“It’s like defusing a bomb when you are not sure whether to cut the red wire…”

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.

Gerard:

“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.

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  • Congratulations on this significant mile stone for Slugger.

    This was an excellent topic to discuss and shows just how useful podcasting can be. I am little dissapointed so few of the readers have any views on the economy. If we were talking about ‘the conflict’ your comment page would be overflowing.

    Come on boys and girls. You must have some interest in the real world!

  • Rory Carr

    KPMG are shitting it and the pundits are yet punditting. Pass the grape juice, please.

  • Really interesting discussion. Thanks very much.

  • This ‘bad bank’ idea isn’t going to make any problem go away completely. The assets are worthless because they are, em, worthless. But the debts that the banks, and the public, built up during their spending spree aren’t going away. Billions upon billions of real taxpayer’s money will have to be used to pay off all these debts sooner or later.

    Those pushing the bad bank idea should be honest. It will involve the taxpayer deliberately paying over the odds for something, knowing that it will never be worth enough to pay back the taxpayer. It may be a good idea, but it’s not a free magic wand.

    We can’t easily “scrub the banks” as suggested by the podcast without the government doing some pretty massive borrowing today to give this free money to AIB and the other big banks. It’d be crazy to fix those banks by creating fake deposits with Anglo – AIB and others need to be given real assets. The government will have to borrow massively to buy German bonds to give to the Irish banks. Only this will restore confidence in Irish banks, by making the Irish banks viable even in the event of Irish government default.

    If the Dublin government had let the banks fail, allowing the international depositors to lose, then Ireland could say goodbye to international trade forever. Importing and exporting requires banks in order to function, and it’d be very difficult for Irish importers and exporters to function if everybody, including the Irish person, is trying to keep the money out of those crazy Irish banks. This is why the deposits had to be guaranteed, and therefore the nationalisation had to happen so the government could avoid having to pay out the guarantee today. Now it can spread the pay outs over a few years, as long as it can convince depositors at Irish banks to delay their withdrawals.

    And there’s nothing in principle wrong with lending long and borrowing short. They are the services that bank customers have wanted, and got, for centuries.

  • Greenflag

    Thanks Mick – an excellent discussion which covered both the background , the bubble and the banking system . Only got time to listen today . Overall I thought Michael Taft got closest to the heart of the issues at stake and importantly a way out of the impasse .

    Gerard O’Neill pointed out the huge uncertainties facing both Government and seems to know more 😉 or is prepared at least to be more open than our hassled Minister of Finance. And Stephen’s diagnosis told it like it is re Anglo Irish with it’s remaining assets ironically just bricks and mortar and computer’s following the deflation of it’s property loans business.

    Sorting out the banks has to be the first phase but in Ireland’s case there will also need to be something done about the huge property overhang . For with that albatross wrapped around many people’e neck any recovery will be slower . It was heartening to hear Michael mention the need to promote ‘indigenous ‘ industry via public funds into small and medium size private companies and start ups . Kensei & Mack have been making was similar points on the inequality thread . As I have often stated here on Slugger the accumulation of capital be it human , industrial or financial is the toughest task for any individual or company or country and without credit availability the process will be much slower . The recent property boom spawned many local entrepreneurs and self employed people . Unfortunately too many were tied in to the property boom.

    But then we all know that business initiative is often attracted to areas where the best returns (short termism ) are seen.

    I urge Slugger readers to take the time out to listen to Mick’s podcast for you won’t hear or at least I haven’t heard on the official media yet a more honest and open account of all of the issues behind this crisis and it’s likely outcome /outcomes .

    As to the connect between the global crisis and the local Michael Taft I thought stated clearly how although an open economy like Ireland’s could not isolate itself from events it still could take actions which will minimise the time spent in ‘recession’.

    I would hope Mick that you could get these three gentlemen to have another podcast in say three months time for an update on ‘progress ‘.

    Again thanks Mick for facilitating the podcast and also to Michael Taft , Stephen Kinsella and Gerard O’Neill for a frank and open discussion 🙂

  • Mick Fealty

    Aaron,

    First thing to note is that Gerard, Michael and Stephen are all their own men. The each disagree on various market fundamentals. But they all seemed to agree on the band bank/bond device to draw out the bad debt.

    What Northern Rock and Anglo have in common is that they both came from nowhere; to top the table of setting bargin rate mortgages.

    Nothing wrong with borrowing short and lending long unless you are way out of the depth of your assets when the general tide turns.

    I think it was Michael towards the end who cited an IMF or OECD report which noted that unless and until the bad debt was sorted, no fiscal stimulus could work.

    This is Augean stables work. And no one but the state, it seems, is in a position to underwrite that cleansing process.

  • Mick,
    I don’t disagree that the government will have to find some way to take the debts onto itself. It’s just that the general public need to be made aware of the scale of the problem and the taxpayer’s money that’ll be needed to fix it. I’m sure you all understood that during the podcast, but I wanted more readers to be more aware of this. The British people for example have been told that the toxic assets will definitely eventually make a profit, whereas that is subjective to say the least.

    I’ve seen people, including on other threads on Slugger, who don’t appreciate that there is even a real problem here; they tend to think that the government can fiddle around with things by magic without anybody having to feel any pain.

    And a belated thanks for the podcast to all involved, and I must admit I didn’t make it all the way to the end 🙂 Perhaps I’ll try again to listen to it before commenting any more 🙂

  • This post at Irish Economy isn’t too impressed with this vague ‘bad bank’ idea. It links to a simple concise piece by Krugman (Nobel economics prize winner) which is very sceptical also.

  • David K.

    Posted this comment on the old thread, reposting in the right place:

    Thanks for that, it was great, far more informative and thought-provoking than most of the coverage of the subjects.

    It would be interesting to broaden out the discussion to include the most general failures of Irish political culture and Irish intellectual culture which enabled us to charge headlong down the “cul-de-sac” referred to in the piece. I know the credit crunch is worldwide, I know dodgy property dealings are an international phenomenon, but it seems there was something peculiarly Irish about the mixture of cronyism, delusion, self-satisfaction and uncritical acceptance that marked the post-2000 bubble-boom.

    Loved the little “hello…? hello… Are we done…? Is that it?” bit at the end too…