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.

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