Once upon a time, in a village, a man showed up and told the villagers that he would buy monkeys at €10 each. The villagers, aware that the area had plenty of monkeys, went to the forest and started hunting them. The man bought hundreds of monkeys at €10 each, and the villagers began to slow their efforts.
The man then said he’d pay €20 for each monkey, and the villagers went hunting again, redoubling their efforts. Soon the monkeys became hard to find, and the villagers began to give up the search. The offer went up to €25, but the number of remaining monkeys was so small that interest in the hunt petered out. The man then announced he would pay €50 for each monkey, but since he had to go to a big city on business, his assistant would handle the payments.
While the man was away, the assistant told the villagers, “Look at all these caged monkeys the man bought from you. I can sell them to you for €35 each, and when he returns he will pay you €50.
The smart villagers took all their money, others borrowed to take advantage of the offer and bought all monkeys from the assistant. The assistant said he was headed to the city to bring the man back.
They saw neither the man nor the assistant ever again, just hundreds of monkeys all over the place.
This little story outlines what happened in Ireland with our housing and stock markets. We believed the hype, got greedy and thought to ourselves that we could all make money for nothing. We borrowed accordingly and now are stuck with the consequences. Worse still, we borrowed so heavily to buy houses that it is unlikely Irish house prices will, at least in the next decade, reach levels seen in 2006/7. The place now is full of land and houses — like the villagers’ monkeys — that no-one wants nor is willing to pay for.
While this will affect all of us — particularly the younger generation who were duped into buying these expensive houses — the true barometer of our financial calamity is the enfeebled Irish banking system, which needs time.
The problem is time is exactly what we do not have. Events in the past 24 hours are not reassuring. Pessimists would take a look at today’s financial markets and suggest that we are edging closer to meltdown.
Yesterday, the ‘New York Times’ put it succinctly: “The cavalry have arrived, but no-one knows what they are supposed to do”. The cavalry in question is the putative $700bn bailout of the US banks by the Bush administration. The reaction to the plan has been one of horror. RTE reported yesterday that the markets sold off because of fears that the bill wouldn’t be passed. This is not correct. The markets have been frightened by the prospect of the rescue package going through.
Let’s leave the US for a moment and return home where we see that shares in our banks fell in response to Finance Minister Brian Lenihan’s €100,000 deposit guarantee scheme. Rather than enhancing confidence in the banks, the move is being seen by investors as admitting that there is a problem at the epicentre of the banking system, but not doing enough to solve it. A full guarantee covering all deposits would have been, and still could be, a much more comprehensive option.
Up to last Friday night, Mr Lenihan and his predecessor Brian Cowen were saying that there is no problem in the Irish banking system. Now, with the deposit guarantee scheme, they are implicitly telling us there’s a big problem. If it’s a big problem, let’s do something big to rectify it.
This difficulty is not going to go away. The Irish banks are like mini-versions of the American banks. The difference is one of degree. In America, the debts of the banking system are there for all to see. So when the property market fell, the value of the bank’s exposure to property fell, too. This is called mark-to-market valuations. And it means that the value of any portfolio is assessed against the price at which you could sell those assets in the marketplace today.
In Ireland, the banks are refusing to mark to market their portfolios and exposure to property, so they are pretending to themselves and their auditors that the land they have on their books is still worth the price it was bought for. But this is nonsense. If Irish banks were to value their assets against the price they could get today, they wouldn’t be far away from the fate of their American counterparts.
Both systems are up to their necks in bad debts in the property market. They have no outside funding available to them (except from the ECB) and, most egregiously, no-one appears to be able to tell the truth about the extent of the carnage on their balance sheets. So we got the pathetic bluff from Anglo Irish Bank last week that it was considering taking over Irish Nationwide. Not only do two bad balance sheets not make a good one, but the idea that we can be duped by a bank which is pretending to be a “buyer” when in fact it hasn’t the means, is indicative of an industry that hasn’t woken up to reality.
The blueprint for Irish banks now looks increasingly like Japan in the 1990s. In 1989 the Japanese property market peaked. By late 1992, property prices in central Tokyo had fallen by 60pc from the highs.
Many people in Japan expected the government to shoulder the risk of the banks and thus bad banks were offered a lifeline. It took at least half a decade from the peak for the banks to admit the extent of the problems. This was because the Central Bank in Japan sought to protect, at all costs, the banks and the developers who had become close to the political system in the boom. So instead of marking down loans and starting again with a new sense of purpose, Japan experienced a tortuous period of obfuscation and bluffs, which eventually shattered public confidence.
We need to learn the lessons of this. We can’t afford to do what the US is proposing and set up a similar toxic fund to bail out the Irish banks’ property debts. We don’t have the cash.
However, there is something we can do. By giving a full deposit guarantee now, the State could re-energise creditors’ — both big and small — confidence in our banks. In fact, given what is happening all over the world, a comprehensive guarantee would prompt foreigners to lodge their money in Irish banks. As a member of EMU with the lowest State-debt-to-GDP ratio, Ireland would be ideally placed to offer itself as a financial port in this international storm.
There’s a real problem here. Although a full deposit guarantee is an attractive idea, it has the same flaw as the refusal by the banks (and the US Fed) to mark assets to market. If one assumes that the amount of money in an economy is an approximation to the value of the economy, then refusing to deflate the money supply in this way will result in price inflationary pressures down the line (more money than value) . This isn’t a free market solution. On the other hand, forcing the banks to suddenly ‘come clean’ isn’t necessarily sensible solution either… Read more »
Whats going on no in the states @ the moment is exactly whta happen during the major stock market crash of the early 1900’s. There was a great bail out was put in place but in turn was ignored by market particapants ……… The financial memory only lasts about 30 years then analysts, bankers and regulators fall victim to greed and fear. No matter how much they fiddle with interest rates & the system, Bob Marley said it best: “One day the bottom will drop out…”
Hi David Excuse my lack of expertise on monetary and fiscal matters, but as a joe soap citizen and a observer of this current finiancial crisis, questions continually arise despite your respected efforts to lay it out plain and simple on this site. On a previous article you mentioned a figure of 300 billion on deposit in Irish Banks, accepting that figure to be accurate I fail to see how a government gaurantee of all deposits would bring confidence back into the system. On the face of it, it is easy to understand – government gives assurances – panic subsides… Read more »
I think David needs to explore the idea that inexperienced investors, who have not yet directly experienced the consequences of a market downturn, are more prone to the optimism that fuels the bubble… In seems obvious from what has gone on in Ireland over the last 15 years that the most Irish investors appear to be trend-chasers…. This trend chasing behaviour reflects our attempts to learn and extrapolate from our limited experience as a nation in investment activities. Such extrapolation may be excessive if not properly adjusted for the small amount of experience at hand. Taken together, the facts are… Read more »
The increase in the Deposit Protection Scheme was necessary after the Joe Duffy cock-up – without a balanced market, and with lots of panic movement of funds into An Post, the government was forced into action
David your proposal for Ireland attracting loads of dosh from worried depositors worldwide, if the minister for Hardship fully guarantees all deposits, may be a little disingenuous. Surely such a guarantee would require Draconian stewardship of such funds by government appointed overseers to protect the state from the bankers avarice and a possible repetition of what’s happening currently. Now I ask you, what did Fianna Fail ever put their hands to -or what quango did they ever create- that ever functioned with any degree of competence or efficacy.? Your proposal might work in Switzerland or Sweden- but Ireland? God help… Read more »
David > a comprehensive guarantee would prompt foreigners to lodge their money in Irish banks. As a member of EMU with the lowest State-debt-to-GDP ratio, Ireland would be ideally placed to offer itself as a financial port in this international storm. If Ireland chose to guarantee all deposits, would the value of these deposits appear as a liability on our national balance sheet? Using your figures this would mean a €300 billion liability at current value. If it was used to attract foreign deposits then the figure could quickly ‘bubble’ out of control. Why should we saddle ourselves with a… Read more »
The Irish economy is banjaxed and will take a decade or more to recover.Fianna Fail screwed up again, what do you expect when there are so many dynasties in Irish politics.It is as bad as Pakistan and India!.If Britain has a recession as bad as the early eighties there will be 400,000 unemployed in Ireland.Makes the eighties and fifties seem idyllic.
David, You say that “In Ireland, the banks are refusing to mark to market their portfolios and exposure to property, so they are pretending to themselves and their auditors that the land they have on their books is still worth the price it was bought for.”. While it may be easy to fool the general public; I do not understand how any auditors can be mis-led? They know the state of the Irish property market and they have access to the banks’ books. When can we expect to see the auditors value “assets against the price they could get today”… Read more »
Yes, this article makes things quite clear. Good to see this kind of writing. Although I don’t see how the state can realistically make such a guarantee without courting bankruptcy itself. It’s not as if the ECB has loads of cash to dole out in loans itself. My own contribution to coming up with a solution would be as follows… (a) have a national debate about what property SHOULD be valued at, in light of ethical and moral considerations, rights, how much money will reastically be available to loan in the future financial climate etc (3xsalary?). Legislative measures should be… Read more »
Sorry – and precursor to said proposed debate should be promulgating the understanding that the representation of ‘interest’ and ‘opinion’ are entirely different political phenomena… And the proposed debate should about representation of opinion… not ‘interest’.
Another interesting thing is that the “affordable homes” quango set up by Fianna Fail,- ostensible to assist the lower paid in purchasing a home of their own-resulted in the better paid getting their homes-not the really lower paid it was supposed to be for.! Prices had gone so high that young people who were on what was once considered good salaries-and would normally have bought their own homes without any subsidy or support from such outfits- were now qualified for such schemes. People earning 50,000 Euros a year are now the co-owners of apartments with Dublin City Council. These people… Read more »
sub
It is foolish to expect that in the political system we have, that the members of whichever political parties in power would not be the first to suck. Ideas of ‘for the good’, ‘in the national interest’, are not based on the general good. If other than the members get something, then well and good, but that is not the first reason for their existence. Being a PATRIOT hinges more to the Liberté, Egalité and Fraternité, except the motto is backwards. Brothers equal and free, is not the same as free equal brothers. And whatever your like or dislike, we… Read more »
Although cultural similarities between Japan and Ireland are few, there is one political similarity in that both countries are ruled by one the most electorally successful political parties in the democratic world. As a general rule of thumb, I find that democratic states dominated by one political party tend to be far more corrupt than those with relatively frequent but stable alternations in power, with a culture of evasion, denial and an utter unwillingness to take responsibility for one’s actions. I know little of Japanese economics or society, but it seems from David’s article that its banks and its Central… Read more »
No we have subsidization of the property market. But it is subsidization in order that people will buy homes and the government will preserve it’s tax take. The ultimate joke in state taxation policy. Subsidies to increase tax. A case of Ireland being a dog that is chasing its own tail. If ever a sign was needed that the Irish economy, Irish society and the Irish state is too pre-occupied with property this is it. The market at least reflects the underlying reality. The property euphoria cannot be sustained. The Lemmings have jumped over the cliff and they won’t be… Read more »
Fergus > I find that democratic states dominated by one political party tend to be far more corrupt than those with relatively frequent but stable alternations in power.
I could counter that argument with Italy.
Interesting aside on this point. There are only four states in the world that do not describe themselves as democratic, namely Saudi Arabia, Brunei, Myanmar (Burma) and the Vatican. That’s two of the richest, one of the most oppressive, and the holiest.
As Winston Churchill said “democracy is the worst form of government except all the others”
Firstly; one solution would be to get the money back from the land sellers and house sellers who managed to sell their lands or properties for up to 3 or 4 times the price it was really worth. Their profit was made on pure speculation, it was never worth the money they sold them for and that is one the simple reasons why we are in this mess at the moment. LADS THAT IS WHERE THE MONEY IS RESTING, IN THEIR BANK ACCOUNTS! THAT MISSING MONEY WE NEED SO MUCH IS THERE. (I’ll pass on all the scavengers ie; estate… Read more »
Great idea! Guarantee all deposits in Irish banks 100% and edgy foreign savers will flock to Ireland with their nest eggs. In the process, they will have to buy themselves an Irish address, so they can show their bank of choice a utility bill as proof of residence; et voila, a new property boom is in the making… That’s what i would call killing two birds with one sliothar! By the way, the edgy foreign savers with nest egg is in Sterling or US$ would have to think real hard moving it to Ireland, as the Euro has become relatively… Read more »
Let’s catch the Man and his assistant and skin them! Hang ’em high! Our own Taoiseach resigned out of embarrassment due to controversy over a few quid and yet the heads of banks in America who were the architects of this disaster walk away with bonuses of tens of millions of dollars. What went on was reckless trading of houses and yet no laws were broken as such. There should be a department in every central bank acting as a watchdog from now on to safeguard against this ever happening again. I wonder what Nick Leeson thinks?
David, A question for you: If we agree that the decline in house values is at the core of the problem, meaning that declining mark to market valuations put pressure on bank balance sheets, then isn’t the difference between US bankruptcy laws and those in Ireland a major factor which may prevent the type of rapid decline in house prices seen in the US from happening here? Would this not provide some limitation of risk to the stability of Irish banks? In other words, in the US, struggling householders are often better off declaring bankruptcy, throwing the keys back at… Read more »
David, well done for highlighting another possible ‘policy’ decision which could have the potential of giving Ireland back a competitive advantage in the flow of foreign and Irish outward invested capital. It would take “Liathroidi”…
Let’s hope the Budget in 2 weeks has ‘innovative’ decisions to attract export oriented companies, capital and people to Ireland so we can move the ‘pendulum’ back towards some demand levels for commercial and residential property to meet the current oversupply. If we don’t act this year/now it may be too late, the alternative is worse than the risk !
my reference to “middle class buyers” is obviously a touchy subject with Mr Joe Rourke, re the affordable homes debacle. Nevertheless my point is unassailable. People on good incomes are now the beneficiaries of this scheme which was heretofore intended for the less well off, who were ignored by local authorities, when it suited them to take cash in lieu of honoring their obligations to those who could not afford to buy property on the open market. No doubt the coming budget will provide further funding for them to take more of the unsold apartments off the hands of the… Read more »
Lads, Not to be alarmist but this whole thing is way bigger than fluting around with Irish developers and house prices falling a few percent. I even think that Davids article was out of date as soon as he emailed it to the paper. We have just had the 9/11 of the financial market. All the wheels have come off the entire banking system. Apparently completely unseen. Nothing has been said about the auditors of the banks. Accounts were signed off that were obviously unchecked. None of the main chancers lost their jobs. If no heads roll then we have… Read more »
Another fine commentary David. Our so-called Government could learn a thing or two from your outside-of-the-box thinking. Why you haven’t been either snapped up or assassinated by now is one of life’s mysteries.
Hi David, > The cavalry in question is the putative $700bn bailout of the US banks by the Bush administration. The reaction to the plan has been one of horror. RTE reported yesterday that the markets sold off because of fears that the bill wouldn’t be passed. This is not correct. The markets have been frightened by the prospect of the rescue package going through. The markets are like a rabbit caught in many headlights running across a motorway. It is skittish, it is unreasonable, it is illogical. It could get crushed, it may get across. It could stop and… Read more »
I forgot to add, another ‘smaller’ problem the US has is the level of private sector credit, non-mortgage. This is in the region of 2.6 trillion, so thats credit card debt, car loans, Sallie Mae, etc. The US consumer has been the mainstay of the US economic growth over the last while, and when mortgage related debt instruments were drying up, they binged on other forms of credit. Checking out historical levels here: http://www.federalreserve.gov/releases/g19/Current/ http://www.federalreserve.gov/releases/g19/hist/cc_hist_mh.html http://www.federalreserve.gov/releases/housedebt/default.htm The last few lines of the latter show that levels are at an historic high. But check out the rate of change between the… Read more »
One of the ironies about this financial crisis is that it makes action on poverty look utterly achievable. It would cost $5bn (£2.7bn) to save six million children’s lives.
Paddy Cullen said “The financial memory only lasts about 30 years then analysts, bankers and regulators fall victim to greed and fear.” This is a particularly insightful comment. Back in the late 1970s an analysis of major wars, oil and gold prices over the previous 100 years showed a cyclical interdependence that peaked every 28 years. It also had an underlying slow but exponential dollar inflation effect that predicted the recent spike to over $100 per barrel. This oil price trend suggests oil price will drop to $30 within a few years but will build to $900 by early 2030s.… Read more »
MK, that 2.3 Trilliion pays for goodies from China and Germany etc. I think the big hits for ireland will come from 1) Slowing global growth as the US stops spending. This will impact every currency and economy. I think the financial system there has had it. What next? One wonders why one cannot just wipe the databases and start again. Get the deeds of ownership sorted and fixed independent of the failed financial system and restart. Do it in 12 months and invent the NewDollar. 2) UK financial crisis – while not as bad as US maybe, they are… Read more »
MK said: ” the US has is the level of private sector credit, non-mortgage. This is in the region of 2.6 trillion, so thats credit card debt, car loans, Sallie Mae, etc.” A couple of months ago, most of us thought that a Billion was a Very Big number. Now people are talking about Trillions of debt quite casually –total derivatives X hundred trillion or whatever. Actually a trillion is not a number beyond human comprehension. Take an ordinary piece of millimetre squared graph paper that has 1000 divisions per metre. A square metre of this will have a million… Read more »
Malcolm > Back in the late 1970s an analysis of major wars, oil and gold prices over the previous 100 years showed a cyclical interdependence that peaked every 28 years. This is a very valid point. But I wonder how much the current levels of debt, both private and government, will skew the cycle. As MK points out, the US are facing the double edge of massive personal (both mortgage and unsecured) and Government debt. This can only be possible in a Fiat money system, where the first respose to liquidity problems has been to ‘helicoptor’ money into the economy.Perhaps… Read more »
Japan offers solution to financial crisis By Duncan Bartlett Business reporter, BBC News It is only four years ago that Japan’s banking crisis seemed close to triggering a global recession. Most of the big banks were in trouble and many seemed to be heading towards bankruptcy. Given their wealth and global influence, it was often said that if one of the big Japanese banks went under, it would trigger a financial crisis that would spread around the world. That did not happen, mainly because the Japanese banks purged their bad debts before they went out of business. It was an… Read more »
Stephen Kenny > how do you reduce everyone’s standard of living, to the extent that reflects the economy In times of recession which is now official here, we can borrow as a government and we will do that. I dont think we should break the 3% limit, at least not by much. Whilst the 3% figure is ‘plucked out of the air’, we need to stick to something. The euro club has the 3% rule, and we benefit by being in that club. Else, set our own rule and leave the club, which may have some short term advantage allowing… Read more »
Ah, David to be oh so correct and be oh so wrong.
@ MK Regarding Irish house prices not falling fast enough. There is a difference between the US and Ireland. In the US you can declare bankruptcy throw the keys back at the bank, and spend a few years rehabilitating your credit, so you can buy back in at a reasonable price. That’s almost an incentive to let the bank foreclose on a house that you vastly overpaid on. Try that in Ireland ! Therefore it’s reasonable to assume that far fewer Irish mortgage holders will walk away from their homes, leading to relatively fewer foreclosures and a less drastic decline… Read more »
David With all the sh1t going on at the moment I think you should be milking the “mess” while you can and writing daily articles. You know, make hay while the sun shines. Like the builders did during the boom. Now its time for you boom. Go for it. I dont fully agree with your theory that the Government should fully guarantee all deposits. It would create a massive capital influx to the banking system which would give the irish banks a big wad of cash to lend out to home buyers again, which they probably would because that “always… Read more »
That which has already died cannot be revived, no matter how much stimulus paper you through at it. I am of course referring to the International Monetary system. The only solution is a political global consensus to write of the 500 trillion worth of gambling ious (derivatives ) and start again, a new financial architecture that is. It follows that the US bailout attempt cannot work nor could it ever have worked except in creating a hyper inflationary blowout of the dollar, the only currently existing unit of international value on which international trade depends. Dollar with no credibility equals… Read more »
Anybody who thinks they can the construction deveoplers millions is missing the point….it is impossible….well hidden far far away….but there stopping Bertie Ahern’s pension is theoretically possible in the light of the Tribunals. We have many problems in this country. The biggest problem is the inate complexity involved in trying to get simple public tasks and projects completed. I am not talking about dealing with residents associations. No the professions are the problem. Everything in Ireland is rigged in such a way that the professions are formed into associations, which charge exhorbitant “economic rents”. This has the effect that the… Read more »
I know where you can get a few Monkey’s , just go into the Dail they are back in it now you’ll find them eating the melted chocolate in their 1.3 million euro glass sweet shop !… asking the government to consider such a scheme here , you might as well start hitting your head off the pier in dunlaoirge ( as the Americans call it !) Regarding America and the decision to put their tax payers money into plugging this black credit hole now puts the US national debt to $11.31 Trillion dollars and to think a few years… Read more »
So what did those villagers do with all the monkeys in the end? They might have some better ideas on how to solve our problems than our current leaders…
Monkey Soup anyone? We’re all in the soup now anyway! Ankle-deep!
Another use could be to train monkeys to turn turf and then to foot it. We could export turf to central Europe and thumb a nose at the Russian gas pipelines. we’d get another 10 years out of the bogs, by which time house prices could be back up to 2007 levels and we could start salting more ejits again. Stay positive people.
Seriously though, Cowen has discussed the diaspora network before. This needs action. We need state-protected investment into project Ireland rigt now, like we’ve never needed it before. we’ve never had so much to lose. A major scheme something like the initial Prize Bonds (don’t mention Dev or the Irish Press to any of them, in case they remember). Use this fund to invest heavily into PPPs for windpower, hydro, roads etc. Its looking like the end of the world but we have plenty of moves left folks. A lot of pain has been created and needs now to be shouldered… Read more »
Sorry, I of course meant the Sweepstakes, not the Prizebonds. But you get the general idea. Appeal to the diaspora with clever, wealth-producing investments. (mental note – not houses or commercial property).
Ger Kennedy asks: “How did so many such powerful wealthy and bright people in so many countries get it so wrong?” I think the problems are far bigger than any individual can really grasp, never mind a committee of monkeys! For a layman like me, DMcW is making a good attempt at clarity on the situation. So is this guy: http://seekingalpha.com/article/96704-bondholders-are-unjustified-big-winners-in-treasury-plan-hussman Many people have said it here, but surely we don’t have to wait until the Americans realize that their fast-dwindling reserves should perhaps be partially diverted into infrastructure and energy-replacement projects. A “New Deal” for Ireland? Sure, why not,… Read more »
Another interesting point is that many of the current empty developments do not qualify for insulation certificates/minimum size requirements, under the new Green Party regime. Therefore if the old stock is not disposed of before new developments are begun and completed;stands to reason that nobody would opt to buy one of these inferior apartments without a big discount, as it costs ten times more to insulate after completion-as opposed to doing the job during the construction stage.! Under the new regulations much of the unsold stock would not be permitted on the market at all! It is really an appalling… Read more »
Below is a text to a private mail from a trading friend this morning- too good not to share… “Did you watch the Senate hearing on Bloomberg?? Historical stuff indeed. I’ve been trading all week as the market is swinging wildly and easy to predict (just follow the herd – fly’s up for a few hours then fly’s down again) . A British cleric would refer to me as a bank robber for ‘shorting’ bank shares that everybody knew were not worth the money in the first place. Overnight, everybody has become an authority on the markets, the causes, the… Read more »
This is slightly off-topic…but I think we are over focusing on finance at the expense of everything else. David’s article is merely a tactical short to medium response to a current situation rather than anything strategic. Just came back on a buiz trip in Rennes – France…you know…the so called basket case economy that should have dissappeared down the tube years ago. They laugh completely at the notion of financial led improvments for an economy so beloved of the US/ UK etc. They have their unions, the hefty taxes etc and it’s pretty anti business in terms of regulation etc.… Read more »
Philip > that 2.3 Trilliion pays for goodies from China and Germany etc. Correct, China’s boom is based mainly on the US’s consumption (European consumption too, and Japan). The US has a huge level of consumer debt, which like their mortgage debt, may start going bad as people cant pay of the interest or capital. Also to note is that many of the ARM mortgages had yet to kick in at market rates. Philip > Real leadership is needed here. We need an all-party coalition to come up with a solution that works. I dont think an all-party coalition is… Read more »
Who will bet against the Soldiers giving a “dig out” to the builders at the taxpayers expense-in the coming budget..
(Might boost the irish stock market a little?)