“Now we potentially have the worst of all worlds..”

In the Sunday Business Post, David McWilliams spots another potential problem with the Republic of Ireland’s bank guarantee scheme, “by placing the weaker banks in the state on a par with the stronger ones”, and he invokes Gresham’s Law – named after Sir Thomas Gresham (1519-1579) founder of the Royal Exchange. By way of an aside, interesting to note that Gresham’s Law, “bad money drives out good”, could actually be called Copernicus’ Law.. but then it did take the administrative genius of Sir Isaac Newton to address the problem of the debased coinage of the time. And Gresham College [established 1597] provided the first meeting place of Those [Royal Society] Guys, on 28 November 1660, as well as, from September 1664, the lodgings of Robert Hooke as the soon-to-be Gresham Professor of Geometry, one of his many roles, where he gave free public lectures and lived until his death in 1703. Three weeks after Hooke’s death the trustees of Gresham College notified the Royal Society to hand over the keys and remove themselves and their belongings.. And, IIRC, Robert Hooke actually proposed decimalisation as part of his solution to the debased coinage.. ANYway, from the Sunday Business Post article.

A conspiracy theorist might suggest that the weaker banks have pulled a stroke over the bigger ones – AIB and Bank of Ireland – using the Department of Finance in the process. Surely not? Could this happen in our clear-thinking country? Could our Department of Finance favour one bank over another? Never!

More likely, the scheme was drawn up with political considerations in mind – with the government under pressure from the opposition not to be seen to put taxpayers’ money at risk. For the economy in general, the worst aspect of penalising all the banks for the sins of one is that it smells and looks like the discredited Japanese model. It means that we have tied the whole banking system up in knots. This can only slow down any recovery of the banks.

It would have been far better to have followed the Swedish or Swiss approach, by sticking to the three-phased programme, weeding out the guilty while recapitalising the system using government preference shares. Now we potentially have the worst of all worlds. The moral of the story is that, when you try to satisfy the left- and the right-wing, you end up with a dog’s dinner. This is hardly the best platform for recovery.