Things are going downhill so rapidly that we need to look at changes day to day, not year to year.
In economic analysis, it is normal to compare year-on-year figures in order to draw some inference about what is happening to the economy. Every day we hear experts saying that new car sales are down 42 per cent since last year, or unemployment is up 47 per cent since last September, or whatever.
The central underpinning for this type of measurement is that we can deduce something from comparing this year and last year, and any such deduction can help us understand what is going on now. The key assumption is that nothing has changed since last year and, therefore, a comparison with 12 months ago is meaningful.
But this premise that nothing has changed since last year is nonsense. The most important thing to appreciate today – in the week the government reacted to the crisis and the markets went into freefall again – is that everything has changed.
As a prominent businessman said to me last week, ‘‘forget year-on-year comparisons – what matters now is week-on-week changes’’. His gist was that things are deteriorating so rapidly that the day-by-day and week-by-week changes are more revealing than the year-on-year malarkey favoured by many ‘experts’. His reasoning is simple: last year was not only 365 days ago, it was an entirely different epoch.
Let’s examine the contention that we are now in a new epoch. Given what we know about lending, debts, house prices, unemployment, migration and tax revenue, it is reasonable to argue that Ireland has now moved into a quite different phase. This is not merely a normal economic cycle amplified by the credit crunch; we are faced with an entirely new paradigm which has enormous ramifications for banks, governments, house prices and all of us.
What is happening in Ireland is a microcosm of what is happening all over the English-speaking world. To appreciate the magnitude of developments, we must understand that this is a global monetary crisis, the likes of which we have not seen in our lifetimes. The epicentre of the tempest is the banking system and the monumental debts that have been incurred.
Make no mistake about it, these debts will not be paid back because we cannot generate the income to do so. As a result, it is highly likely that one big Irish financial institution will fail in the next two years.
This might sound dramatic, but it is fact. Remember, telling people that house prices would fall two years ago was labelled heresy – but it has happened.
In fact, the lesson of the past 12months is that the ‘experts’ haven’t a clue what they are on about. If you look at how the consensus view has changed in the past year, we see that what was originally labelled ‘extreme’ and ‘maverick’, has become normal and mainstream.
For example, we were reassured that the crisis would be limited, ring-fenced and manageable. But the opposite has occurred. If we look at what has happened in the US, we see that the local has become global.
Twelve months ago, the experts told us that the financial crisis in America was limited to the sub-prime market. Then we were told that it was only in Florida. Then the spin was that investment banks were safe and only mortgage banks would be affected.
Then we were reassured that a run on a bank was not likely. Now we know that possibly trillions of dollars of debt will have to be wiped out as mortgage problems feed into credit card default and on to insurance premium defaults and car loans. In short, the entire ‘buy now, pay later’ culture has been exposed as little more than a pyramid scheme.
Exactly the same will happen in Ireland. Up until this year, the Department of Finance was forecasting a budget surplus! This coincided with the ‘soft landing’ scam — which was, of course, bogus, because it has never happened in any market. However, this unfortunate truth didn’t stop the experts from peddling it, or the people from believing it.
Then we were told that only outlying areas would see house-price falls. Yet the biggest damage in percentage terms is being felt in the premium side of the market. Then estate agents indicated that new apartments in good areas would be fine. Yet last week we saw prices of swanky apartments in Dublin 4 slashed by 20 per cent. In addition, some developers are now offering zero-interest-rate loans to potential buyers.
This is indicative of the dire straits we find ourselves in, where the banks are trying to hoodwink ordinary people into debt by doing a backdoor deal with the developer, rather than forcing the developer to reduce prices. Where do you think the developer is getting the money to give you the zero interest-rate loan? From the bank that underwrote the project in the first place, of course.
This amounts to the bank agreeing that it is better that we lumber a small individual with the crud of a falling market, rather than standing up to a developer and telling him the game is over. But the game is over. The Irish business model does not work any more.
The business model was simple. It was the same as the business model of the modern bank and it was based entirely on leverage. But leverage and credit have dried up. Borrowing for houses is half of what it was last year and it is likely to be half again next year. In these circumstances, the probability of a bank failing must be high. Remember, there has never been a credit crunch without at least one bank failure, and this credit crunch is like no other we have seen.
Unfortunately, our banking authorities are doing nothing. Why don’t they just call the banks in and say: ‘‘Listen lads, stop conning us, we know your balance sheets are in trouble, now let’s work together to sort this out.” Instead, the Central Bank is criticising the government for not cutting public spending enough, when the Central Bank is the institution most responsible for the credit crisis in the first place. This is a bizarre and truly shameful piece of theatre.
The Central Bank can see the train wreck of a bank failure coming down the track, but it is hoping something miraculous will happen before it hits the buffers. So, as always in Ireland, we wait for the crisis before doing anything, by which time the remedial action is considerably more dramatic than it needed to be had we acted with courage earlier. What is likely to play out is drearily familiar.
There is likely to be a run on a bank, particularly banks most exposed to property and the ones with the least developed deposit base. As is always the case, the equity in that bank will be wiped out and shareholders will lose everything. The Central Bank will then force a shotgun wedding with one of the larger banks and the delinquent bank will be swallowed up.
All this will occur against a backdrop of rapidly rising unemployment, rapidly falling house prices and persistent budget deficits.
The Irish business model does not work anymore. Sorry for the bad news, but someone has to tell it like it is.
Which bank will it be? 3 letters with one of them being an “i”
David, you are truly a “John the Baptist” figure, telling everybody what they yearn for in their hearts (the truth) but what many influential profiteers do not really want to know-or want anybody else to know.
What the speculators do not want to tell them is- The game is over.
Unfortunately the small shareholders in the banks and other financial institutions will take the hit.
Gilt edge stocks -my ars*.
The whole world is being taken to the cleaners.
When will we ever learn.?
Luckily for you, we live in an era in which prophets do not lose their heads!
‘May you live in interesting times’, according to Terry Pratchett, quite a curse to bestow on someone. We certainly find ourselves in interesting times, both socially and economically Ireland at the moment. There is nothing in your article that I fundamentally disagree with, David, but it does leave a rather large question hanging at the end, Where do we go from here? I agree that the Irish business model does not work anymore, but our current problems are exacerbated by the fact the model, in it’s current incarnation, is the mongrel child of the US free-trade and European social models.… Read more »
A simple payroll program for the health service, one that could be applied nationally became a mire, too such a point that on-one knows even in a philosophical sense what the hell is going on. Last week, on the radio a chicken farmer from Co. Limerick was commenting on the loss of a college education for his five kids. How exactly, I’m not sure, but I for one am not paying a vast price for chicken, so that someone can send his sprogs to Rockwell, Glenstall or Kylemore. Nor am I all that keen on their rumps parked at Loyola-Marymount… Read more »
David. Thank you for calling it exactly as it is. The banks are in serious trouble. However there is one thing everybody is banking on. From the politicians in Kildare Street to the local auctioneer in the shiny office on High Street. The multinational sector. What people do not know is that the pressure on the multinational sector is slowly ratchetting up, consistently. The fall in the value of sterling vis a vis the Euro is tightening margins for any multinational exporting into the UK. Beyond that costs in other areas of the Euro zone are dropping. Same currency. Lower… Read more »
VincentH…concerning the HSE IT project….the unfortunate fact is that the same project has been implemented all over Europe without a hitch over a hundred times over….it is absolute indightment against a country that likes to see itself as a technologically advanced society…most of the administration in the HSE is still paper based…a combination of factors is creating the cost overruns…public sector unions, an embattled minister for health who is rumoured to have an alcohol problem, bad managers, nepotism, consultants who regard the entire project as a means to negotiate more pay, and inexperienced personnel charged with making the thing a… Read more »
David, listening to Liam Griffen the Wexford hotelier on the radio talking about the costs of business compared to Britain and France. I reckon a forum should take place to discuss the Irish economy. David McWilliams, George Lee, Liam Griffen, Micheal O’Leary, and two industrialists. On live television for the Irish people to realise how ‘out of kilter’ things have become !!!
Fair play David, I agree with you Deco also, but I think the central message of this article is too important to be diluted, there are billions at stake. The title captures whats going on with out banks perfectly, its a shameful piece of theater. The front of house staff (PR & paid economists) are busy tap dancing and singing that everythings rosy. Meanwhile their corporate colleagues have merged with the developers and are desperately trying to offload property rather than writing off bad debts…. Other colleagues in mortgages are refusing loans to the few first time buyers who are… Read more »
George Soros in his recent book, The New Paradigm for Financial Markets, makes reference to this new epoch. He contends that the post WW2 credit super-boom has reached saturation point and a contraction is inevitable. Ireland has benefited from this quite belatedly. It enjoyed a decade of decadence based on negative real interest rates, a kind of economic masturbation where noting real was produced. The past twenty years saw the first truly global economic boom facilitated by financial deregulation and globalisation. The bankers chanted in unison about the benefits for self regulation “trust us were the experts”. Wall St went… Read more »
David Good article. I think you are correct in your assumptions about the Irish business model but, given the Irish way of doing things, I think you are wrong when you say that a large bank will fail in the next two years. Ultimately I think that one or more of the banks will be sold to an oil rich sovergn fund/bank to avoid said failure and save face. You alluded to this in a previous article and I still think that will happen. It will be hard on the “poor” builders because the banks will be under “new management”… Read more »
Remove your savings and place them in a credit union or buy some gold or silver coinage and stuff them in a mattress or a safe deposit box, or form a syndicate and buy a few acres of good land, least that way you will be able to eat if push comes to shove. As for the banks let them burn and the bankers with them, no one needs them. Whatever banking functionality communities need can be served by credit unions. The current banking system only exists to serve parasite shareholders who leach of the productive capacity of the underlying… Read more »
The US administration today bailed out Freddie Mae and Fannie Mac, taking on the management of $6 trillion (with a T) of mortgage debt.
Will this set a precedent for the Irish government to use taxpayers money to save National Allied Bank of Ireland?
Unfortunatly for all of us, the answer probably is yes. Listen to the excuses given by the US administration today, so you won’t have to waste your time listening to our government regurgitating them in a few months time.
David: You have done an excellent job as harbinger of doom over the past couple of years, usually pointing the finger at appropriate culprits. However you are rather reticent about offering solutions. Perhaps you see this as the function of those of us who contribute to this blog. Anyway, here’s my two bits worth. The ultimate custodian of wealth in Ireland is not the banks, which are pretty well derelict behind their Corinthian pillars these days, a bit like an Irish Acropolis. The place with a finger on the true wealth of Ireland is the Land Registry Office. It knows… Read more »
Malcom, I understand your wish to move on and find solutions but I think its pointless to debate them at this stage, the main contributors to the problem (banks, CIF, developers, central bank and indeed others) are still playacting… They may be delusional, having believed their own spin for years and think that another round of section 23’s will magically get the party going again…. I’m afraid offering solutions at the moment is like talking to an alcoholic who’s still half pissed… Trying to help at this stage is a waste of time; they need to sober up and admit… Read more »
I too believe the banks will be bought before they fall. Depends on timing really. I figure they’ll be let fall to near zero and picked up for a song to give an Arabian or Russian outfit some western cover. Of course, I am assuming that there’ll be a need for that in the first place. If the US Treasury Notes are starting to vapourise in the Chinese banks because Fanny and Freddie is sitting on thin air, we literaly have a new financial paradigm where Wall St becomes irrelevant and new methods of exchange of value will come to… Read more »
I have a question? Bank stocks are taking an mighty walloping at the moment, and the main reason is that there is a genuine fear one or more could go to the wall at some stage. As someone who holds a small amount of stocks in one particular bank I have two options – I can either hold out and ride the storm and hope that the stock recovers, or I can sell at a significant loss. The question is, if I sell I will receive a cheque from my stockbroker, what do I do with the cheque? I have… Read more »
So, if one does have some cash on deposit in Ireland, where’s the safest place to put it? [my mattress offers a poor rate]
If one of the big 3-lettered-banks banks was to experience a run, or crash etc., would the gov step in & guarantee deposits [isn’t that what happened Northern Rock in the UK?]
Anyone care to recommend a liquid institution?
btw – Read Vincenzo Browne in the The Post today. He seems to think this will all turn around in less than 2 years.
“The Irish business model does not work anymore.” Banks lending solely to property backed schemes can’t work alone in a ‘developed’ economy. Is there another business model which could work given our current strengths and make a significant impact ? In case anyone doesn’t believe MNCs are here for anything else besides tax, the exchange rate in 2000 was $0.80/â‚¬1 and recently it hit $1.60/â‚¬1. Assuming salaries in MNCs were comparable with the US – it costs twice as much today but ‘services exports’ have risen 4 fold to â‚¬45 billion. That’s not sustainable in a global economy no matter… Read more »
We should reduce our corporation tax to single digit %’s, 8 sounds good to me and give other tax breaks. Especially companies who are spending or investing into R&D, research and development. Dell are selling factories, as design and technology are the future, not the manufacturing of products.
Nice idea about tax haven…but…what’s to stop China/ Poland/India from doing the same? Setting up a financial haven with just banks, reconciliation centres etc. does not employ many. Costs of manufacturing are just too high. I think the idea is good just for service businesses with a high knowledge content. Forget about moving material (except agri) and focus on software dev/ biotech etc. which are high in value add, need little in the way of transport logistics or raw materials. But fundamentally you have to play with the rest of the world – EU will block you and if you… Read more »
Playing a economy game with corporation tax is like playing a game with steroid.
You may look macho, but you are not. It is temporal, and will damage your health.
We should face to the reality rather than disguising ourselves.
‘The Irish Business Model does not work any more ‘ ,….Really what was our business model anyway ?. We borrowed money at the start cheaply from banks bought over valued homes off crooked estate agents who were working with these institutions, we fitted out our new homes with appliances off ignorant sales assistance’s who were been over paid for their ‘services’ we then headed down to the forecourts to take out yet another loan from another institution to purchase our nice big cars, when our new washing machines , telephones and home cinema systems broke we waited for hours to… Read more »
Hi David, Another interesting and good article from you that hopefully will ignite some people into doing some thinking. > the entire ‘buy now, pay later’ culture has been exposed The only catch is that the buy now pay later culture is something which capitalism as we know in most countries is completely based on. Its embedded. And we have been using it for decades. Its a trust model for one thing and its based on future activities/work output. I dont think we can get rid of it or drop it outright, just like a heroin user cant stop overnight,… Read more »
Brendan W, You make a lot sense. However common sense isn’t in vogue right at the
moment among Ireland’s ivory tower dwellers and the pro environment bullcrap promoters.
It’ill take a tidal wave of reality to wash these b**stards away.
“I believe that banking institutions are more dangerous to our liberties than standing armies.” So said Thomas Jefferson in 1802. It still rings true over 200 years later, despite all the changes in the interm. The historical sharp practices of banking institutions have been stiffled by legislation to be replaced by a new form of usury, not excessive interest rates, but excessive credit. This practice has had the support of the authorities because the liquidity it provides helps economic ‘growth’. But this growth is false. It is borrowed growth, borrowed from the future. We have sacrificed future growth and, more… Read more »
>The Fannie&Freddie bailout is an indication of just how bad things are. I’m susrprised to see bank share valuations rising today based on that news, as I would have thought it bad news
fannie and freddie guarantee the majority of the U.S originated mbs’s which are now on the books of many
of the European and U.S banks. So the bailout has artificially improved that quality and value of these mbs’s and hence the share value of any institution holding them.
You’re implying that there was a certain degree of fear on the part of the bondholders that Freddie & Fannie would be allowed to disappear, and also, and quite separately, that the US government would allow all, or some, of their bonds to become somehow technically valueless, irrespective of their underlying value?
Their bonds might be over the counter, but surely they – which are, after all, just a bunch of mortgages – have value in their own right?
FDR’s famous phrase comes to mind “Only Thing We Have to Fear Is Fear Itself”. Really, Freddy and Fanny bailout was necessary or panic would take over for sure. This is what it’s all about. Managing fear and I expect there will be an intense managing media to ensure the wheels do not come off the cart. It might just work provided the internal corrective action takes place…firings, dismissals, changing legislative frameworks etc. I figure the US have about 2-3 months breathing space to show fundamentally it can prove that the businesses there can generate enough activity to pay back… Read more »
Philip quoted FDR “Only Thing We Have to Fear Is Fear Itself”, but George Sewell said “Fear is the tax that conscience pays to guilt”. And we are all guilty, at least by default, for what has happened in Ireland over the past 15 years. We all enjoyed the benefits of the boom and the rising standard of living it enabled, without raising obvious questions about how it could be sustained. Other members of the EU scorned our dependence on low corporation tax–an economy on steroids, as someone said. During the boom years, active people at every level of society… Read more »
reply to Stephen Kenny An MBS backed by what was initially overvalued and now depreciating assets, i,e shoddy American houses, and the increasing likely hood of default by mortgage payers who generate the dividend on the MBS, mean that they have much less value now than they did a year ago. This is the sort of toxic waste many banks were exposed to which was the initial cause of the credit crisis as no bank was willing to lend to any other bank who was suspected of having these mbs’s on their books. In fact they have so little value… Read more »
Lets not get ahead of ourselves. Its not even the end of the dollar/euro/sterling let alone the end of the anything else. Even if it is, I suspect debts will carry over. But this article is really important, it’s telling the government and the central bank theres a real problem out there… you can’t claim ignorance…. sort it out now. Its timely, as decisions are being made, deals are being done now that will seriously influence the amount of money the taxpayer is forced to spend over the next few years on property, banks etc. You must understand that each… Read more »
@ Johnnie G , quoting George Soros ,this is the same man who with his investment vehicle single handily caused the devaluing of sterling and the punt back in the early ninties ,What a man he is! @ Lorcan Kelly with reference to Fannie and Freddie , this bail out has been done by Mr Bush who like our Bertie stepping aside ( knowing the sh*t was about to hit the fan here ) is out of office in four months, they are as good as bankrupt they actually have mortgages to the value of $5.3 Trillion which is as… Read more »
@ Garry. “Lets not get ahead of ourselves.” I think its a bit late for that now. The horse has bolted. And as for “potentially’ paying too much tax all we have to do is look at the toll bridge on the M50. We have paid for that multiple times and are still being ridden for a toll just for the pleasure of using the bridge. The HSE has pissed money up against the wall with practically no accountability and no results. I think you are being a bit soft. We have had a 10+ year highway robbery and its… Read more »
Brendan there’s a lot to be learnt from people like George Soros and his ilk. No doubt he is a pragmatic some would say ruthless business man. Regardless of your feelings about his business ethics and those of his contemporaries, there is a lot to be garnered from the writings of people like him. The most pertinent information is discussed in business publications with a transparency seldom seen in the general press. I have no particular admiration for the man but it do like to know what the real political power brokers are thinking, it makes it easier to protect… Read more »
@B All I’m saying is “stop trying to analyze what went on in the last 10 years and how the worlds problems can be fixed in the next 10″…. and just focus on ensuring the builders and banks don’t get bailed out over the next few months. It’ll make a huge difference and its actually something that can go either way right now! It is really encouraging that most analysts are now advocating non interference in the market, our host here was one of the first to say this publicly, so it shows opinion can be influenced. Politicians are guided… Read more »
> “I believe that banking institutions are more dangerous to our liberties than standing armies.” That is very true. The way banking has developed over the centuries and recent decades is that we have given them a licence to literally fleece money from others. Yes, its true that capital serves a purpose in mobilising and enabling labour, BUT, the excessive profits, bonuses/salaries, marble “cathedrals” are ‘obvious to a 4 yr old’ that the system is skewed and flawed. I should know, I used to work for a bank and also in other positions we provided services and solutions to them.… Read more »
Garry> It is really encouraging that most analysts are now advocating non interference in the market, our host here was one of the first to say this publicly, so it shows opinion can be influenced. Politicians are guided by public opinion, they need a simple message to leave the losses with the banks & developers, hands off our taxes! Well, I dont think we are at that point yet, ie: politicans being guided by public opinion. If you caught the ingratiating interview of Brian Cowen with Pat Kenny on the Late Late, they talked about nothing else apart form the… Read more »
@ JohnnieG. I would have to agree really Soros book Open Society is a very good read too,
John Kenneth Galbraith noted in “A Short History of Financial Euphoria” that money and intelligence are not necessarily linked. I see this as the fundamental crux of the problem. Many assert that people in finance are intelligent by default – ergo…the idiotic trust in Banks and people with money…as though they must be intelligent to start with. Most bankers/ accountants I have come across are not exactly the sharpest tacks in the box. They know all the standard and clicheed cute hoor responses. But there’s little depth. That’s who you have running the country and our financial systems. Never questioned… Read more »
For the past 6 years, we have been running crazy monetary, fiscal , exchange rate and immigration policies.Now, the shit is hitting the fan.The eighties’will look like a picnic, compared with the next decade in Ireland plc.
@Garry If we bail out the banks we are the biggest shower of eejits to walk on two legs. If we bail ou developers too we must realise that democracy is well and truly dead in Ireland. My point was that we could have had a more sustained prosperity if we had tempered our enthusiasm for property by a property tax. This is probably wishfull thinking but maybe one or two of the developers could have maybe finished a house properly. Basic things like good paint and doors that close properly and maybe a wall or two thicker than cigarette… Read more »
“… a pyramid scheme …” (view my past comments) my sentiments exactly. The credit card debt will run into the trillions world/Europe wide- nearly two trillion in the states. The big shit hasn’t quite hit the fan yet. Anyway! The banks and the government are in league with the property (criminal) developers. No property tax, and very little in commercial property development leaves the door wide open to every dog and devil to make a fast buck. Look a Fannie and Freddie The two companies (I’m sure you know but for the benefit of those who don’t) are privately owned… Read more »
“Delegations of bankers have been making their way to the Department of Finance in recent times lobbying for ….”
Of course they could be looking to increase penalties for tax evasion or reckless trading, looking to tightening up lending standards, or even strengthening depositors protection legislation or volunteering to pay us back for their last bailout now that money is a bit tighter. Somehow I’d doubt it.
Be very afraid….
We didn’t vote for the banks. The politicians that entertain the bankers should at the next election be shown what the public wants. If the public is happy to elect them to have vested interests and explict cozy relationships with bankers who are we to object?
If we elect the same chancers again we deserve what we get.
Guys, I know how to save the local economy…offer the place as a freebie launch facility and control centre for experimental space craft. They are doing it in Scotland. We are less mountainous and probably more empty. Turf powered rockets safely landing on the sun at night come to mind. Also we have lots of vacant buildings for target practice for the new prototype weaponary. Turn the whole place into an Area 51/ Isle of Wight. Joking aside, this is how fundamental and leading edge knowledge will develop.
Well the economic doomsayers will love the next bank to enter into the theater the fourth biggest lender in the USA Wachovia are now also on deaths door . This new dynamic will have Mr Bush running back to texas. I know I’m thinking strongly about stopping to pay my bank loans , well if big business can do it why can’t we ?
Brendan W said: ” I wouldn’t knock the Celtic Mysticism either as after all the visitors that come here or invest here do enjoy the Irish ‘Craic'” Brendan, you want a modern Irish economy that can compete on the world stage, yet you still hanker after that bygone world that Dev held so dear. I hold the cultural accomplishments of Celtic society at the time of the Senchus Mor in highest regard, however that society had already begun to disintegrate after the Black Death in the 15th century, with increasing internecine strife, resulting from the competing blandishments of the Roman… Read more »
Longlivetherepublics That’s interesting. I was unaware that F & F MBSs had guaranteed dividends (coupons, I guess). I’m just trying to get a view on the change that has occurred, and so it’s possible effect. F & F were already GSEs, so there was certainly some sort of presumed Government backing. Paulson had already publicly stated that the Treasury ‘stood behind’ F & F, on two occasions, I believe. Even with that, people started to get nervous, what, over the last couple of weeks, but their CDS prices were never very high, and certainly not over the last couple of… Read more »
@ Malcom McClure, regarding having our cake and eating it !, I only mention the ‘craic’ in the broader context of the association I certainly have no admiration for Dev , as far as I’m concerned there he sold out Collins so I’m not going down that road even if the fair maidens will meet me at the cross roads. I am though intrigued by your comment on ‘civilized’ visitors coming to visit us , you seem to hold the ordinary Irish in low esteem with this remark for you can’t stereo type or put us all in the grouping… Read more »