The brilliant English economist John Stuart Mill, writing in the 1860s, noted that “a crash doesn’t destroy wealth, it merely reflects the extent to which wealth has already been destroyed by stupid investments made during the preceding boom”.
Mill’s way of looking at financial crises, examining the period well before the bubble burst, when the boom masked the progressive destruction of wealth, remains the most constructive way to look at any financial crash, including the great Irish banking/property crash.
Let us not forget that every bank in Ireland went bust. It didn’t matter whether the banks were locally or foreign run and owned. They all indulged in reckless lending and they were all bailed out.
To date there hasn’t really been a satisfactory answer as to how exactly this happened deep inside each bank and why there didn’t seem to be even one dissenting bank. Nor is there any real answer as to why the Central Bank and the regulator ignored all the warning signs, or why those few who did warn and publically stressed the dangers of all this reckless lending were scorned and vilified.
The endgame of banking crises all over the world, if nothing is done in the boom to slow down lending, are bank collapses. These meltdowns are caused by bank runs. Those at the bottom of the queue – depositors – will lose everything without somebody plugging the hole in the banks.
The lesson from both the Great Depression and the Asian crisis is that a bank run is much more damaging to the economy, to employment, confidence and income than even the shock of the crash itself. The loss of deposits eliminates the wealth of the middle classes. If you doubt this can happen even when banking crises are managed, consider what has just happened to Cypriot depositors.
In recent years, the notion has been raised – at ECB level – that depositors are “lenders” to the bank and therefore, when banks wobble, the depositor should expect to lose money.
But this is a terribly mistaken interpretation of what goes through a person’s head when they deposit money in a bank. Most people deposit money for safekeeping. You do this for the rainy day. Your savings are what you have when all the other bills are paid. It is your nest egg.
Yet, every time a loan was made, every time a bank in Ireland scrambled to extend money for some development or other, ordinary people’s deposits were risked because more and more wealth was being destroyed.
Deposits were not sheltered. Even after the Northern Rock collapse and the collapse of Bear Sterns on St Patrick’s Day 2008, neither the Irish financial regulator nor the Central Bank drew up a bank resolution mechanism to protect depositors in the event of a crash.
But how was the situation allowed to get so out of hand?
Bear in mind all the banks were at the same game. It wasn’t just Anglo. AIB and Bank of Ireland doubled their loan books in the three or four years preceding the crash.
The other banks copied Anglo’s lending approach by lending as much as possible, and they also followed Anglo’s funding model, by borrowing as much money as possible in order to fuel the binge. This is where the infamous bondholders come in.
Obviously, when lenders to the banks are confident of getting their money back, they are prepared to lend for long periods. But they began to panic, triggered by a property market crash, and demanded their cash back.
This mismatch between liabilities (what the banks owe) and assets (what the banks have lent out) is often why banks go bust. They lend out for very long maturities but they are financed by very short maturities.
So, when a crash comes, they can’t call in their loans (their assets) because they are illiquid and lent for, say, 20 years, but the people they owe money to (their liabilities) can ask for their money back the very next day. The fragile nature of a bank’s balance sheet means that wise and vigilant regulation is paramount.
Failure to oversee the system meant that when the panic came, the authorities were not faced with good and bad policy options. All the options were bad. It is a question as to which option was the least bad.
Once a banking boom leads to a banking bust, the entire drama becomes like a hostage situation. On the one side you have the kidnappers – the bankers – who threaten that if they are not bailed-out they will shoot the hostage, meaning the economy and the deposits in the bank. They threaten the authorities as follows: if you don’t do as we say, we will allow a bank run and your people will lose their savings and your economy will stall because your payments system will break down. The ransom is the size, type and duration of the bailout.
The government which has already suffered a monumental intelligence failure as the regulators and the central bank have failed abjectly, faces a choice: are the kidnappers bluffing or do they have a nuclear option which they are willing to use?
This is what the Irish Government faced in September 2008. It was a hostage crisis. And we know from the Anglo tapes that the attitude of the kidnappers ranged from the cavalier to the sociopathic.
While outside governments such as Germany and the UK may have said “you shouldn’t deal with kidnappers” or “we wouldn’t have done it that way”, in terms of concrete plans there was nothing coming from the ECB.
The guarantee was temporary to stop the flood of money leaving the country in panic. Once the panic had subsided, it ought to have been rescinded and followed by a resolution mechanism whereby bondholders were picked off one by one in an orderly fashion.
Why this didn’t happen in the subsequent months/years remains a mystery, particularly when it became obvious that the bankers were lying about the extent of the losses.
Would it have been a runner to do nothing in September 2008, call the kidnappers’/bankers’ bluff and risk a run on the banks where depositors would have lost everything?
The Irish banking crisis didn’t start in September 2008; it started years earlier when bank after bank abandoned prudence and risked everything for short-term profits and personal bonuses. It ended up as a hostage situation with kidnapper/bankers threatening the economy and deposits, leading to the state guarantee. This option was the consequence not the cause of the financial meltdown.
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Good morning.
The combo of Fractional reserve banking and central banking has the hostage situation described above baked in the cake.
The best regulation is the nuclear option. Forget your oversight and prudence outsourced to some bureaucrat who is selling you safety and taxing you for it, because over time that becomes diluted into once again becoming what it set out to stop. Corrupt crap. There should be absolutely no guarantee or tax money used to prop up a banking system, or any other failed business for that matter. Even if it means taking a loss on cash deposits. It’s harsh but fair, and everyone would play by the same rules. Much like no matter how absolutely stupid the driver in… Read more »
“The guarantee was temporary to stop the flood of money leaving the country in panic.”
Problem is, government had no right to stop the flood of money out of the Country, neither did the Banks IT WAS NOT THEIR MONEY!!
Is this article about justifying your role in promoting the bank guarantee? As the tapes reveal the idea was a hotel California situation, check in and they cant check out. As I have said before, they knew how bad it was and you knew how bad it was. You gave the Minister a banker favoured solution.
There was other options, you didn’t present them. I have being following you closely for years. You are a banker dressed up in the peoples champ wool.
As usual there will be a few “David is the best comment posted below.” BA BA BA
@IrishSovereignty
DMcW is not below turning the Anglo-Irish cassettes ‘crisis’ into an opportunity to defend his decision to advise Lenihan to go for a bank guarantee.
He is defending his own reputation in this article.
Sadly for DMcW, John Bowe’s response to Lenihan’s move is to sing Deutschland Über Alles.
For a laugh, you understand, because he found DMcW and Lenihan’s move naive and worth having a laugh at.
!It is baffling that nobody linked the much talked-about imminence of a property crash to the solvency of the banks. For instance, David McWilliams, the economic commentator, who for years had been prophesying the collapse of what he regarded as the “property bubble”, was the one urging the government and the minister for finance Brian Lenihan personally to give a blanket bank guarantee. David McWilliams must not have believed himself!” (Vincent Browne Irish Times Wed, Jun 26, 2013, 12:00)
http://www.irishtimes.com/business/economy/ireland/why-did-almost-no-one-realise-that-anglo-irish-was-not-just-illiquid-but-insolvent-1.1442412
The reason for the sacrificing of Ireland and continuing to do so is very very simple. Given the choice between money and integrity, money wins every f*&^ing time. Drumm and the rest of them across all the banking community are evil at best. The boom we witnessed is like a zombie movie where the disease spreads by “Status Anxiety”. People are panting to ape these characters. Our politicans, regulators and our civil servants and you name it. The real reason we have massive muzzling laws relating to defamation and the reason no one goes to jail is precisely due to… Read more »
Afternoon David,
“Why this didn’t happen in the subsequent months/years remains a mystery”
Odd remark considering you have been pointing out all along that what’s going on is an exercise in saving the euro.
Mrs Edna isn’t going to put us first.
Thankfully a commentator of substance also correctly identifies that many of the humans in charge of organisations of this type are sociopathetic.
I never though I would find myself referring to bonbon but it’s bail in’s we should be afraid off.
This is a very interesting and given the Anglo debacle timely article. One thing that strikes me is what David describes as the “notion” that depositors are merely lenders to a bank and in the event of bank insolvency they become unsecured creditors of the bank and are close to last in line to be paid out. Unfortunately this is much more than a “notion” and is exactly the legal position between a depositor and a bank. When you deposit money in a bank you are actually lending money to the bank which has the legal right to do whatever… Read more »
I think it’s gas how nobody wants to read what david McWilliams actually said and advocated in 2008, particularly at the point where the game was up in September of that year. I found those archived articles on this site relatively easily and they set out clearly where the man stood as regards what should be done. In the event, things were half done for political expediency I’ve no doubt and broke every rule of capitalism. Why persist with the ad hominem attacks on the guy? If those who take the cheap swipes were here at the time, or made… Read more »
“Ireland’s economy lurches back into recession” – when hearing this CAO statement today one takes it as if it’s water off a ducks back (oh gosh really). It seems times and expectations have changed but this might be a good thing too? ||| <> (DMcW) Yes, we had a bank run but not by depositors but by bondholders the crash was not brought about by governments but by the privatisation of our money system and nothing has changed. It’s Time to change that and it looks like you may be on board… Ireland is too small to change or to… Read more »
After only 20 comments our friend is on the ropes and taking a murderous beating. The natives want blood. They want ‘Drummer’ and the other scum hanging from lamp posts
Hi David Gangster banksers, rotten politicians, exploitative insiders etc…… CHICKEN AND EGG QUESTION. Do corrupt participants ultimately produce a corrupt system? OR Does a corrupt system ultimately produce corrupt participants? WHICH IS IT? Are we remonstrating with The SYSTEM or are we remonstrating with HUMAN NATURE? If it’s human nature then we are wasting our breath, every and any system will be corrupted and fail. On the other hand if it is the System at fault then there is hope for improvement and our remonstrations are not futile. I have yet to answer the above question clearly in my mind.… Read more »
Hi Adam, that would also be my outlook. A system can nurture either the good or bad in people. I’m convinced the power of conditioning is absolute on people who are inherently malleable and start out life as blank slates. In the correct environment people will flourish and vice versa. The only downside with this view is that you have to constantly tell yourself that the gombeen destructive behaviour of all and sundry is a form of conditioning or even brainwashing by negative group think imposed by a bad system which I feel uncomfortable with as I find it slightly… Read more »
The Anglo Tapes are a national embarrassment yet John Bruton thinks we need to regulate these guys even less. He is insane
[…] full article at source: http://www.davidmcwilliams.ie/2013/06/27/how-the-banking-collapse-turned-into-a-dramatic-hostage-cri… […]
What a jig and a reel around the Glass-Steagall swords! Have’nt ye forgotten that that was meant for celebrating victory?
The fight has just only begun! Jigs and reels later!
The Anglo bankster tapes are exactly what is needed on the doc of the upcoming Pecora Commission. Perfect material, unbeatable, at least so far.
Now be serious, Glass-Steagall first, let the banksters change their “nature” in rubber rooms, howl all they like. It’ll be recorded any by Tempora/PRISM.
“US Must Call in the Unpayable Debts of London and Continental European Banks”
Brace yourself DMcW, this is what will happen. I think you have underestimated the situation entirely. West Brit parochialism has limited the vision, I’ll say.
It is time to understand what Glass-Steagall really means!
Thomas Hoenig & Sheila Bair Recommend Glass-Steagall To Congress; British MP Tells Chancellor “Glass-Steagall Or Crash”
Have you all really made an effort to understand this? I recommend it urgently, as you will be simply upstaged by events, AGAIN.
Yes
No
about 6.30
load of crap
disagree entirely
Good Evening Mr Brogan,Adam,Pauldiv..hope everything wonderful..?
oh pizza ready………….
To put things in context –
Brendan Keenan of the Irish Independent tells Kelly he is wrong about the scale of the problem with Irish banking.2008.
http://www.youtube.com/watch?v=EI5o8qsTVoM
David Mc Williams predicts Ireland’s economic downturn in 2003, Austin Hughes disagrees
http://www.youtube.com/watch?v=6gWPmufcOTo
The hacks are out tonight, lots of abuse for David. I would be more concerned if I were getting compliments. You know what floats to the top in these parts……
Our government has been trying to get the message out to that Ireland is open for business.Ireland is a safe place to do business. Our governments reaction to the Anlgo tapes will have shattered this illusion. Our Taoiseach tells us he understands the anger of the people. Has he no anger? Instead Kenny decides to use the tapes as a political football and have a few swipes at FF. I heard it reported that the FG machine intends to push for an Oireachtas inquiry believing that timed correctly maximum damage could be done to FF before the next election. When… Read more »
Aye shipmates!
The storm clouds are gathering and the horizon is taking on a distinctly darkened hue…
The veneer of respectability is well and truly scattered all over Stephens Green, headquarters of the infamous Anglo, in light of these most recent phone recordings. Indeed the veneer has been stripped from the whole sordid bunch of cowboys from Kildare Street, through the financial regulator, central bank, ntma and especially the centre of all the bloody incompetence and for me the breeding ground of all that is wrong with Ireland, the one and only Department of Finance. It comes as no surprise to me to read that most of these clowns started out in the DOF, before moving on… Read more »
German people are disgusted and offended at comments by Anglo executives
http://www.independent.ie/business/irish/anglo/merkel-ally-describes-anglos-german-comments-as-unbearable-29374863.html
It is blatantly obvious that few understand the cause of the present catastrophic depression (call it by its proper name). finally DMW identifies that the depression is the result of the boom. Why we had a boom and what to do about it is apparently a mystery. what caused it? Why did the central banks not prevent it? Why were the regulators asleep? how many times has it to be repeated. A CREDIT INDUCED BOOM LEADS TO AN INEVITABLE BUST. (Austrian school economics 101) Always has happened and seems like it always will. So now the question is why was… Read more »
Good for it to be exposed. It is not restricted to Ireland. I can assure you such attitudes are endemic. It should be taken as a warning by all countries, they are not immune.
Above was supposed to be Re Pauldiv’s comment on Irelands reputation.
David, why protect depositors at the expense of taxpayers and ordinary citizens of a country, who may have no money on deposit. I am sorry, but you are completely wrong on this one and the only conclusion I can come to on this, is you must have a lot of money on deposit. The bailin in Cyprus was a choice between, loose a smallish percentage of your money or loose it all… I think that’s a pretty good deal actually. Here is what should happen with banks; Auditors need to properly audit banks and report the situation and outline the… Read more »
David, many of us have studied economics and here’s one fact I know about, we have thousands and thousands of economists and yet here we are up the creek without a paddle…. if you understand nature, then you understand that what is going on is nature, human nature if you like. If you couple economics, which gives very limited view of what is going on, with nature then you start to get a little closer to being able to manage the economy and society. What is lacking at this stage is an ability to be creative, to envision the future… Read more »
http://www.forbes.com/sites/karlwhelan/2013/06/28/the-anglo-tapes-the-guarantee-and-irelands-economic-crisis/
The Anglo Tapes, The Guarantee And Ireland’s Economic Crisis in Forbes 130628 by Karl Whelan.
Brian Lucey on Anglo Tapes Pravda RTE tom 130629 Sat 1-2pm with Clare Byrne
It’ going to happen even if we don’t say it…
But sadly honesty and whistle blowing have destroyed many a person and people don’t want the truth as it hurts….
Be careful out there Mac it’ jungle
It’ going to happen even if we don’t say it…
But sadly honesty and whistle blowing have destroyed many a person and people don’t want the truth as it hurts…
Be careful out there Mac it’s a jungle
The calendar archive article thingy is gone
I agree with mush of the articles main points. This though:- ‘the government which has already suffered a monumental intelligence failure as the regulators and the central bank have failed abjectly, faces a choice: are the kidnappers bluffing or do they have a nuclear option which they are willing to use?’ Not for a second; Individuals in govt and with the CB and regulatory bodies did know. In fact what about the auditors – they knew too. Drumm and the lads are being thrown overboard by the scabbard pirates fighting amongst themselves. The anglotapes have been in circulation for the… Read more »
Typo – *mush* -> *much*
Also,
Plausible deniability is a key MO for the scabbard banking pirating professional insiders.
A classic example of this was our gracious host – David – being used by Lenihan – for him to give the bankster criminal insiders their banking heist demands.
The Irish banking system was used by how grown power elites of Ireland to game the euro and game the inter-banking markets and loot, plunder and pillage the wealth of the economy of Ireland.
Ponzi Rep:
Greetings All
Tomorrow, Saturday ,I’ll be hanging around the Grand Hotel, Malahide, in the lounge from 2-6 pm and later if someone insists.
https://maps.google.ca/maps?ie=UTF-8&q=hotel+in+malahide&fb=1&gl=ca&hq=hotel&hnear=0x48671a891bda8a55:0xa00c7a9973215c0,Malahide,+Co.+Dublin,+Ireland&cid=0,0,4019076055501274519&ei=pfDNUamoL8H17Aayu4HQBQ&sqi=2&ved=0CK8BEPwSMAA
If you can mange it I will love to touch base one more time before I leave for less green pastures!!
All the best to those others and enjoy the Summer (yes there will be one this year)
I’ll be around Sunday too, but around Greystones
Tony
087 389 7787
Note Chancellor Merkel got it right – “the tone is similar across all the banks”. The time is nigh for the upcoming Pecora Commission. I expect more tapes any moment… — German chancellor Angela Merkel has intervened in the Anglo Irish Bank tapes controversy, saying such revelations were damaging democracy. Asked early this morning in Brussels about the disclosures the German leader said the disrespectful tone towards the wider society appeared to be a common problem in the banking community — in Ireland, Germany and elsewhere. “I have nothing but contempt for this,” she said.. “The tone seems to be… Read more »
Ah yes Angela.
She should save most of her contempt for Deutsche Bank when their goings on finally make the light of day…
Best thing about the Berlin Wall being up was that she was safely ensconced behind it in Leipzig! Germans should ponder on how they went from having a Chancellor like Willy Brandt to the present day incarnation in a quite short period of time relatively speaking.
The silence is earth shatteringly deafening and I’ve waited for someone out there to to answer question of the week – Why now and who benefits? Like a submarine navigator I am waiting for a faint ping but all I can hear is the tick of the clock as I gaze through the blank page of log book feeling alive and sensually heightened due to the awareness that death can appear suddenly and without warning. Will anyone ever know I existed I sometimes ask myself. It doesn’t matter is the answer I get Such thinking is the luxury of anyone… Read more »
Silver manipulators will have to drop their shorts.
No way but up for silver for the next 5 years
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/6/28_Eric_Sprott_-_Stunning_Indian_Buying_To_Crush_Silver_Shorts.html
Top Global Management Consultancy Calls for Shock Financial Asset Wipe-Out, Which “Requires an Environment Last Seen in the 1930s” The highly-influential Boston Consulting Group (BCG), the world’s second-largest management consultancy, issued a memorandum on Sept. 23, 2011, with a gameplan for dealing with the global financial crisis by wiping out large chunks of financial assets at a stroke, even though this means sinking the world into a deep depression with attendantgenocide. Back to Mesopotamia? The Looming Threat of Debt Restructuring calls for a 34% across-the-board “haircut” in the Eurozone, and a 26% and 27% wipe-out in the United States and… Read more »
The insanity of the Boston Consultancy Group report posted above show up in the reference to “Mesopotamia”. Have a look at the eyes in this Rembrandt : Balshazars Feast
The same glint is in the JP Morgan, Bank of International Settlement, and Boston Consulting Group maniacs eyes.
Thank God we have nation-states and Glass-Steagall now to deal with this!
Does anyone around here do any homework at all? We have John Stuart Mill quoted yet again as “brilliant”! And not a twitch, not a glimmer, no comprehension of the sheer swindle? The entirety of the British East India Company’s Haileybury school in political-economy, including Adam Smith, Jeremy Bentham, Thomas Malthus, David Ricardo, James Mill, John Stuart Mill, and so on, are all rooted in the dogmas of Quesnay et al. Marx, too. Virtually everything taught as “economics” in universities today, and virtually everything still accepted as “economics orthodoxy” by most governments and other institutions, is a offshoot of this… Read more »
More tapes! Have ye seen the reports? The timing is perfect!
Jesus Pauldiv you have it bad. On the upside once a century on average (1690,1798, 1916)we decide enough is enough and we go tits up. We’re getting close to that time again. And I think there will be blood on the streets. And unfortunately as ever it won’t be the blood of the assholes who have caused this disaster.
David, That is not a bad analysis of the crisis and a good explanation of the maturity mismatch. However, it seems to ignore how money is created in the first place and it’s not really the case that people deposit money in banks who then keep some aside and lend out the rest. Instead money comes from bank loans. Once a loan is approved a bank types new money into the borrower’s account and this is how most ‘deposits’ are created. It’s also why every ‘deposit’ has a matching debt. In fact with the charging of interest it’s impossible for… Read more »