The recent publication of Professor Patrick Honohan’s inquiry into the banking disaster reminds me of weekly scraps I had with lads when I was a boy.
Back then, I regularly ran the gauntlet of the local hard lads on the bus home from school.
Suffice to say that a Blackrock College uniform was considered to be a ‘legitimate target’ in Dun Laoghaire in the 1980s.The drill on the bus was always the same; some of the local shapers would get on and ask me for a smoke or some cash. It was always the same:
‘‘Hey Redser, any odds?”
‘‘No, sorry.”
‘‘Bollix.”
Then the slap came, normally delivered by the weediest ones (they were always the most dangerous).Then they tried to steal my gear bag – for the craic.
‘‘Please stop, I don’t want any hassle. Leave me alone, leave my bag alone.”
‘‘What the f… are you going to do about it, Redser?”
Fair question, because they knew there was nothing I could have done about it, so there was no option but to take the hiding. Now – let’s go back to the banking report.
The ‘‘what are you going to do about it’’ question could also be legitimately asked of Professor Honohan. As governor of the Central Bank, he has the authority, both moral and executive, to follow up on his excellent report and actually change the banking game here, so that it never happens again.
Can you imagine if we did something to ensure that never again will our country be destroyed by the greed of bankers, and never again will the banks be used to speculate on land and houses? Can you imagine if our houses would never again be used as glorified ATMs to facilitate a credit frenzy?
In the 1930s, following the disastrous bank-led speculation on the stock markets, the US authorities broke up banks into investment banks and ordinary banks.
This move followed the realisation that banks couldn’t be trusted, so they needed to be broken up and regulated. We need to do the same here.
Apart from appalling management, the main reason the banks got themselves into such a mess was that their balance sheets played tricks on them. The more money they lent out to property, the more the price of property went up. So the price of property went up – and up.
And as it went up, it played tricks on the banks and they thought the value of the security was going up too. But it wasn’t. In fact, the quality of the collateral was falling and getting more risky.
So the key to avoiding a new property boom is to change the amount of collateral that is permissible against property lending, because this is the relationship that is fooling the banks and making them more likely to lower their balance sheets.
What if we were to back up the banking report with a new way of looking at collateral?
What if Honohan were to look at a backward-looking index of property, let’s say property values over 25 years, and introduce a new system whereby the bank could lend only 80 per cent of the average price of a property over the past 25 years?
By adopting such a backward-looking approach, there would be no risk of any more booms or busts, because using the average price would limit the amount of cash that could be lent against any property.
We would eliminate the risk of banks getting into a lending war at the top of a cycle because they wouldn’t be allowed to use the latest valuation to justify the latest mega loan.
We might also break up the banks, as Roosevelt did after the Great Depression.
How would you do this? And why?
Well, it could prevent banks from ever again getting involved in property and push some to move back to a building society model.
Remember, international banks had derivatives – complex financial products in which risk was carefully hidden.
Our equivalents were more prosaic – commercial property,100 per cent mortgages and speculative development land deals. It was, as the bank reports said, a ‘‘plain vanilla’’ property boom.
Using this logic, if we were to follow the recent US move of banning commercial banks getting involved in derivatives, we could ban ‘normal’ banks from getting involved in property investment plays again.
We could have land and property banks that simply lend to property buyers, but are governed by tight regulation and backward-looking indices to limit loans.
All these small changes can be made. The interesting thing about the banking collapse is that it gives us permission to change, it gives us the excuse we need to revolutionise the system.
This is what Honohan has on his side.
We, the people, are on his side as we have never been before with a Central Bank governor.
When I was a young economist in the Central Bank, Honohan dropped in occasionally. At the time, he was working at the World Bank.
He was always helpful with his time and was happy to explain difficult ideas to younger economists, using his clear mind and his wonderful teaching skills. But more than anything else, he had a deprecating sense of humour.
It was the same sense of humour that he used when I first saw him debate, when he deftly filleted the pompous British economist Dr Patrick Minford in the early 1990s in Trinity – without him even noticing.
Honohan is now deservedly in the most important economic position in the country, and power has shifted to him from the Department of Finance. Because of his open mind, we can expect more invaluable initiatives in the months ahead.
I expect that he will make bold moves when he feels it’s the right time.
Recreating our banking system to make sure that it functions properly will be one of the tasks. I don’t expect Professor Honohan to shrink from that challenge.
The report is only the beginning.
David McWilliams hosts the Dalkey Book Festival next weekend. Details can be found at www.dalkeybookfestival.org
But some of your former schoolmates are going to have to accept his changes and not conspire with the industry to make his job impossible.
Ahreeh Redser?
Lets have a look back at what the HSE done to reduce the number of un-employed….
Ireland Mother Ireland…
http://www.irishexaminer.com/ireland/unadvertised-hse-jobs-filled-by-relatives-of-staff-122418.html#ixzz0qoUoqt4w
Lets look back at what FF were trying to do above in Inniskeen, the home of one of my great hero’s Patrick Kavanagh………..Where next ? NAMA? Can we have our rebate there lads?http://www.independent.ie/national-news/ff-senator-left-millions-out-of-pocket-as-land-plans-rejected-2219643.html
Like I’ve said before, we need to stop being Irish.
Ah fond memories when the natives were drunk on credit and nobody would question any of this……
http://www.independent.ie/business/irish/83641m-a-year-in-public-money-props-up-ibec-1475189.html
Bubble blowing property lending has got to be looked at. Gearing lending to reflect changes over an 25yr period and factoring in 80% loans would certainly help. Plus looking at the whole issue of the quality of construction and design and services. General planning issues need overhaul. We should look at successful lending policies/practices e.g Denmark as well. I’ll reserve my own judgement on Honan until I see the new regulations set in stone, new financial laws that will prohibit illegal lending to cronies without collateral, or setting up of scam ‘ built to fail ‘ companies, bonds for the… Read more »
“Just lifting the so called veil of respectability off the Irish landscape here Boss” ” The message does’nt seem to be getting through Boss” “Might have another failure to communicate here Boss”
http://www.youtube.com/watch?v=1fuDDqU6n4o&feature=related
David: I am constantly impressed by your ability to bring a fresh perspective twice weekly to Ireland’s economic blight. Every perspective on the matter has beenn explored ad nauseam. Everyone who has passed leaving has become an economic expert by necessity rather than choice. And you continue to educate and entertain in an inimitable way. Your backward looking idea is excellent in theory but difficult to implement in practice. As everyone knows by now property value depends on location, location, location. Average prices over 25 years have no meaning for situations like the nice Georgian rectory whose glebe has been… Read more »
And on and on it goes………………..
FF senator left millions out of pocket as land plans rejected
http://www.independent.ie/national-news/ff-senator-left-millions-out-of-pocket-as-land-plans-rejected-2219643.html
I think bullying, as described in the opening lines of this latest article, is a major issue in this country and country wide seminars should be held on it.
It destroys esteem and confidence etc.
On a more positive note, started my first business venture at the weekend and have been able to give work to one person, something I have long wished for.
best to all, G.
Is that ‘one’ you G? ;)
Another good read from our host.
If we went back a little further to examine the origins of Banking in this Country, when Collins put aside his gun he sat outside the GPO issuing Bonds to everyone so they could share in the growth of the new nation.
Alternatively, Our beloved Dev did a bit of creative fundraising in the States, had Collins shot and ploughed on to the inevitable conclusion we have today.
This is a personal historic comment BTW and any resemblance to blasphemy is regretted.
Not so sure about this idea, seems a little clunky and easy to manipulate. I think a better solution would be to put a limit on the amount of lending that can be secured against property, say 50% of the loan book. If a bank reaches that limit and wants to lend more, they must lend to something other than property. This ensures that property never again gobbles all the resources and promotes balanced growth across the entire economy, not just construction through a boom.
Putting people through this is a total failure! One life.
http://www.independent.ie/lifestyle/independent-woman/health-fitness/i-was-so-stressed-that-even-thinking-about-work-gave-me-panic-attacks-2219548.html
This sound’s like a good Idea. Looking Forward. :lol:
http://www.rte.ie/business/2010/0614/mortgage.html
David. I love the article and reason why is because I see in it advocacy for *credit provision* and *money creation* as *utility*. Everything got lost when the utility of credit and money creation became weaponized and taken over by a gang of thugs and sleveens for their own special interests and agenda beyond the *common good*. The article provides a simple straight forward reminder on a *credit / banking how to guide* for the community to access and use to build real capital and pursue wealth generation with common good beneficence. The values of our culture we all share… Read more »
PIGIS watch
http://www.bloomberg.com/apps/news?pid=20601087&sid=aMYA0pYqoy4o&pos=2
This is bad news, because the PIGS as a category all seem to take some hit. And the UK can expect some sort of hit from this also. British gilts are under immense pressure after all the debacles involving RBoS, Northern Rock, etc..Plus the immense borrowing from New Labour under Blair/Brown with a continual effort to buy votes…
This will have implications on the shares on the ISEQ and the companies that are the backbone of IBEC (the real governing party in Ireland).
I like the new web design Congratulations David .It is nice to know that you have availed of the new moon phase to renew your site .Maybe I am one of the earliest contributors . I would like to refer to the on going delicate political matters relating to the recent demotion of Richard Bruton. Last night while I was watching RB on the tv news I noticed how watery his eyes were .The first reaction I had was ‘gosh he is a pisces ‘and ‘how does he survive in dirty politics’.So I decided I had to do some research… Read more »
Maybe it might be more accurate to imagine the following :
Three Bulls in the Ring
One Referee sitting in his post looking on – Kown ( will he be toppled over ?)
One Metador ready to fight all three bulls – Lenihan
One Doctor on the sidewalks ready to nurse the injured.- RB
Macbeth: I have no spur To prick the sides of my intent, but only Vaulting ambition, which o’erleaps itself, And falls on th’other. . . . Macbeth Act 1, scene 7. 25—28 Could that be Richard Bruton above? What bad timing? We had hope King Kown would be ousted today. Events conspire with blind political judgement to save the Kown moron once again! But there’s certainly change in Ireland with support for FF down to 17% and the public 75% view Brady should resign. Its a political watershed that will replace the old political lines of civil war politics with… Read more »
Hellooooooooooo campers.
Nice.
Very good.
Could we do the posts log in reverse, alot easier to read oldest post first, newest post last.
[…] Looking back is the way forward | David McWilliams […]
Yup.Now we’re suckin’ diesel.
We’ve had a couple of tweaks to the site over the last two years which were overall improvements generally but this overhaul works much better. Might take a little effort to acclimatise to the navigation side of things but methinks we’ve moved from Blog-rant to studious assessment forum. It’ll suit our heavyweights and no more than they deserve since what is being played out now is what I read here 2 years ago.
Well done.
F
The reports are a coverup for government. They place the blame on the regulatory regime and banking sector without questioning why the housing/property bubbles developed in the first place. They did so because FF shut down social housing in the mid 1990s and brought in rent allowance to “house” tenants who previously might have found social housing in the massive portfolios of slumlords, handsomely subsidised by the taxpayer. This inflated (and continues) to inflate rent prices at the bottom 33-50% of the rented market and creates an effective state controlled sector which ironically, the government don’t really want to control.… Read more »