While practically all of the focus this week will be on the budget, the plan to clean up the banking system will be of more long-term significance to the country. The bank clean-up goes to the core of our monetary policy. Without properly functioning banks, we will not pass any interest rates cuts onto the economy. We will have an engine, but no petrol so to speak.
Unfortunately, Brian Lenihan, the chief mechanic, seems to have an unusual view of how the engine works, while the mechanics around him are just keeping their heads down, hoping to hold on to their jobs.
However, this engine works not only on liquidity, but on expectations, too. Therefore, we have to offer hope to those who are now in debt, so that they will come into work and continue to try to keep the businesses open while the banks figure out what to do. The worst thing now would be to pull the plug, or for the banks to expect to get all their cash back. Hardening loan terms now will only cause more bankruptcies.
But how do we ease the repayment pressures on businesses that have a future but too much debt without making the taxpayer liable for the sins of the delinquent debtor? More crucially, how do we keep the banks on the hook so that they carry the consequences of their recklessness?
A bank plan has to answer all these questions satisfactorily. This is why the current favoured plan, which is a ‘financial skip’ loftily termed an asset management company, won’t work. It falls down on the third issue. If we buy all the banks’ distressed loans at today’s market value, we will let the banks off the hook.
So, how else could we do this while satisfying the second stipulation that this should not cost the taxpayer a penny? First, the state should insist – as its primary stipulation – that the bank plan should not cost the taxpayer a penny. Secondly, it would seem obvious that all the senior management should go, but alas that looks now to be a pipedream and not the way our country works.
In Ireland, the government appears to be willing to saddle the person on the street with the bill for the bankers, and not even demand the heads of the guys who enriched themselves while bankrupting the country.
This is even more galling when those of us who questioned the wisdom of all this and warned that the banks were taking us for a ride five years ago were told to ‘‘belt up’’ by ministers and by the former taoiseach.
Having made the fatal mistake of boosting the property market on the upside to satisfy their own political ends, we now are faced with the equally ‘appalling vista’ of buying bad assets too early with real cash and compounding the problem. We are about to unveil the most expensive ‘cash for trash’ scheme the world has ever seen, and no one is saying anything about it.
The government is asking us to trust it on the price of a piece of land or a house. Why should we trust it? Nothing that the government has done over the past ten months would suggest that it could call the bottom of the market, so the potential for a monumental mistake is enormous.
Once this banking plan is executed this week, the senior management and boards of the banks are free. They will have no bank debts on their books and they will start lending again. Their share prices will rise because we, not they, are taking the rap for this delinquency.
Do you know what these lads will do then? They will consolidate the system. This will result in the delinquent management of the two big banks, swallowing up the smaller banks and they will end up personally in a stronger position after the bust than they were in the boom. If anything reinforces our ‘banana republic’ tag, this move will.
However, it is not just the Minister for Finance who is at fault here. He is, after all, just one man at the top of a deeply – in fact, embarrassingly – out of touch and incompetent group comprising the Central Bank, the Financial Regulator and the Department of Finance. If the top layer in this troika keep their jobs, nothing will change in Irish finance. We have the same institutions that failed to predict anything now charged with overseeing the recovery.
Instead of borrowing a fortune today and realising the losses of the Irish banks at today’s market price, a smarter move would to be to make the banks, not the taxpayer, pay for their mistakes.
Why not entertain the following approach? First, we admit that the bad debts will be €50 billion or even as much as €100 billion. We don’t have this type of money. But the European Central Bank (ECB) does. The G20 said they would do everything in their power to unlock the system, so let’s test this global commitment by asking the ECB in the spirit of solidarity to do something inventive.
The Irish state could set up an asset management company to manage the distressed debts of the bank. This ‘financial skip’ would take over all the management of the debts but, crucially, the banks would still own the debts, because the new asset management company would simply be working out the debts and trying to get the best price. This is the first crucial difference between this plan and the government’s preferred plan.
The banks would pay a set figure of around €6 billion to the state over the ten years of the asset management company’s life. This could go to build hospitals and roads.
This implies no dividends from the Irish banks for years, but the shareholders would get the upside of the stocks rising as the economy recovers. This will help our pensioners and the thousands of Irish people coming up to retirement age, whose nest eggs have been smashed by the greed of the banks’ top brass. As the market gradually recovered, the banks would begin to recover some – but not all – of their bad debts.
The most significant part of this plan is that it doesn’t cost the taxpayer a penny, and the responsibility for the bad loans remains firmly with the banks, so that they recover without being bailed out by us.
If we are serious about moving the country on, and if the G20 is serious about international solidarity, this is the plan for us. However, if the state is in the business of mortgaging the poor to bail out the rich, the current buying at market prices plan will be announced. We may well know whose side they are on by the end of the week.
Spot on but as Frank Gill of S&P suggested we need a change of government to move this on, anything better than the ‘Pierrots’ that have mortgaged our future.
http://www.demotivatorblog.com/wp-content/plugins/yapb/cache/motivator7025633.1en2tfopi7y8408c0sc4ccckw.ap2qhjyqp08cgc0c80ss4cco4.th.jpeg
http://www.geeksaresexy.net/wp-content/uploads/2009/01/sw-squirrels.jpg
David: You have obviously put a lot of thought into this suggestion. Having the banking problem laid out so clearly by you entails admission by the rest of us that practical solutions lie beyond our human ability to fathom. –So we go to the ECB. They refer us to the IMF. They in turn, know nothing about Ireland but have a formulaic approach that ties the hands of all Irish governments for the next 10 years, unless we can unscramble the problem for them. Simply put: We need at least two viable banks. We’ve guaranteed six bank’s debts and deposits.… Read more »
We can’t afford to ‘crystallise’ the bad debt losses into a financial skip or bad bank, sounds great in theory – generates fees but is madness. We need to generate economic activity by guaranteeing lower taxes, this will generate employment, people will travle to Ireland to work set up business and transfer operations. In turn, residential and comemrcial properties will be in demand and therfore valuations will stabilise. The alternative is one direction…. Government spending is still out of control (March exchequer returns show a 70% increase in Education from €560k in 2008 to €950k in 2009) and tax terurns… Read more »
Its all about trust,pure and simple….IF I need to have an operation tomorrow,my worries should not be compounded by thinking the Doctor could steal some of my organs while Im on the operating table.If you think of Fianna Fail as that Doctor then the History of that Party under succussive Leaders would guarantee you the loss of at least 1 kidney.No Credibility, too close to all the offending Parties.Mouthing off pre-learned scripts to vetted questions.I think the word that everyone is looking for is SLEAZY.Not fit for Office,way too evasive when asked straigh questions, too shifty, too busy trying to… Read more »
Back to the more mundane world of high Finance, its nice to see Katleen Barrington taking an interest in me auld mate Liam oReilly in Todays Sunday Buisness Post.Liam worked for the Central Bank and then became our first Financial Regulator.Hope He has an eventfull time before the Gubberment Committee.Just follow the money Katleen,your on the right track.Dont forget about the share dealing,Im sure there’s a can of worms offshore.Does people not find it strange that when the Financial Regulator finds something to Investigate it brings Dolittle&Touchy in to do the leg work.Can someone remind Me again just how many… Read more »
# Malcolm McClure Subscribed to comments via email | 05 Apr 2009 12:55 pm Noel Whelan ends his Irish Times piece today: “There are now more important things at stake than the political fortunes of the Government.” – No, no, no, Noel, not for this government there ain’t. Regardless (or indeed because) of their low standing in the polls, FF, in their budget, will put the requirements of its core supporters WAY before the needs of the nation. To do otherwise would be to break their habits of the past 90 years. You can almost hear Cowan to Lenihan; “Steady… Read more »
Tim: I think the pendulum about bankers has swung too far and comments like yours above: “The chief bankers are guilty of TREASON and they are still alive, still at-large, still free, still RICH and, critically, STILL doing what they have always done: taking money from good, decent, honest and hard-working people.” do nothing to advance a clear analysis of where we stand, vis-a vis the banks, at this critical point in Ireland’s history. We all seem to be agreed that the banks are a completely indispensable feature of the Irish economy. Some bankers have indeed taken liberties with the… Read more »
Why did we get the whole Tim – Malcolm conversation repeated here in this thread?
article, sorry
Malcolm, I am, personally, PAYING for Seanie, ……. (alotta money, by the way!)
Are you?
Jelly Fish Economics – have you ever seen a jelly fish bleed or see their brain? Will you ever see cash flow again or a rational government budget and banking policy ?
Jelly Fish have no blood and are transparent .They also have no brain and some can sting and kill any man immediately .There is no antidote to their poison .Nevertheless their tentacles paralyse everything within reach and are destined to take over the world.
Some animals can eat them .
So buy a dog that barks.
Hi David, > While practically all of the focus this week will be on the budget, the plan to clean up the banking system will be of more long-term significance to the country. BOTH are needed. The budget is important. Getting the PS costs back into kilter is important. > Without properly functioning banks, we will not pass any interest rates cuts onto the economy. We will have an engine, but no petrol so to speak. Cant we ‘park’ our sick banks, and bring in other Euro banks that are not bad-debt-laden? They may say they may not have a… Read more »
Spot on, and a new factor, the G20 intentions, but seriously, there is no way JOSE the ECB will sustain the banking system here indefinitely. Eventually, losses and bankruptcy will ensue, as sure as Atlantic gales blow in March, and now in April. The assessment of the political culture in this benighted fraction of an island at the northwestern periphery of the Eurasian land mass spells prolonged depression, much like the weather, and keeping the elite comfortable while the democratic deficit deepens. Until people change the way they vote, because they have changed the way they think because they feel… Read more »
Folks, I am confused by the optimism spin in the media about the G20 $1 Trillion:
Isn’t Ireland’s private sector (non-banking) debt €1.6 Trillion?
That’s Ireland ALONE. How much in other countries? Multiple trillions in the U.S. and UK, other PIGIS, Eastern Europe?
$1 Trillion, surely, is not even a “finger-in-the-dyke”?
Can any of you explain this to me, please, because I think that the G20 thing is just gibberish and “window-dressing” for the sheeple.
I can sense a bit of an end game here in this Blog. DMcW’s final comment on whether it’ll be on the side of the bankers or the remaining working people says it all. Originally we wer gabbing on about the demise of the Celtic Tiger and its inevitable collapse. We have now “arrived” and the shock of it has yet to dawn on those people with jobs. Tomorrow’s April 7th Budget will sort that out pretty quick. I hope for all our sakes that Malcolm’s description of a Darwinian landscape in the corridors of power is not the whole… Read more »
David, I entirely agree that the ironically McWilliam’s promoted ‘financial skip’ plan is not the way to go – you have seen the light maybe or not. I have said many times before on this site when you were strongly urging government to push forward with this plan that it was unworkable for many reasons. This has been a big talking point for those working within the sector since it was first put forward – and I have not heard one voice of recommendation (other than at the bank executive levels through the media). Some of the contributors above have… Read more »
Mr. McWilliams, money is for stoopid people.
I just read your posting about ‘The Pope’s Children’ and thought you may enjoy my video concerning The Pope and George Harrison’s influences…..
http://www.youtube.com/watch?v=_m6qC6FCiY0
Stay on groovin’ safari,
Tor Hershman
I’m losing the will to live reading thru articles on bankers, asset insurance, toxic debt etc. At this stage I cant be arsed trying to understand the article above, to try to decode the language and see if I’ve understood it correctly. And I started out interested. Just imagine what normal people think. I reckon a newsreader could tell a story about pigmys and polar bears and provided they started the item with the words Anglo Irish Bank or recapitalisation, nobody would give a f*** Thats dangerous So a request.. Can someone provide a worked example later this week for… Read more »
@Philp> Let’s face it, we are not going to be able to pay back the 50-100bn I agree that it wont be paid back, but who the ‘we’ is is important. Its senseless for the taxpayers to ‘pay it back’ or even lessen the blow for those that are responsible. I’m all for the Darwinian ‘destruction’. You may be sick of my manta – lance the boil! The banks operating here, if bust, should be allowed to go bust. End Of. And those responsbile for the morass should be held accountable. End Of. Bankers, regulators, government. David originally was stating… Read more »
Newsweek has a major article on Paul Kroogman, the way he pronounces it, worth a read for bloggers on this thread.
http://www.newsweek.com/id/191393
He is a outside the establishment, yet gets calls from the head kiddies. The Obama boys shout practical, no can do, and Krugman does not do nitty-gritty, bit of the similar attitude here.
gadfly 55 – international Tax havens have been named and shamed and many are now complying to norms again.The rest will follow in good time.We can in time name and shame our new super elite and make a condition of honour to hold an Irish Passport if we remain issuing them next year.
General – I was told by an old lady who plays bridge that among the elders they notice a shortage of barry’s tea in a particular supermarket .Has anyone else that experience?
The government are schizophrenic just like US Treasury Secretary Timothy Geithner.
They speak about what has to be done and do exactly the opposite.
It would appear ”private is better” at any cost, but even he has mentioned putting top executives in place. I wonder, is it only talk after the AIG bonus mess up brought into the light.
So if it’s obvious to all, what is going on.
Is there any fight left in people at all.
We have the technology, but the biological determination of the forces of sustainable living for all living systems, are beyond the control of human management systems. We are particles in a river, now falling into the chasm from the tectonic shift generated by internal combustion engines and electricity. Take those away and the balance will be restored, indeed the hydrocarbon bonfire of great expectations will soon be expired, and the population will crash in about 30 years as food and water resources along with climate change precipate famines beyond measure, refugees in hundreds of millions, and the disintegration of super-cities.… Read more »
I am coming around to the ‘isolation’ theory concerning the banking crisis. This is the complete reversal of what the government are doing. It is a polar opposite of New Labour economics in Britain, which thanks to media support (read support from our advertising sponsors), is gaining ground in media circles. Gordon Brown is there to save all banks, including those with the most reckless and liberal lending policies. Brown will support banks whose philosophy does not add up. And he will subsidize them until everything appears well, confidence returns, and the votes increase. It is economic nonsense, and is… Read more »
[…] David McWilliams puts his finger on the gigantic scam that the government is about to perpetrate in order to bail […]
Since our leaders are going to do what they want irrespective of what the ordinary fir agus mna at the crossroads think, (or indeed the man on the Santry omnibus) here’s something on a lighter note to prove you cannot keep proletarian initiative down;
http://www.irishpost.co.uk/tabId/321/itemId/1404/Cows-might-fly-or-possibly-not.aspx
‘A Quarter of Junior Minster to lose their jobs’ More denial http://www.breakingnews.ie/ireland/eyauojgbidau/
Why not cut the whole lot, they don’t know what they do anyway.
Keep digging boys sure we’re doing grand! Gives a song there boss, diddly idle deedle doo, tis singing on de back of de lorry we go, 110 miles/hr downhill and we never got those ould brakes fixed.
http://www.cartoonstudio.co.uk/images/00MidweekMotivators/HavingBadDay.jpg
I know everyone is all hung up on what the government is trying to do – i..e getting us taxpayers to water down the debts incurred by the managements therein. But in a way, we are all to blame. We took a higher quality of life that was not due to us. Blaming the bankers and their profits etc. is not wholly honest. And while I accept that the Government’s role is purely based on looking after the interests of its own before the nation, it still does not change the fundamental fact that we are all in the $h1te… Read more »
Malcolm McClure – in the desert people would tell you that you have the wisdom of a thousand camels
John Allen: When I was in the middle of the Calenscio Sand Sea I came across a 200 head camel train crossing the Sahara from Nubia to Sirte.
I exchanged greetings with the drovers but none of them told me that.
Maybe there weren’t enough camels for them to work that out.
John ALLEN and Malcolm McClure, What a moon-pull this is! Are the camels defending seanie, now, too? Sheesh!
BTW, John, see poor Italy? ((wobble))
Moon Pull – the pulling is strong now and becoming stronger until 10th – emotion swings are in action – it is liken to a form of being drunk on water and in a split second concentration can be lost thus accidents occur – the chatters have suddenly increased their orations in operatic proportions – I hope the site does not collapse or run out of band width as did happen on last two full moons – keep up the output allow the nation learn more. Don’t forget from next tues I will reveal the next moon wobble happening this… Read more »
Preview from Brian Dear John, Every family in Ireland is affected by the recession. The global economic downturn has led to a gap in our public finances which we simply must bridge. Tomorrow in the Dail, I will introduce a budget that proves Fianna Fáil is the right party to lead Ireland. Our budget will strike the difficult balance between higher taxes for those who can afford it and necessary spending cuts. Our strategy for recovery is based on everyone making a contribution. This Budget is one step in a series of measures we will continue to take between now… Read more »
I have been thinking about this financial skip/asset management solution etc.. and it seems to always return to the fact. Ireland has borrowed too much to fund non value adding activity (like buying land banks, building houses and buying houses) There is only one way to get a return of investment in this case, and that is by rising asset prices, and with the amount of money already invested in this sector, it would be madness if asset prices rose, as this sector has no real ROI In short, Ireland has borrowed money to buy irish land which they owned… Read more »
Folks, Quangos and Spanners presents us tonight with “a business woman” who reckons that axing just five junior ministries is a great move.
“Business woman” is Lorraiane Sweeney and she said: “I am not in business to create employment; I am in business to make profits; 40% of my turnover goes on wages”. So, 100% of her turnover is earned on the backs of other people, who only receive 40% of the fruits of their labour. (I know there are overheads, etc. and that she is entitled to money for taking the initiative and all that, but it is the mentality that bothers me). This “profit is the be-all-and-end-all” notion is at the root of our problems. I have said before that I… Read more »
News at 1 featured George Lee and when He was asked how the Economy had gone from crises to catastrophe He said ” THAT’S A DIFFICULT QUESTION TO ANSWER IF YOU WANT TO KEEP YOUR JOB AT RTE”………………I’m sure Sean oRourke did’nt see that one coming. I was gobsmacked,and that as ye know on this forum is a rarity.LOL.:-))
Back to that charlaton from Limerick Mr.John Allen and His pronouncements of Munsters reclaiming of Leadership of this Country. Kilkenny 4-23….Cork (couple points) CASE DISMISSED.
Todays Bank Bailout (Part 3) is going to make Januarys €7 billion bail-out look like loose change!
http://www.irishtimes.com/newspaper/frontpage/2009/0407/1224244146722.html
It’s important to know who Linehan is taking advice from to know what to expect from the upcoming Budget. Patrick Honohan will be advising on the Bank reform issues based on His experience as an advisor to the World Bank.Decent bloke, hope He makes the right calls and is not too heavely swayed by Linehans Political considerations.Next up is Philip Lane so based on His ideas you can expect a Tax on Child Benifits, Tax reliefs for the well off to be removed, and some sort of Redundancy package and other measures to bring down the cost of the Public… Read more »
Should be take bets as to whether or not Gobshite Backbench Lickarse Fianna Fail TDs will stand up and clap after the delivery of the budget?
My guess is that they will.
Have a look at this and ask yourself if Ireland is going to change in the future with this shower in charge?
http://www.youtube.com/watch?v=yzaaAYQ3nQY&NR=1
Fianna Fail, ‘peasent class politics for our peasent class people’
Platitudinous claptrap from a maladministration.
Da Hour Hath Commeth – we are now closer to the revelations we have waited for so long and it would appear that this forthcoming movie is in 3D to experience that touching feeling that raises the hair on our necks.These Looney Moments are very changing and what you get is only what you see . Lets see if we can peep in to the invisible budget brief case while the finance minister is choking on his breakfast toast this morning and the taoiseach is in a cubicle on a colonial mission stuck in mars.What might some recent evidence tell… Read more »
Was reading National Geo.You know how much gold is mined in the world? 165,000 tons. 50% in the last few decades. Would barely fill 2 olympic pools. That’s about 5,7bn Oz. At about 1000 USD/ Oz, that’s 5.7Tn USD. And Trade is about 50-60 Tr. And Ireland’s debt is about 20% that or 40% the size of an Olympic Pool filled with Gold.
Ireland is iceland on ice,
Financial pressure grips like a vice,
There’s nowhere to go with the meltwater flow,
We sink and its no very nice.
TIM: “This “profit is the be-all-and-end-all” notion is at the root of our problems” Sorry but reading this I must rant. I am sick and tired of this socialist drivel. We had a successful business woman who expressed her pro-business views (poorly I agree) and she was then attacked AND on the other hand we had a marxist spanner from the Daily Star daily comic book and the donkeys in the audience thought he was great!! Look, it’s quite simple as much as the likes of Vincent Browne, Fintan O’Toole and the rest of the Irish Red Brigade wanabees would… Read more »
In the exchange with Tim he copied to this thread above, I drew attention to the incestuous, sybiotic relationship between PPublic Servants and FF, We will find out the reality this afternoon but meantime we have lenihan’s preview on RTE covered in the IT today: “Two-thirds of our spending is now welfare payments and payments to public servants. If you want an adjustment on the spending side you have to cut pay for public servants or cut rates for social welfare, I have not seen many people advising me to do that. Let’s get real where the balance has to… Read more »
Agree with you seanoc, Social Welfare for too many people here is a lifestyle choice there are longterm unemployed people who were too Lazy to work during the boom while a Polish guy with no English or skills was prepared to work.
recently laid off people should be looked after by the system and encouraged not to loose face, but i would be inclined to get the lazy ones out to pick up litter or something for their dole.
SEAN OC – I am ashamed to admit that I was one of the 40% that voted for these clowns in the last election. Looking back I think it was the fear of Enda that Joan Burton as the alternative that made me vote FF. NEVER, NEVER, AGAIN. After the budget today I think there is an argument for a snap election I can honestly say that I would even vote for Dana if it meant kicking out these FF/Green half-witts AND I believe that is view of the vast majority looking at the polls. The point is that after… Read more »