IF you want to visualise what is now happening in the economy, think about the great plains of Africa. Have you ever seen the wonderful image of the rains flooding into the savannah of the Serengeti? Once a year, between March and May, the arid, sun-parched plain undergoes an extraordinary transformation as the rains bring life and abundance. Flowers and vegetation bloom, animals and insects return to the lush pasture to graze, mate and generally do their thing.
Then, as the seasons change, the waters recede. Water recedes first from the extremities and then progressively the waters retreat until the last verdant area is a small knot around an almost dried up river. Where once there was abundance and plenty, there is now only dust and barrenness. The burnt earth can’t sustain any life.
The credit cycle displays similar characteristics. Credit in an economy works like fresh water in the natural world. It brings life and hope, as well as a little bit of exuberance, which can go over the top at times.
But for all its faults, credit, like water in the wild, is absolutely essential for society to thrive and function. When credit recedes, so too does economic life.
Like water in the Serengeti, credit follows a pattern. Initially it is only plentiful around the river, but then, with the rains, it cascades into remote regions of the plain. These outer reaches only experience life for a few weeks a year when they are joyfully submerged before they are choked off again.
The global monetary system operates in the same way. When credit is plentiful and investors aren’t too worried about risk, money flows into every nook and cranny of the system.
Credit rating agencies are prepared to give the thumbs-up to practically any country and company and what follows is nothing less than a deluge of free — or at least cheap — money. Other people’s cash is available everywhere. So in the case of the Irish boom, ghost estates with no economic or demographic logic get financed. People are offered car loans, holiday loans and interest-free mortgages. Banks’ coffers are overflowing.
But unlike the animals in the Serengeti, who are conditioned to understand the limitations of the natural water cycle, we humans have no appreciation of the economic cycle.
So we go mad when we have the credit and spend and spend until the tap is turned off abruptly, as we are now seeing to our despair.
Take the Irish banks as an example of this lunacy. These so-called “professionals”, who should have known better, borrowed abroad to fuel the housing boom at the top of the cycle. This is the financial equivalent of buying a lawn sprinkler system in the Serengeti in early June! They borrowed up to 60pc more than they had on deposit in order to lend. This drove up profits and, don’t forget, enriched themselves enormously. Irish Life and Permanent went one better than the two big ones and raised its loans to deposit ratios to 265pc. This class of economic joyriding could only lead to a horrible crash.
Then, when the credit waters started to recede, their sprinkler systems didn’t work. The people who lent to them refused to lend any more. In Serengeti terms, they were caught out on the periphery, miles away from the river in rapidly drying-out land. They had no credit. So everything around them started to wither, beginning with their own putrid balance sheets.
All over the world, credit is heading home to safety. The world map mirrors the Serengeti as money rushes back to the sanctuary of home.
When you have borrowed as much as we have, that means that more money leaves the country than flows into it. And our banks have to be drip-fed by some outside institution to prevent insolvency.
The institution in question is the European Central Bank (ECB), which is keeping the Irish banking system alive. The ECB is now Ireland’s IMF.
Like the IMF with a delinquent country, the ECB is giving Ireland money via its banks and hoping for good behaviour in return. Very soon, that hope will turn to something more firm.
The reason the ECB is concerned about Ireland is because of the perception that Ireland’s euro commitment, although politically strong, is economically untenable. The ECB will not countenance problems on the euro’s western borders any more than the Romans tolerated insurrection in Gaul. So the bankers in Frankfurt will extend liquidity to Ireland in return for good behaviour and good behaviour for central bankers means the silly anti-economical creed of cutting spending in a depression. Lord preserve us!
So we have got ourselves into the position where we are not going to be governed by our elected representatives, but by a glorified Bundesbank which is doggedly fighting inflation when the world is facing the most serious deflation in one hundred years.
This is why there is no consistency in the Government’s recapitalisation programme. If we are now a department of the European Central Bank, then the right course of action, if you want to preserve the banks, is to borrow much and make your problem their problem.
Of course, this leads us to wonder why we should be trying to preserve the old banks at all. Why not create a new “good” bank with a clean balance sheet. You’d want to put your deposits in there, wouldn’t you?
Foreign investors and domestic investors would pour their cash into its stock and whatever cash the Government put up to create the bank would be paid back in double quick time. We could switch our pension funds into it too. What does the State care if there’s a run on AIB if our deposits are heading into the new bank?
By creating a new bank, Mr Lenihan could suck all the good assets out of the bad old banks — AIB and Bank of Ireland — and in one fell swoop solve his banking crisis.
WHILE he is at it, he could create two good banks and leave the eejits in the bad banks to their own toxic mess. In fact, we could help them by using the good banks as clearing houses for trading their distressed debt.
The deposits of the system would be safe in the new banks. The equity holders and the bond holders of the old banks would be torched, and that’s not always fair, but that’s life.
In a sense, the new good bank would, of itself, begin the process of quarantining the bad debts. And of course we could get the ECB to keep drip-feeding liquidity into Bank of Ireland and AIB, thereby rendering a major Irish problem which could sink us into a small European issue which would be a minor irritant to the monetary union. Pretty simple isn’t it?
Why would we not create such a liquid oasis in our Serengeti? Because, like the herds of wildebeest that migrate annually to the savannah, we follow the pack, head down, never using our own noggins.
While reading this I was thinking of the River Nile and then closer to home the River Shannon .There are so many offshoot rivers and lakes from the Shannon before it reaches the Ocean .Without the Shannon life would change as we know it .If we could only connect the Shannon to a Tap and feed the Nation with Cash Flow .
David, Good article. What you say about two good banks and a bad bank for the toxic debt makes sense. The only problem is that there are eejits in the Government (including Dept. of Finance) as well as in the banks and your advice is likely to go unheeded, or at best, partly implemented in a diluted fashion that does little to solve the predicament we are in. Hopefully, there is somebody in the Dept. of Finance reading this and will prove me wrong and show that they are not all eejits by taking heed of what David McWilliams is… Read more »
More Court Orders for Home Repossessions have become commonplace and the
Gov continue their chirade to recapitalise the Insolvent / Bankrupt AIB and B of I .
In Dubai new Islamic Laws forbid Banks reposessing Homes that are principled
residence of the borrower . We should learn from them .
….’ tirade’
David this sounds fine in theory but the consequences of repudiating the debt of existing banks to external bond holders would do little to support any future bond sales for a “Good” bank. It is hard to comprehend how other investors would have any trust in a new bank if they felt that when things go bad (never say never) that they in turn would be the ones who suffer and get defaulted on next time around. I am with you on the a “Good Bank, Bad Bank” scenario and while the distressed debts could be sold off some recourse… Read more »
This may well be a daft question but why does the State have to set up the new banks? What if David McWilliams and one or two other eminent economists were to convince their contacts and wealthy friends both within and beyond these shores to invest in a new bank which they would run on an initially temporary basis while setting up the new banks’ articles of association/charter – one of the principal tenets of which would be to prohibit the trading practices of the past few years ever re-occuring? This would create the market forces and conditions for good… Read more »
Critical mass is growing to support this view, glad to see that it’s common sense, I’m not deluded / naive, and there are loads of people who see the same thing, and have been doing so for some time. See today’s Irish Times article from Richard Bruton, he makes the points to support this concept well. Help people help themselves. Here’s an extract of the text of a mail I sent to him last December, around the time of the KKR / Mallabraca nonsense. Clear differences I’m sure in implementation, but the point is create the Noah’s ark banks and… Read more »
The politician should not be allowed dodge for cover!
They presided and enabled this boom and benefitted with higher salaries and 14 years in government, they should be in the dock as the article below argues about British MPs – this is without doubt the greatest cover up and financial skull duggery in Irish history – we need answers and accountablility. To see Neary toddle off with 600,000 payoff is a scandal.
http://www.guardian.co.uk/commentisfree/2009/feb/10/recession-bankofenglandgovernor
[…] Random Feed wrote an interesting post today onHere’s a quick excerptIF you want to visualise what is now happening in the economy, think about the great plains of Africa. Have you ever seen the wonderful image of the rains flooding into the savannah of the Serengeti? Once a year, between March and May, the arid, sun-parched plain undergoes an extraordinary transformation as the rains bring life and abundance. Flowers and vegetation bloom, animals and insects return to the lush pasture to graze, mate and generally do their thing. Then, as the seasons change, th […]
Interesting article. As a non-economist, (and taxpayer!) I’ve been wondering why the hell we need to bail out the “bad” banks when we could simply use our 8 billion to create a new “good” bank with a clean sheet and in the context of proper financial regulation. Maybe it really is as simple as DMW states in this article, but perhaps the government need to keep BOI and AIB alive since they have guaranteed deposits? If these banks go under, will it bankrupt the state? Maybe I’m missing something regarding credit, but I think there is a wider issue. Credit… Read more »
We have seen this all before, to say otherwise is a bit disingenuous, we saw it when the world bank et al gave billions to African countries in the 1960’s, shooting up in the mid 1970s (to tinpot dictators who weren’t interested in reading the small print) then times changed, interest rates shot up, credit tightened and the poor of Africa have been paying it all off every since despite the efforts of the odd rock star, I think this is probably a better analogy, we (the majority of honest, hard working people), will carry these debts for generations.
Excellent article and ‘on the money’ as usual. Serengeti analogy is brilliant. I think we need some clever thinking and a fresh approach at the top. This Government is tired however I don’t see any fresh faces anywhere else. I was listening to a podcast of David giving a presentation to Bank of Ireland customers in January of 2007 where he offered them a deal on his house (a sale and lease back). He was effectively betting against the market in Ireland. It is really amazing to hear what he said now. He was right then and he is right… Read more »
Thank you David. I think you’ve written a valuable piece, especially the metaphor you use seems to facilitate thoughtful streams to flow. “like the herds of wildebeest that migrate annually to the savannah, we follow the pack, head down, never using our own noggins.” – what a challenge to us. Are we truly like that? Who isn’t? Who would be acclaimed a member of a roll of honour representing the voices of dissent? You certainly. Shane Ross too. I would like to invite your readers to nominate people who have proved themselves capable of seeing the perils and haven’t yet… Read more »
Hi David, > Of course, this leads us to wonder why we should be trying to preserve the old banks at all. Why not create a new “good” bank with a clean balance sheet. You’d want to put your deposits in there, wouldn’t you? I Fully Agree! One (or two) new “good” bank(s) is the best use of our money at this point in time as untangling the mess of the ‘six’ ‘irish’ banks is very messy indeed. To use a Revenue term, lets ring-fence the old. It is true that we also need to ‘look after’ the 6 bad… Read more »
My list would include Messrs McWilliams and Ross, in addition to Brian Lucey, Brendan Keenan, Eddie Hobbs, Alan Ahearne and possibly Alan Dukes or Ruari Quinn. The latter two may provoke a reaction but their responses in the media to date have been fairly clear and rational.
Oh and of course Morgan Kelly in UCD.
Brian Lucey is the one who has impressed me most, he appears to be such a clear and focused thinker.. no bullshit whatsoever… What about Naseem Talib black swan boy.. for an external eye?
The honourable thing comes to mind, as in a bottle of whiskey and a revolver on the table. Greed unrestrained and belief in privilege, in private ownership, in the tenets of capitalism are impossible to dislodge from the primal instincts of the FF gene pool, who are in control, not anyone with an ounce of common sense, integrity or honour, or a commitment to the common good. How is this government going to escape from its guarantees when it revenue has collapsed, and even if it completely shut down its operation, would never be able to pay off the liabilities.… Read more »
Incredibly, Eugene Sheehy and his banker pals get to keep their jobs.What have the staff in the Central bank and the Dept of Finance been doing for the past 3 years?.Everyone of them deserves to be fired.We will have 20% unemployed within a year and a budget deficit of 30 billion in 2010.Californian deficit is 55 billion $ this year- with a population of 40 million people and the 7th largest economy on the planet!.Shows the painful mess we are in.
The Serngetti example says it all. So much for the ‘green shoots of recovery’. It is a case of adapt to your environment. Banks with expensive, clueless executives, are not viable. Banks with layers upon layers of nepotism appointees are not viable. Networks of speculators rigging the market for development ground are not viable. IBEC supported cartels/oligopolies are not viable. And something which is highly questionnable – is the idea that the taxpayer funds can make it all viable. As Al Gore would be one to say ‘the environment has changed’. And we need to change our strategy. Which requires… Read more »
The 4b or 7b ‘movement’ or whatever it turns out to be from IL&P to AnIB around their year-end is most ‘disconcerting’ for the current government. (a) If the government knew about it, they are complicit/party to in falsifying the ‘true and proper accounts’, the true financial status of AnIB (b) if they didnt know about it on the day of announcing the state guarantee, its reckless behaviour as it shows they did insufficient due diligence These factors plus other incompetencies in recent times and indeed over the last decade would surely lead them to conclude one and all that… Read more »
From Midnight at the Olympia to the plains of the Serengeti. My isn’t DmcW waxing lyrical these days.
In addition to the names mentioned above including the likes of David McWilliams, Shane Ross and others. I would also include Dr. Michael Smurfit, he was around during the 1980s and played a key role in reforming the Telecom Eireann (Eircom) to such an extent that Ireland’s telecommunications system was looked-upon as a world leader in the early-mid 1990s. In addition, I would also include Dermot Desmond. Okay, he may have more in common with the wealthy club who have taken more than their fair share during the boom years. However, he is someone who knows how to make top-class… Read more »
Hi guys, This might be beside the point of this article, but I have followed this page and your comments with interest over the past months. So I thought maybe you could help me answer some questions I have been wondering about First a comment about Alan Ahearne and the introduction of school fees. I am not from Ireland but have been living here for the past 6 years. What I always noticed as somewhat peculiar was relatively low tax base, combined with the extremely high wages in public sector and I could never get this to add up compared… Read more »
It’s encouraging that this idea is gaining steam.
http://www.thepropertypin.com/viewtopic.php?f=19&t=15632&p=158675#p158675
http://www.thepropertypin.com/viewtopic.php?f=4&t=15616&p=158683#p158683
pera> maybe you could help me answer some questions I have been wondering about Low taxes, high public sector costs: the tax base was skewed so that corp tax was low (altho overall income was healthy), personal income tax was reasonable, capital tax was reasonable (income was high due to property boom, some of it was borrowed!), and direct sales tax (VAT) was high (income was good but again some of it based on credit). > it seems that the universities are funded from taxes, as in most european countries, but the the wage costs are more similar to American… Read more »
Silly question no.1) why start a new bank? Why not have Deutsch Bank do retail banking here? Why not put all your savings into Rabo or whoever and forget about the locals here? Is the latter not already happening? What will an Irish bank do for us that a SEBANKEN or a Kredit Bank could not do? Silly question no. 2) is credit really going to fix anything? Builders just build more houses. etc. I think we need a Bank that is R&D/ Export Business focused. We need to differentiate where the credit goes. There are profound issues with our… Read more »
Are we off the mark altogether on our analysis of this ??? Do we need to take a step back and see it for what it truly is, take the power back into our own hands… we are the politic afterall.. no point moaning about the boys in the comfy jobs in dail eireann, we put them there.. I found this article published almost 10years ago at this stage.. it may be off the point but it may also show how far all of us have fallen : its on Ethical Banking: Why is it that when I mention ethical… Read more »
This is a great plan/idea David — we need ‘good’ banks lending to productive businesses not ‘bad’ banks writing down property loans generating a multi billion euro bill for IRISH taxpayers ! The ECB should be underwriting the guarantees for the bank’s liabilities to the wholesale lenders and bondholders. The Irish government should only cover deposits as suggested back in September. The risk is too big for Irish taxpayers with no reward. We are part of the euro zone, which is of course a benefit from an ECB banking point of view but the strong exchange rates are doing the… Read more »
brighteyes – I agree with what you have said in absolute terms – the national crime forum held meetings in 1998 around the country and invited people and organisations to make a formal verbal and written submission in the presence of the full bord .I was invited to make mine relating to Banks and Crime .Nobody else in the country dared to then. At the time nobody would believe me and I was up against a stone wall .As it so happened everything I wrote has now come to past and I predicted it to the exact year .Nevertheless I… Read more »
Hi, I am new to economics. Can someone please explain to me how bank lending should take place.. If you have €1,000 deposits, how much should you leverege up by borrowing from other banks and then lend into the economy. What percentage borrowing from other banks is acceptable…? Can some please talk me though how a bank lends money by using a combo of deposits, and borrowings… and from there show me how it went wrong from the irsh banks., Please also convey simply what tier 1 capital is and how that comes into the picture with an example… Also… Read more »
@ Justsome1 Tier1 Capital is the equity in the bank in other words what the shareholders have put in or own. As regards lending I would recommend the post by brighteyes above which actually goes to the core of the issue in banking Also The beginnings of the modern banking system go back to when a group of merchants (some people say freemasons) started the bank of england and were allowed to begin inventing money out of thin air (ie lending money they didn’t have and earning interest on it) Since then this alchemy has moved the world in the… Read more »
Mediator, There is not even the collective intelligence in the financial/ political community to engineer a pee up in a brewery let alone a NWO. This is just plain old entropy at work. The system went out of control as more and more of the control limitors were taken offline. HBOS’s alledged firing of Paul Moore – their risk manager is just an example of it. Never ever underestimate the genius of stupidity and greed. We are witnessing a collapse of the first version of a global system which had no global laws or regulation to speak of. Revision 2… Read more »
Not having an economist-Im a bit confused by this article. Is David suggesting that the Government set up its own Bank? What about a branch network? ATMS? How would setting up its own Bank allow the Government to borrow more? Would that honestly make any difference to the amount the Government could borrow?? Please Help!!
If you are a Muslim and a follower of Islamic Banking and borrowed accordingly from an Irish Bank – You principal house
cannot/ will not be repossessed through an Irish Court
Bright eyes, I see you’ve been watching the “Money as debt” video… You’re right, there is a bigger picture to all this. The treaty of Maastricht basically meant that all the european countries renegated on their right to control their money and will now have to pay interest on the money they borrow from a private bank (i.e. the ECB). Why would any country agree to such a bad deal (apparently they didn’t pay any interest before)? For France, this “bad deal” has been sealed back in the seventies. At the time, the president was Georges Pompidou. He had been… Read more »
Sharia Law Practice and Bank of Ireland in UK & Irl
http://www.alburaq.co.uk/homefinance_partnerships.asp
I am searching for more
Not just one good bank – half a dozen.
Let them compete amongst each other, while the market straps the criminal banks in to the electric chair. Fzzzzzz!
Sharia Law Practice and Irish Bank Loans
http://www.islamic-banking.com/ibanking/ifi_list.php
You will see Ireland near the bottom of the list of countries
Sharia Law Practice and Irish Bank Loans
http://www.allbusiness.com/banking-finance/banking-institutions-systems/5083600-1.html
Sharia Law Practice and Irish Bank Loans
http://www.mondaq.com/article.asp?articleid=73110
DWMC’s idea outlined above is the natural extension of his untouchables idea , the creative accounting used by Anglo Irish Bank is another nail in the coffin of Ireland’s credit rating ,financial credability is long gone, our existing banks are out of options, a new bank is needed for day to day business and the autopsy of the zombie banks is for another time, it’s a national embarrassment at this point. Much like a premiership side head hunting the best players to form a world beating team, our government should at this point be well underway to forming their own… Read more »
I still see no reason for a new bank. Use a foreign one. We owe them money anyway. They are our real bankers whether we like it or not. Last time I was in a bank was 3 years ago. Last time I used an ATM was 3 months ago. Internet, laser card and credit card…there is no need for a branch network. Anyway, the latter are generally useless and offer no personal services or advice. Force the economy to upgrade. Receive no snail mail, no faxes or cash. Internet or nothing. Stop wallowing in a dickensian past of quills… Read more »
[…] And last, but not least, our very own David McWilliams Serengeti Economics point to Good Bank Solution […]
Folks, ………. eh, ………. did I REALLY hear Enda Kenny say, in the Dail today, that “the Fraud Squad are [sic] investigating”?
Is it? Any confirmation on this, from anyone? I hope it’s true.
Anyone have a “contact”? (six-degrees-of-separation, and all o’ that)
Michael Creed TD made an interesting point: (paraphrasing) “Paying the recapitalisation money to farmers, in lieu of outstanding grants, would help the farmers out of banking debt because they would be handing that money directly to the banks, anyway”, thus, my point about the PS pension levy: spin the money through the economy, so it can flow and do some good and retain jobs/incomes/repayments/mortgages/LIVES!
….. instead of, just, “skipping” the economy and handing it straight to the banks.
Again, I say: “CRAZY”!
remember where you were folks, the night the recession and banking crisis was ended… the BOI and AIB are wholly sound, nothing funny going on , and the petty cash boxes have been topped up by 7bn, or 3.5 x 2. If Mr lenihan only read half a report on Anglo, one must hope he hasnt done the same with the big two. I have spent the last two days , watching the the Uk treasury do the Uk bankers over, and tonight the US treasury do the top 8 US bankers. What did impress me tonight was they universally… Read more »
I,ve just been able to read this latest thread. And it’s unbelievable in my humble opinion. Lets get one thing clearly out of the way. Latterly, mea culpa, on this site, I irritated some economic commentators and I have apologised for that. Correctly, this is not Facebook. What, in simple plain English, has been set out in this particular piece by David, summates the conversations I have seen over some considerable time. Now our host has brought this to a different level. And before ye all mutter it, yes, I am talking A45.There exists on this forum, the root and… Read more »
furrylugs, how do we get the bankers on the tv , like the way they have been in the Uk and USA, Let the the people of Ireland who have been hurt and damaged by the action of our bankers, see and hear the about money they were paid, went to type earned, then realised that wouldnt be taking the phish. Live on RTE for 3 hours , of questioning …………………………………. Do our bankers not want to be on a par with their peers in UK and USA, they were happy to seek like for like pay…. IF you know… Read more »
The Lex column is probably the most respected part of the FT. This is what it wrote back 18 December 2008…. “The Irish government’s haste to guarantee the deposits and debts of the country’s banks was balanced by its slowness in recapitalising them. It caused persistent uncertainty about the true extent of the Irish banks’ woes. Dublin’s early guarantee reassured depositors, but also reminded investors of the fragility of the highly leveraged HBOS-like funding model banks used to finance domestic and UK property booms. The more guidance Ireland’s bankers gave on their likely loan losses, the less analysts trusted what… Read more »
Treason “serious acts of disloyalty to one’s Sovereign or Nation”
How many in both the Financial and Political arena are guilty.?
Give then a fair trial, and afterwards some Chinese Justice, then there will be no need for any extention to Portlaoise.
Excellent visualisation analogy. But there’s one crucial element missing from this African plain’s story: Human beings. Yet again, I repeat: This is an ethical crisis manifesting as an ‘economic discontinuity event‘. We are NOT the victims of forces of nature which we cannot plan for, respond to, and exert ever increasing degrees of control over. We have always, and will always need to respond rather than react, to mutations of climatic, bacterial, viral, ethical or ‘economic’ origin. From the first steps of our ancestors across the plains of Africa to our current challenges, it is human ingenuity and innovation that… Read more »