartment block in Tallaght laying empty and unused or a quarter of a new housing estate in Kildare empty and unused, it’s builder has the problem of it not selling. The ‘Bad bank’ takes over the problem from the original bank that lent to the builder. All the ‘bad bank’ can do in this situation is to sell off this property way below the market price (if it can) and make back the difference in the interest it charges over say 25 years to Joe Soap. If… Read more »
@bloggers; If the derivative black hole credit crunch had not burst irelands ponzi credit bubble gangster paradise something else was going too. It was an economic nightmare,self made, waiting to happen. Not every resident of the rep. of ireland participated in the great ponzi ireland inc smash and grab. Not every resident of the rep. of ireland is responsible unto the great ponzi ireland inc smash and grab aftermath clean up expense. Who is reponsible…….? Who is responsible for the economic fiasco……? How is it that irelands competitiveness some many people sacrificed hard for to happen, was squandered and frittered… Read more »
Folks, how about this for a paradigm-shift: “Negative equity” means nothing if you switch to viewing your house as a home for your family, instead of a rung on a ladder/an asset to capitalise on/a profit-making scheme for the lazy.
Then, begin to regard a business as a means of providing a working living for its employees instead of a means of using those expendable employees to create profit-for-profit’s-sake.
Any chance?
Utter utter utter utter crud, David. The Ballsbridge brigade must love you. For a one-off 6 billion charge, the Irish taxpayer is supposed to take on a potential 100 billion writedown risk. Why can’t the banks manage this risk themselves? We’re supposed to take on this garbage, all so the D4 set can continue to hold the purse-strings, and decide who gets a loan and who doesn’t, and in some cases who gets a job and who doesn’t. No thanks. On the plus side, Bertie is now a football pundit, after his latest appearance on the Roy Keane documentary on… Read more »
David,
Once again Daithi does a 180 U turn!!! Rubbishing his self proclaimed “financial skip” plan. I happen to agree that it is unworkable as I have said before on this site – but it is McWilliams habit of changing his tune which I find amusing.
Wait for his next volte-face – probably David´s love affair with an annual property tax. This govt´s eagerness to introduce this residential tax is only matched by my determination never to pay it – just as no one paid it in the 80s and 90s.
Sometimes the devil is in the detail,like for example in the case of Anglo Irish Bank.and the owners of the 5.7 billion subordinated bonds.Subordinate Bond holders usually fall between the Main Bond holders and the shareholders when getting paid if the shit hits the fan,and as such represent a lesser risk than shareholders but a higer risk than the Main Bond holders.Subordinate Bonds are usually issued to give a higher return than Main Bond holders and are usually for a shorter time .In other words Banks use these for short term funding for various reasons.Im always curious as to the… Read more »
Irish Leaders – today I hope we will all witness again the reclaiming once more the new real leaders of Ireland ( Munster ) and the overthrow once more of D4 Brigade ( Leinster ) ……another great moment of change in Ireland.
Famine – Our Recession started exactly 150years since the Famine .It would be interesting to correlate economic data between those years to learn why ?
What I do know is that I was not around then when my great grandfather arrived to Ireland as a settler and I am around now to watch all the recent new settlers in Ireland .My point is there must be an economic cyclical pattern to learn from and this must be explored.
Rugby Sequestration – Munster has reclaimed to be the Irish Team. In the same breath DMCW’s Party can sequestrate the political process and show new leadership .
DMCW Party – Sequestration primary process has begun I second you Tim and I am sure the motion will be passed.Lets build a Winning Team that always will come first and scores the best .
I am sitting at the table listening and I have no doubt that this matter will continue tomorrow .I hope everyone joins in to make all this possible.
Folks, I asked the Minister for Ed and Sci to examine my cost-neutral proposal below to save jobs, class sizes for our children and allow teachers who feel unable to continue with their task to retire; His answer – received by snail mail – I have re-typed in full for you as an example of what we are dealing with, the brick wall against which we are banging our heads. Make of it what you will …… (don’t get mad, Robert – just keep strategising). My email-follow-up to my conversation with him at the Ard Fheis: “Essentially, the problem is… Read more »
Furrylugs, please return. You were wrong about leaving this forum to “heavyweights” alone – we need them, yes, but we need you, too. Lorcan, where are you? Folks, I think that we ALL need to maintain stamina of contribution here. Do NOT fall into the trap of “instant gratification” and drop out because you don’t receive that “feed” here. Some are manifesting tremedous tenacity here: MK1, Ruairi, John Allen, Malcolm McLure, jim, coldblow, goinghome, BrendanW, Philip, gadfly55, Garry, pera, Dilly, colin-in-exile, PaulOMahony …. etc. Let’s keep at it! Ideas count – even if their fruits are not immediately perceived. No-one… Read more »
http://newstalk.ie/newstalk/breakfast-show/rss-comments/
Hit that link, folks.
One of the presenters, Claire (Byrne, I think), has fallen into the trap of having bought a house in 2007, so she might listen to the likes of us.
Newstalk106 is a reasonable, non-governmental, news station.
It receives none of your annual TV licence fee, yet it survives.
Perhaps, you might consider telling them what you are telling US?
There is the link for you,.
Hi Tim, Newstalk: problem is would they air any “issues” related to Denis O’Brien? Probably not. Newstalk are not free. RTE is beholden to the government of the day (rather than being protected by non-changeable legislation, the judiciary or an independent president). Others have equivalent ‘ties’ and limits, not only to owners but also to advertisers. Oh for a free and non-beholden press/media. Be wary of what you read. > 35/80ths of their salary One of the costs of pensions is that the costs will rise as teachers salaries rise. The actuarial math is relatively straight forward but for many… Read more »
Retiring at 50!, we we need to keep people working longer, not retiring early. see Waddell and Burton Review for the UK DWP, http://occmed.oxfordjournals.org/cgi/content/full/57/3/229 http://www.rsm.ac.uk/pathwaystowork07/burton.pdf When the welfare state was set up after WW2, there were 20 folk in work paying for every one person on pension. It’s now between 2-4 folk in work paying for every 1 person on pension!! This is unsustainable and socially devisive. There is extreme pressure on ill-health retirement as a financially advantageous way and easy way for management to exit the dispossed, disgruntled and disengaged folk from the public service. But this is also… Read more »