Could it happen again? This is the thought that went through my head, as I waited for the first question from the panel at the banking inquiry last Thursday morning. During the previous few weeks, I spent lots of late nights going through articles, books and documentary evidence written since 2000 on how an economic catastrophe builds. It’s funny how things seem so obvious in hindsight, but back then it was not clear to that many people.
In the inquiry, I likened the narrative of economic and financial meltdown in Ireland to a forest fire which starts with a few matches and ends with an inferno engulfing the entire economy. This fire, if it is allowed take hold, will destroy everything around it and therefore has to be put out with force, otherwise it will incinerate the entire economy.
This analogy came to me years ago, sitting in a Croatian café talking to a local fireman as he explained to me what can happen when a fire is allowed catch.
Every summer I visit a particularly parched region of Croatia called Dalmatia, which is subject to quite high and variable winds. All the young lads in the village belong to the most important local institution: the fire brigade. Every few years, vicious forest fires catch that kill tourists and locals. Usually they are started by tourists who are camping in the forests, unaware that they are barbecuing in a potential tinderbox.
Dotted around the higher points of the island are numerous look-out towers where the locals take turns doing eight-hour shifts on the look-out for smoke, day and night. If they see anything suspicious, they radio the base in the village and the trucks – manned by local firemen – head out.
Being a fireman is a rite of passage for these rural Dalmatians, so much so that my own son, who hangs around with the youngsters every summer, is down in the village ledger to be a fireman in 2018.
Now think about the banking/property/credit cycle in this context.
The pyromaniacs who start the fire are the bankers (and all others who cheer-led the credit splurge, you know who you are). Credit is the lighter fuel igniting the economic inferno. Human nature is the wind that whips up the flames because everything I do affects everything you do. You are forced onto the property ladder, not by yourself, but by me. When I buy, prices rise, this forces you to bring forward your house purchase because you don’t want to get left behind. So all our actions affect each other.
In the period 2000-2004 when this was building, the firemen who are supposed to spot trouble – the Irish central bank and regulators – are saying everything is grand.
Yes sure there’s some smoke and maybe a bit of fire, but it’ll be grand!
As they take no action, the fire engulfs the entire economy and culminates in a bank run, which is the financial equivalent of the entire island – forest and village – being incinerated.
At this very late stage – the very last resort – the state wakes up and has to put out the fire with whatever method it can deploy.
To argue about the method used to put out the bank run is like criticising the firemen for the type of water they use to put out a forest fire. It is a legitimate discussion and argument, but it misses the point that the entire episode was predictable and preventable. It needn’t have happened had the warnings been heeded.
There would have been no need for the troika had there not been a credit boom. There would have been no need for any guarantee had the banks been regulated, but once an economy gets into the disaster, the state can’t just say, “Let’s see what happens.”
It is like the Croatian fireman saying, “Let the fire burn itself out, sure you never know, the wind may change at the last minute just when your curtains are catching fire!”
Early warning is the key; prevention is always better than cure.
Now that we are armed with the experience of 2000-2008, could this possibly happen again?
My answer is unfortunately yes, unambiguously yes. The reason is that human nature is a funny old thing. We never learn. Never. Credit cycles are as old as the Bible. Read Leviticus and Deuteronomy and you’ll find the biblical equivalent of Anglo.
We always think this time it’s different; that’s just the way we are.
This consideration of the nature of humanity came to me when I was testifying at the banking inquiry. In the end, the question was whether it could happen again. It could because the way banks, credit and property work in Ireland is that banks will always want to lend, so prices will always have upward pressure and, as prices go up (as is happening now in Dublin) people will always look at the last rise in prices and think, they had better get in before they get left behind.
At the moment, the last monthly increase in house prices amplifies the amount of credit extended for lending next month. If the house price goes up, the banks will feel they can lend more because the house is the collateral and that collateral has gone up in value. Therefore, there is always inbuilt inflation in the system.
Imagine a mechanism where the latest increase in house prices doesn’t increase the amount of money that could be lend out but decreases the credit available. This could be self-regulating and would work as the watchman without having to depend on human frailty.
Think about this.
When a loan is granted, the nominal declared maximum LTV ratio (say 80 per cent) should be multiplied by the average house price index available for the previous 24 months and divided by the latest available price index.
This means that LTV ratios will keep coming down as long as prices go up, and thus the ability to flip over the property to the next guy will diminish.
The system will become self-regulated. The greater the increases in price last month, the less can be lent out next month and therefore increases in prices beget decreases in credit. This implies you don’t need to depend on humans, blighted by human nature, to make judgments, the system can do it itself.
This is a simple way of breaking the link between credit and prices and would go some significant way to reducing the tendency of houses prices to feed on themselves.
As I left the inquiry, I asked myself why hasn’t this type of innovation been introduced.
Could it possibly be because the same vested interests that cheer-led and caused the last boom are still in more or less in power and the system hasn’t really changed?
Surely not – it couldn’t be.
Could it?
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Absolute rubbish, David McWilliams! The crisis that occurred 7/8 years ago was not caused by lenders, developers or governments. It was caused directly by us. By our inherent greed, driven by our ignorance of the consequences. We didn’t have to borrow to buy things we couldn’t afford. And of course it will happen again. It’s happening now. Imagine, in a broke country that can’t afford health-care, people are still shelling
Absolute rubbish, David McWilliams! The crisis that occurred 7/8 years ago was not caused by lenders, developers or governments. It was caused directly by us. By our inherent greed, driven by our ignorance of the consequences. We didn’t have to borrow to buy things we couldn’t afford. And of course it will happen again. It’s happening now. Imagine, in a broke country that can’t afford health-care, individuals are still shelling out tens of thousands for new expensively-imported cars to be run on expensively-imported fuel on cart-tracks that pass in Ireland as motorways. Get a grip! Banking enquiry? Ego trip?!
YES IT COULD! We are ruled by an oligarchy. Nothing changed with the last election and I doubt much change will occur with the next one either. just like Irish radio, same ol shit, and I do mean shit. Steve Jackson or gRay F’Arcy? you decide.
https://www.youtube.com/watch?v=rzjM-efkFfo
YES It HAS
It is a classic case of tragedy of the commons. Every one gets to play with a common resource with the hope it will improve the common good, but you always get some sociopathic entity that has no moral qualms about pushing the boat out as far as possible and destroying the common resource in the process. Imagine burning the candle at both ends and the middle, while in an oven. There are those of us who are thinking we are dealing with sane people in the system, surely they’ll manage themselves they have to know if they proceed as… Read more »
Hi David, “could this possibly happen again”. Yes most definitely. It is even foretold in the bible as pointed out by you that it will happen over and over again as sure as the tide goes in and out. “As I left the inquiry, I asked myself why hasn’t this type of innovation been introduced” Because the politicians are in cahoots with the head cases who call the shots. Their agenda is to save the Euro and banking system at our expense. Your solution to the problem isn’t fully thought out I respectfully suggest so let me add a bit… Read more »
I think Irish Economic commentary can be incredibly insular and parochial especially when a wider world view is what is really needed. All the chatter about housing bubbles, economic recovery, banking enquiries really miss the point. The last crisis was triggered not in Europe, nor Ireland, but by criminal US Bank lending, criminal wall street practises and zero regulatory oversight fuelled by a mortgage market that was used a vehicle to get as much credit into the system as possible regardless of who was the recipient. Once credit was created, wall street financial instruments of mass destruction infected the credit… Read more »
David,
To continue your analogy about the type of water used to put out the fire (which conveniently excuses your own contribution to the disaster!):
-we could have used water to quench it (let anglo & nationwide go bust, converted all aib/boi bondholdings to equity or nationalised them)
-but we decided to put the fire out by smothering it with bank notes (the fabulous guarantee, which you boasted was after catching out the short-sellers of anglo shares a few days afterwards!!!)
As long as political parties take donations from developers, and as long as governments derive huge revenue from housing/property, can’t possibly see how the cycle of boom and bust will be avoided. The efforts to reheat the property sector are under way which might not be too bad if we had a proper financial regulatory system especially over banks that were bailed out. What has gone on has been deeply cynical. Taxpayer bails banks and then pays charges on virtually all transactions, virtually impossible to get a a loan for a small business, they’ve built up their balance sheets using… Read more »
Hi David, congratulations on your performance in front of the banking inquiry last week. Considering the great calls you made in the run up to the crisis I bet you could not believe your luck to be able to say the biggest ‘I told you so’ ever, and on the record. To be able to replay a recording of your actual forecasts to the politicians in front of you must have been very sweet indeed. Footage of your leaving the inquiry on the news later was classic. It looked as if you were high as a kite! And rightly so.… Read more »
I like the analogy and solution David proposes for preventing it.
If we are to include the bailing out of the banks into the analogy, would it be as follows: throwing more wood on the fire and hoping it won’t burn?
Rock Star Economist Well done David .Your dress attire contributed to your successful presentation . I saw some of the televised event and you were in control all the time. You did not drop the ball and no knock on penalty. The moment was a watershed insofar as has the wheel come round only to start again . If all the events repeat themselves again in a few years I do not think the people want to be told the same all over again unless you can impersonate and that requires more stage skills .People were interested in what you… Read more »
It’s a fair analogy David so how about learning something from it? Neither the arsonists (the bankers) nor the firemen(the regulators) nor the recklessly incompetent thieves who appointed yes men/women regulators(the politicians) are in jail. All three groups have been handsomely rewarded with jobs, bonuses and pensions paid for by the taxpayer while the taxpayer can go and f**k him/herself. We had a fairly effective method two centuries ago to deal with thieves who placed vulnerable people in odious debt. It was called the boycott, it was used by the land league and it was effective. It’s time to boycott… Read more »
“Could it possibly be because the same vested interests that cheer-led and caused the last boom are still in more or less in power and the system hasn’t really changed? Surely not – it couldn’t be. Could it?” Of course it could. you identified the bankers as a primary problem but without stating which bankers. If the central banking system is NOT dismantled then nothing else will work. It starts with credit as you identify but you refuse to go far enough. You do not address the ultimate credit problem. The fact that our money system is issued as credit.… Read more »
YES every bank loan is a loan. should read
..every BANK NOTE is a loan at interest.
As all economic data is manipulated and hard to ascertain, it is crucial to know where to go for reliable data. As a primer try www dot shadowstats dot com Here is John Williams Some Biographical & Additional Background Information Walter J. “John” Williams was born in 1949. He received an A.B. in Economics, cum laude, from Dartmouth College in 1971, and was awarded a M.B.A. from Dartmouth’s Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. During his career as a consulting economist, John has worked with individuals as well as Fortune… Read more »
i just now had the pleasure in watching David at the Banking Enquiry.
in a word – surreal
Comhghairdeas leat Dáithí
mise le meas,
a fan
Something of interest as the manipulation continues without letup thanks to the central banking system
http://www.zerohedge.com/article/former-goldman-commodities-research-analyst-confirms-lmba-otc-gold-market-paper-gold-ponzi
The Nasdaq is at another peak. http://www.marketwatch.com/story/innovation-not-easy-money-is-behind-the-nasdaqs-return-to-5000-2015-03-02 By the way, marketwatch is owned by Murdoch Media. Just like the last Nasdaq peak companies with funny earnings predominate. This time it is different. Well, actually….it is not that different. Because, like the last time the PE ratio is built off a very high Price level, and a very low relative earnings level. All that is missing now is for that perennial joker the Economist magazine to tell the world that this is only the start and that this bull market will get to 10,000 before 2016. Purely for comedy. The Central… Read more »
Here is a country moving rapidly into a major recession. Only lies and distortion claimed it ever recovered from 2008.
The truth is this will come to be called the great depression.
http://investmentresearchdynamics.com/category/financial-markets/
This self-correcting lending mechanism which allows only 80% LTV borrowing of the previous 2 years HPI. Has this been adopted in any other countries? If so, where??
It is amusing to watch and read of the adulation of david this week. A month ago he was criticized for being wrong by nearly every writer on the blog. Beware the mood of the crowd David. Right or wrong they will turn in an instant. Davids greatest strengths are his writing and acting ability. He plays to the audience. Observing him on stage I noted not a laugh coming from him was spontaneous. All were stage managed. His smile is that of the joker, painted. He is in my opinion wrong in his assessment of the root causes of… Read more »
audit the Fed for transparency
http://www.chooseliberty.org/posthearing.aspx?pid=0303
http://www.breakingnews.ie/showbiz/david-walliams-marriage-in-trouble-reports-664669.html
Dont worry you will be OK!
Bail ins have started. Get your money savings out of the banking system. One for you David to warn the people. It will be a fabulous ‘I told you so’ The G-20 agreed to bailins 18 months ago and Canada for one enacted the legislation 4 months ago ———————————————————————————- Success Council 3:01 AM (7 hours ago) to tony Ok, I need you to pay close attention to what I’m about to tell you. There is a threat to your bank account that is real, tangible, and happening right now… Europe’s M.O., as its banks begin to collapse, has changed to… Read more »
Honest money provides stability , David. Dishonest money produces strife and war. Which side are you on? The side of honest money, I hope! The central bank fiat money system will be the death of millions. If the globalist, elites have their way, the death of billions. Kirby goes on to say, “It all boils back to the money. And it all boils back to the notion we don’t have honest money because when you have honest money, these excesses don’t occur. Things cleanse themselves, and that is the virtue and the merit of the old relic, the gold standard,… Read more »
We are dealing with a psychotic foe when it comes to money and the power it brings.
Putin forecast an assassination to try to polarize Russian dissent. It has not worked in Russia although in the west it is debatable as people here still think we have a free and honest press.
http://www.paulcraigroberts.org/2015/03/01/putin-predicted-washington-employ-assassination-tactic-russia-paul-craig-roberts/
13 Trillion paid to banks in back door loans
corruption reigns in government
http://wallstreetonparade.com/2015/03/warren-citigroup-morgan-stanley-merrill-lynch-received-6-trillion-backdoor-bailout-from-fed/
well done David.
Just goes to show how a good guy can reinvent himself in the face of it all.
http://www.thejournal.ie/mcwilliams-company-profit-1974075-Mar2015/
Michael.