We had our first Slugger Live podcasting session in a while this morning. We were lucky enough to have a fine panel of southern economists with us to pick over the wreckage of the Anglo Irish Bank, and upon which there was remarkable unanimity about what should be done with it: ie, let it collect all the toxic assets of the other Irish banks, then tow ‘out to sea’ and sink it in a box for thirty years and then deal with it when this current economic cycle is a mere detail of modern Irish history… There is no sign that the government is even beginning to think in those terms. In fact, with the Finance Minister’s assertion that there had been no run on the bank, there are signs not simply that it is heavily in denial but, as David McWilliams noted this morning, that it doesn’t understand how the banking system works (or at least hopes the public doesn’t)…Stephen notes towards the beginning just how bad it was for Anglo when the Government stepped in: “Yesterday the shares were trading at 22 cent when they were stopped, which means the markets where essentially valuing Anglo Irish on the value of its computers and buildings”. Quite literally, a brick wall then.
For Gerard, the wider worry is ‘the systemic risk’. The actual risk to the taxpayer could be in for as much as 20 Billion. He notes also a commentary from Standard and Poors not only that Ireland’s sovereign fund stands the risk of losing its triple AAA credit rating but that government dept to GDP ratio reaching 228% but the end of this year. Something the Department of Finance has not even admitted to yet.
Michael offered a road map:
“Whatever the process, whether through an instrumental nationalisation or niot, it is clear that the State has to step in, and actually reconfigure the banking architecture. We need to have one bank which is public ownership. There are five other banks that should be collapse into two, so that we have two strong healthy banks. The dubious assets that are going to drag down these banks and raise the possibility of a Japanese, Zombie Bank system for years to come, those should be put into Anglo Irish; a bad bank, a bad debt depository. And then as a next step a third public enterprise banking system should be established on the model of the United States’ Community Development Banks; a third force in retail banking. But we need to bite the bullet and do this up front, otherwise we are just going to get a drip, drip, drip of capitalising banks of which we have very little knowledge about the state of their balance sheets.”
Michael also mentions a recent IMF Report which noted that all the Fiscal stimulus in the world was literally only sending good money after bad until and unless the whole banking system is washed clean of these bad debts.
The bad debt sponge idea met with approval around the table, but the problem remains perhaps a cultural one. In order for this to work the other Irish banks will have to come clean about the extent of their own bad debts. Given the culpability of the Executives within the Irish banking system, that’s a hard one to answer.
“I have some sympathy with the Minister of Finance. It’s like defusing a bomb when you are not sure whether to cut the red wire, the green wire or the blue wire. You’ve not just got a banking crisis here, you’ve got a property bubble that’s imploding. So you’ve got a number of these huge uncertainties to manage; each of them capable of triggering an explosion in the economy. It is phase one. We need to sort the banks as a first phase and then get to the real economy afterwards.”
It’s a great conversation, but probably a bit long to listen in one go to at the desktop… You can get the download here.