A glimpse over the rim of Ireland’s financial inferno…

Excellent piece in today’s Irish Times on the Irish bank deal from Morgan Kelly, who gives us a quick view of what it might look like when if the Irish state tips towards a state of state bankcrupcy [can that happen? – Ed]. Oh, yes. You don’t go to court, if the country defaults government will have to pay for nearly everthing itself on a dwindling tax take, government bondholders (ie pension funds and ordinary citizens) will all be f*&%ed, regardless of what the Supreme Court might have to say about it… [So how come the Republic’s in such peril? – Ed]… Well, it might not be… Morgan takes up the story below the fold…

…imagine that you are a bank manager and somebody that we will call Brian (not his real name) comes in looking for a loan.

Brian’s income is €30,000 and he would like to borrow €20,000 to cover living expenses. This sounds like a lot in these nervous times but, because Brian is not carrying much debt, you think you might lend to him.

However, Brian then lets it slip that, because his income is falling sharply, he will need to borrow at least as much each year for the foreseeable future. He also admits that, late one night and for what seemed like good reasons at the time, he somehow agreed to insure the gambling losses of some “banks”.

Brian has no idea how large these losses might be, but is starting to fear that they might be substantial. At this stage, you realise that Brian is on a trajectory into bankruptcy and show him the door.

The devil in this case lies not in Ireland’s public debt, but in the government’s foolish audicious cunning plan to guarantee the losses of the Irish banks:

The Government has not updated its estimate of losses since Brian Lenihan’s boast that the liability guarantee was “the cheapest bailout in the world so far”, an assurance that already ranks in the annals of supreme political irony alongside Neville Chamberlain’s “peace in our time”.

According to Kelly, the equation is brutally simple:

The ability of the State to continue funding itself ultimately depends on the size of these bad debts. If they are of the order of €10ր20 billion, we will survive. If they are of the order of €50-€60 billion, we are sunk.

And how did we get here? Lax regulation is not just an Irish disease. Right across the western world, the banks and international financial houses lobbied for it hard, sometimes making sub rosa threats to political parties and leaders that they would redirect their resources elsewhere without a lowering of base standards.

According to Fintan O’Toole, Ireland under Fianna Fail bought the line hook line and sinker:

At the IFSC annual lunch in December 2005, Micheál Martin noted the “unhappiness in the business sector at the degree and extent of obligations imposed by directors’ compliance statement obligations” and boasted that he was changing these regulations to ensure the law would be “less prescriptive about the methods a company uses to review its compliance procedures, and in not requiring review of the compliance statement by an external auditor”.

There was a concerted campaign to silence calls for tighter regulation. Charlie McCreevy urged the Financial Regulator: “Don’t try to protect everyone from every possible accident . . . And leave industry with the space to breathe and investors with the freedom to learn from their mistakes.” He actually boasted of how “Many of us in this room are from the generations that had the luck to grow up before governments got working and lawyers got rich on regulating our lives. We were part of the ‘unregulated generation’ – the generation that has produced some of the best risk-takers, problem-solvers and inventors.”

In effect, Fianna Fail took a gamble on the goodwill of the financial services industry. Last October it went in deep, before it knew just how deep a hole their mates in the banks had dug for them and the whole public sector. Back then Noel Whelan probably reflected government expectations that:

…if the insurance given to the banking system is not called upon, the Government finances will turn a substantial profit from the levy charged for the guarantee. Even if difficulties arise and some of the guarantee scheme is drawn down, the Government is determined that those costs will be borne by the wider banking sector rather than the taxpayer.

That was clearly very wide of the mark. The government seems to have mixed bad with good without asking the tough questions. Hardly surprising since the banks had all gotten used to being in the bully place. Morgan Kelly sees the worst looming:

To see what would happen to Ireland if foreign lenders suddenly pull the plug, we only need to look at what happened in Latvia last December. We would be forced to seek an international bailout, with the International Monetary Fund and European Union playing bad cop and good cop. We could expect cuts of one-quarter to one-third in public sector wages and social welfare benefits, and draconian tax rises to bring the deficit back to around 5 per cent of national income in two years.

There is actually a worse scenario where international bond markets suffer a general panic, like 1998. Not only does Ireland gets torpedoed, but also Portugal, Italy, Greece, Spain and Austria. The IMF and EU simply would not have the resources to bail out so many economies and we would be entirely on our own.

In circumstances where the Government could not even pay public sector salaries, the bank guarantee would immediately become worthless and we would see an uncontrollable run on all the Irish banks.

This won’t be like previous recessions. If the stimulus packages elsewhere don’t work (the Republic has already committed its future earnings to covering the banks come what may…), we are heading for a very painful reversal of the globalisation process. Unlike the 1980s, there is simply no place to escape to. As my colleague at River Path, David Steven noted in Tokyo recently: “be ready for the backlash – people are angry and rightfully so, but that may well lead us down some populist blind alleys.”

In which case, what Ireland needs right now is an opposition with a steady eye and a steady nerve.

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  • Mack

    Scary article, I’ll comment on that tomorrow.

    300 jobs to go at Intel Ireland too.

    http://www.rte.ie/news/2009/0217/intel.html

  • Maca

    Depressing article.
    Painful times to come, and i’ve zero faith in any of our current flock of political leaders. We’re screwed.

  • Trying to decide who’s in worse shape – California or Ireland. I think Arnieland has the nose in front on the scale of fail but doubtless Ireland will find a way to make their situation worse again:
    http://www.nytimes.com/2009/02/17/us/17cali.html?ref=us

  • Dave

    Those who tritely proffer the “lax regulation” explanation as the cause of the woe convieniently omit to specify how much of the 1.67 trillion in external debt was loaned to those who, presumably, should have been classified as a subprime risk oe what the lending criteria should have been for property LTVs if not the mark-to-market model. Without that data, their ‘argument’ is completely meaningless.

    On the other hand, overheating in the economy and the excessive borrowing that fuels it could have been stopped before it began by putting the interest rate up to 6% or 8%. That, of course, wasn’t possible because Ireland had trnasferred sovereignty of its monetary policy to the EU’s ECB, so a policy rate that was designed to stimulate the German economy (which needed a boost) had the effect of strapping a turbocharger onto the back of the Irish ecomony (then full of feel-good folks enjoying the real Celtic Tiger 2000 RIP) and utterly destroying it.

    Morgan Kelly is, of course, correct to state that guaranteeing the banks was insane (even more insane than transferring control of domestic interest rates to the ECB). Rather than safeguard the banks, it serves to imperil the nation. That is why the credit default swap on Irish bonds went skyward from September onward.

  • Dave

    Typo and clarity: “…subprime risk [b]or[/b] what the lending criteria should have been for property LTVs [b]and what model should be used for asset valuation[/b] if not the mark-to-market model.

  • disinterested observer

    Surely Gordie and Darling can roll this little local Irish difficulty into the UK situation. At least then we’d get a United Ireland!
    Chucky ar la!

  • Dave

    Nah, while the northern nationalists would happily accept a UI within a UK constitutional context, they’d have to be dragged kicking and screaming into a UI that was about to become more of an economic basket case than NI and where their beloved UK subvention would no longer apply. Nanny-state addicts, and all that. They just don’t have the will for hard times. 😉

  • I’m not sure what to say only that the local situation with the Irish Banks should be more amenable to a reassessment of the assets against which loans were taken on than is the cause the International situation were the complex financial instrument are what are hitting a bum note.

    The Irish banks lent money for the most party to developers and so on to buy land, that land exists and while making an exact valuation right now might be hard, a comparative one shouldn’t be. A 100 acres outside Navan isn’t nearly as valuable now compared to 10 acres in Dublin city centre and Ballsbridge isn’t more valuable than downtown Boston. You make some comparative valuations you plus or minus them by 20% and the ones that look like they won’t pay back should be rolled up into the national debt via the NTMA. Sure it might add 50 Billion to the debt side of things but the state would own land that it could manage for development over the long term.

  • Good grief, Fealty, and I thought I was pushing my luck in fisking this piece at some length. Doesn’t the Professor do a really nice both-ears-and-a-tail job on Lenihan?

    What’s missing here, as far as I can see, is the news up-date: see the Irish Times website refresher on the defenestration of Michael Walsh from the Irish Nationwide Building Society. Plus the even more revealing story that “Cowen says he doesn’t know Anglo ‘golden circle’ names”.

    Whoa-hoo! This one has potential; so eyes-on-the-ball, chaps.

  • frustrated democrat

    A United Ireland outside the UK is not going to happen anytime in the next 25 years, that will be the minimum time it takes to get RoI borrowings back to a reasonable level.

    Just as at 9/11 the whole world has changed and everyone needs to revaluate their political beliefs in light of the new situation. We need peole who are interested in working to get the Northern Ireland economy sorted out before even looking at a United Ireland, do they exist?

  • Dave

    They do exist, FD. The problem is how to get them to stand for public office. Just look at the tossers we elect on both sides of the border, and wonder why that dismal ilk would encourage their better to compete with them for seats. If all else fails, we can always have a right-wing coup. 😉

  • frustrated democrat @ 10:05 PM:

    Which misses the point entirely. As it is said: RTFM [Read the full material].

    What the good Professor Kelly wrote is:

    … if foreign lenders suddenly pull the plug, … We would be forced to seek an international bailout, with the International Monetary Fund and European Union playing bad cop and good cop. We could expect cuts of one-quarter to one-third in public sector wages and social welfare benefits, and draconian tax rises to bring the deficit back to around 5 per cent of national income in two years.

    That, of course, is the worst blood-curdling scenario (and, as my other piece implied, Kelly is writing some impressive, flesh-crawling, melodrama here). Yet it chimes with last week’s talk that the bottom-line would be a massive underwriting from Germany. Read 2009 for 1941.

    The particular turd that might be shredded by the ventilator is the whole Euro-system. Probably, the Eurozone could wear one of the minor economies (Ireland, Portugal, Greece …) going belly-up, but Kelly points to the domino-effect:

    There is actually a worse scenario where international bond markets suffer a general panic, like 1998. Not only does Ireland gets torpedoed, but also Portugal, Italy, Greece, Spain and Austria. The IMF and EU simply would not have the resources to bail out so many economies and we would be entirely on our own.

    In circumstances where the Government could not even pay public sector salaries, the bank guarantee would immediately become worthless and we would see an uncontrollable run on all the Irish banks.

    Or, as Kelly doesn’t quite say, “Be afraid. Be very, very afraid.”

  • Nomad

    Dave,

    “Those who tritely proffer the “lax regulation” explanation as the cause of the woe convieniently omit to specify how much of the 1.67 trillion in external debt was loaned to those who, presumably, should have been classified as a subprime risk oe what the lending criteria should have been for property LTVs if not the mark-to-market model. Without that data, their ‘argument’ is completely meaningless.”

    Dave, I think the point is that the regulators should have attempted to better understand how the securities were packaged; listened to the few economists dissenting over previous years about potential problems; asked why investment banks were outsourcing much of their risk analysis to ratings agencies protected by the first amendment and able to say whatever they pleased; figure out why mark to market was being mixed with marking to models.. Oh, yea, and perhaps wondered why banks were becoming so highly leveraged as part of the new economic golden era where property didn’t lose value.

    Property losing value- no one could have seen that coming, could they, Dave?

  • frustrated democrat

    MR

    I don’t accept Professor Kelly’s analysis I believe in something less drastic with a rescheduling of debt and smaller cuts which will then mean it takes 25 years to repay.

    The more drastic option would lead to a failure of the economy in the south with a mass exodus of the middle classes, and very dangerous fall in overall tax take, not a repayment in 2 years.

  • Mick Fealty

    nomad,

    Nice. To that add the bullying from the banks themselves against anyone in government who even thought about tightening anything.

    This is where Stevens’ advice should come to the fore. The worry is the left carries too much animus against the free market per se, and crunches unintelligently past the right solutions.

  • Kensei

    I have a certain scepticism towards these scenarios. The IMF has come out in the last few days to state that Ireland is unlikely to need their help:

    http://www.reuters.com/article/usDollarRpt/idUSNLE14994320090114

    and Ireland at the moment has low debt. If foreigners pulled the plug then country would be screwed, but that goes for just about any country at any time. The bank guarantee has left Ireland open to both severe losses and a speculative attack, but I haven’t seen a smoking gun that screams Iceland as yet. Wiki gives nominal Irish GDP at $285 billion dollars; even with the budget deficits is $50-60 billion going to sink the country? Countries can get by on 100+% debt-to-GDP ratios though it’d be singularly unpleasant. Can anyone explain?

    Even the cost of ensuring US Treasuries is soaring:

    http://www.xe.com/news/Wed Feb 04 17:05:00 EST 2009/222649.htm?categoryId=1&currentPage=10

    I think this translates to about 6% risk of US Treasury default, which you should note, as it is the chances of the world ending.

    Of course, given the events of the last year it is possibly not an unreasonable estimate.

    Nomad

    Dave, I think the point is that the regulators should have attempted to better understand how the securities were packaged;

    It is impossible for regulators to do this with every type of financial asset. I have a better solution.

    There is a concept in Computer Science used to classify programs called Cylomatic Complexity. WIki is fairly good on it: http://en.wikipedia.org/wiki/Cyclomatic_complexity

    It will give a rough and ready measure of how complex a piece of software is, how many paths there are through it. Software with more paths has more opportunity to fail; as testing software can never be exhaustive, there is more chance for even good QE teams to miss bugs. You don’t need to know what the software does to know there is a risk factor there, and critical applications may specific a level of cylomatic complexity to reduce risk.

    So what regulators should do is hire some of those rocket scientists coming up with these vastly complex asset classes to come up with objective ways to measure complexity of said assets, and use those as the basis of regulation. It avoids the need for detailed knowledge, or the need to be overly prescriptive.

  • DK

    “Wiki gives nominal Irish GDP at $285 billion dollars; even with the budget deficits is $50-60 billion going to sink the country?”

    This from memory, so might be wrong… 285 billion is the whole economy. Of the 285 billion, the government only gets to play with its cut, which is 50 billion. That is why 50-60 billion would sink the country.

    As for Dave… if it wasn’t for the euro, you’d be like iceland by now – begging to join.

  • Mick Fealty

    Ken, as I mentioned in the post, the equation is brutally simple:

    “The ability of the State to continue funding itself ultimately depends on the size of these bad debts. If they are of the order of €10ր20 billion, we will survive. If they are of the order of €50-€60 billion, we are sunk.”

    Radio silence from the Minister, unexplained resignations, and the fact the Minister of Finance has been not reading his detailed reports as thoroughly as we might have expected are, you must admit, just a wee bit freaky?

  • Kensei

    DK

    This from memory, so might be wrong… 285 billion is the whole economy. Of the 285 billion, the government only gets to play with its cut, which is 50 billion. That is why 50-60 billion would sink the country.

    Don’t buy it. The ratio normally quoted is Debt-to-GDP – was 25% in 2007, jumped to 40% last year though in 1990 was 95%. Say another 3 years of 10% growth in that ratio, even with austerity measures that’s 70%. You could add 50 billion and not hit 100%. Italy has had 125%, and Japan has had a very high one too.

    Now I’m not suggesting Ireland become Italy, but that sort of debt could be carried and worked off over the long term. Contries have done it, not just Ireland. I would guess you’d need ot be in the $100+ billion plus range to start getting into default territory. Smart people are saying otherwise, so what am I missing?

    Remember the government merely has to service the debt. My mortgage is about 4 times my earnings, yet I have not defaulted.

  • Kensei

    Mick

    Why does $50-60 billion sink the state? See above.

    There’s serious nastiness here for sure, and bad government. FF need to and will take a severe beating. But, you know, welcome to 2009. There are scenarios that could sink a number of other countries. Why is this one likely, and why that range?

    There is a swirling mess everywhere. I’d prefer some cold hard figures to as and why.

  • Mick Fealty

    When it takes a computer three to four days to work out one of these instruments, we may be waiting a long time for ‘cold hard figures’.

    You software engineers have a lot to answer for!

  • Dave

    Nomad, that doesn’t answer the question, does it?

    Now much of the 1.67 trillion in external debt was loaned to those who could not afford to repay it? You don’t have a clue, do you?

    We have thus far only bad debt provisions from a number of banks that amount to a tiny fraction of that amount. Is it even safe to assume that those defaulters were provided loans under deficient lending criteria? It is not, since even sound businesses can fail during recessions and very few businesses can absorb downturns in sales of the magnitude that are now commonplace.

    Ergo, what do you have to support your argument that a deficient lending criterion was applied? What do you think would be a safe loan-to-value ratio? Would you say, for example, that a good LTV ratio would be 80%, i.e. the bank supplies 80% of the cash for a property and the borrower supplies the other 20%? That sounds better than an LTV of 120%, doesn’t it?

    But what if the asset depreciates by 40% or 60%? The bank still becomes technically insolvent, doesn’t it? Residential property has already fallen by an average of 40% and it is still falling. Commercial property has already fallen by an average of 60%. The LTV ratios that are required to prevent insolvency are not feasible as nobody would ever be able to afford to buy a house.

    Now back to the LTV of 120%. That may sound excessive but it is meaningless to quote it as a cause of calamity without (a) quoting the amount of such loans, and (b) failing to consider the ability of the borrower to repay the loan.

    What alternative method do you have for valuing property to the mark-to-market method? You don’t have one, do you? Of course you don’t because there is a Nobel Prize in economics for the first person to devise a fail proof method for valuing property.

    The only thing that worries the markets about Irish banks is there exposure to property. And you haven’t a clue what regulation could have prevented that worry, do you?

    No, you haven’t but that won’t stop you from rabbiting on about “lax regulation” while gingerly ignoring the pivotal role of monetary policy.

  • Dave

    The real whack will come when borrowers lose their jobs and can’t afford to pay their mortgages. If they have negative equity, the bank will repossess the asset and absorb the loss. That is a large part of what worries the markets in regard to the exposure of Irish banks to property.

    What was lax about the regulation that caused that situation to arise? Lending money to people who may lose their jobs at some future point? Sorry, but that would rule out the overwhelming majority of borrowers from ever getting a loan.

    Property developers owe 35 billion to the banks. That is only 0.33% of the total external debt. That means that 99.66% of it is outstanding among groups who aren’t the pet hate of The Irish Times muppets.

    Most of that property developer debt, however, is what the Irish government has selected to underwrite at the direct expense of the taxpayer when they nationalised Anglo Irish Bank. Bad mistake.

    In regard to the budget deficit, folks forget that FF increased government spending unnecessarily and that public sector can be returned to a sustainable level. Whether the muppets can take the pain or not is another thing. Just look at all the screaming they did when the government cut a miserable 2 billion when the deficit was heading for 20 billion. The muppets need to stop squealing and recognise that austerity is what is now required. The markets are watching closely.

  • Dave

    Slight correction on the math: 35 billion is 0.21% of the external debt, so 99.79% of it is not loaned to that popular hate group.

  • Dave

    Okay, you don’t want me doing your accounts: it’s 2.1%

  • Harry Flashman

    If you really want the heebie-skijeebies just read Ambrose Evans-Pritchard in the Daily Telegraph. Ok he is a bit of a doom and gloom monger and they do say as it’s only being so cheerful that keeps him going but by heck if he’s even half right we are heading for global economic wipeout.

    We’re doomed, dooooooomed I tell ye!

    I mean can anyone more knowledgeable in economics tell me a) are we absolutely rootin’ tootly fucked? b) what will happen then? Is it Krugerrands and Kalashnikov time or can we simply press the big “reset” button and start all over again?

  • Harry Flashman

    Oh dear, that was Sunday, ol’ Ambrose is back and it seems it’s getting worse;

    Mummy why has all the water drained from the beach? Wow look at that big cool wave on the horizon!

    I know it’s only 11am here but I’m going to get drunk, nothing else for it.

  • Dave

    Good articles, and if he is right, the EU is certainly permanently f*cked. I will celebrate that, preferring that the dismal enterprise terminates in economic ruin rather than in seperatist terrorism as nations are integrated into a latent totalitarian entity against their will. He has some other good articles there where he highlights how the monetary policy of the ECB has been utterly destructive to member states. His colleague, Jeff Randall, shows that the ECB did for Spain what it did for Ireland, pointing out what happens when there is monetary union without political union:

    [i]”As historians begin to assess damage from the credit crunch, Spain will surely be singled out as a classic study for what can go wrong inside a monetary union when the policy requirements of its members become hopelessly misaligned. It is simply not possible to pursue the best interests of every participant when some nations are running trade and fiscal surpluses while others clock up huge deficits.

    Ten years after it was launched, the euro is propelling Spain towards disaster. In giving up control of domestic interest rates to the European Central Bank, Madrid handed over a vital instrument of macroeconomic management. It is learning to regret that.

    For the early part of this millennium, that loss of power seemed not to matter: Spain’s outrageous (and in some cases illegal) construction frenzy hid a multitude of sins. At the peak, about 800,000 homes were being built annually on the basis that demand from foreign buyers was limitless.

    That dream has vanished, along with the over-supply of cheap money that funded it. Drive down the E-15, the main motorway link between Malaga and Gibraltar, and you will see block after block of half-built apartments, connected neither to essential utilities nor to financial reality. They stand as temples to a religion that ceased to exist when the bubble popped.

    The Spanish economy is weak; it needs lower interest rates and a softer currency. Such a prospect, however, doesn’t suit Germany, the eurozone’s dominant force, so Madrid has to sit and suffer while its people cry for help.”[/i]

  • kensei

    Mick

    When it takes a computer three to four days to work out one of these instruments, we may be waiting a long time for ‘cold hard figures’.

    You are confusing two issues. I want to know why $50-60 billion blows a hole that sinks the ship. It doesn’t matter what the asset actually is: the country could have lost it betting it on turnip futures. You can assume a loss of $50-60 billion — why does this blow a hole taht sinks the ship?

    Harry’s links are alarming because it gives plenty of comparative figures as a basis for fear. For example:

    Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

  • Mack

    Dave, Nomad, Kensei, Mick

    Still reading the comments, but a quick note.

    The bad assets in Irish banks aren’t complex derivative products like those held by other European, British and American banks. They are simply very large loans that won’t be repaid.

    The regulators job was very, very simple (he just didn’t believe in regulating the banks). Just keep the limits on how much banks could lend to home owners it used to be 2.5 times salary + 0.5 times second salary (then that €10 billion bad loan guestimate from Morgan Kelly would never have occured), and prevent Irish banks from borrowing on wholesale markets. Irish banks average loan-to-value ratio is 150-160%. Indicating that much more than 30% of all Irish borrowing was due to imported funds borrowed on the European wholesale markets. They may not have prevented the bubble in doing this (banks not regulated in Ireland could still have provided the loans), but Irish banks would not be in anywhere near as bad a state had they done so.

  • George

    Only last month Poland was being heralded as one of the countries with some of the tightest financial regulations on the planet.

    How lucky and full of foresight they were, was the refrain. The Poles were flooding home etc etc.

    Now we hear that 60% of Polish mortgages are in Swiss francs and half of all private sector debts are in foreign currencies.

    The zloty is tanking and the country is going down the debt tube as a result.

    It seems we can believe nothing any more.

  • kensei

    George

    That indicates to me that the Polish regulations were indeed tight, so in the globalised world people went elsehere to borrow. Looks to me taht one is hard to pin on government or Polish bankers.

  • Mack

    Dave

    Can we agree on this?

    European monetary policy was lax for Ireland. The Irish authorities would have been aware of this, but didn’t seem to regard it as a problem (e.g. “The boom is getting boomer” – Bertie Ahern). Rather than take atempt alternative methods of controling the affects of European monetary policy, the regulator and government actually made changes that were pro-cyclical (tax cuts, pay rises, loosening credit terms).

    The Taylor rule for calculating interest rates
    is (roughly) –

    r = p + 0.5y + 0.5 (p – 2) + 2

    r = the short term interest rate in percentage terms per annum.

    p = the rate of inflation over the previous four quarters. (Taylor used a measure known as the GDP deflator)

    y = the difference between real GDP from potential output.

    The government has no control over r, but it and it’s agencies have a fair degree of influence over p and also y!

    Our government was aware of the rules of the game, and presumably also the value of this rule (purely based on inductive reasoning as far as I can tell), so surely they should have taken some measures wrt to inflation and the output gap to match the constant r ? Otherwise, as you point out, the equation will balance itself with disasterous consequences..

  • Driftwood

    http://www.washingtonpost.com/wp-dyn/content/article/2009/02/17/AR2009021701117.html

    Wherever you look, globally, the ship is sinking.

    Harry has it right,whenever I get home tonight, I’m off to the pub to get some explanations.

  • Mack

    George, Kensei

    Taking out a cross-currency mortgage is an insane risk (unless you earn in the non-domestic currency). I’m not sure that’s a failure of regulation, unless it was Polish banks providing the mortgages – in which case I would say regulation was extraordinarily lax! If not, there’s no accounting for stupidity I guess.

  • Harry Flashman

    Aw thanks Driftwood, I had just woken, shambled downstairs, kicked the cat, shouted at the wee’uns to stop making so much noise and had a row with the wife and when I looked in the booze cabinet I discovered that the gin was gone, I’d finished off the last of the Christmas Baileys some time aound 3pm and the only whiskey left wouldn’t fill a hole in my tooth, and then I log on to SO’T to read your latest offering.

    And as if that’s not enough the Indo has this:

    Brian doesn’t know who’s in the Golden Circle. Like fuck he doesn’t!

    My favourite part of that article;

    “The drama unfolded against a backdrop of startling new figures which estimate [b]the liabilities of the Irish-owned banks could amount to more than €138,000 for every man, woman and child in the country.[/b]”

    Sweet. Screaming. Jesus.

    Is there no end to this? Hang on there’s a bottle of aftershave in the bathroom, I can drink that.

    Good night. Feck! Drink!

  • LJS

    http://www.davidmcwilliams.ie/2006/04/02/hot-money-is-beginning-to-melt-icelands-hardy-economy

    How Iceland got into trouble in part borrowing in foreign markets to serve the home market.

    The Chastening by Paul Blustein is a good read on why the same borrowing strategy did not work in 1998 for certain Asian countries.

  • Mack

    Dave

    Morgan Kelly estimates the bad losses from developers and builders to be around €35 billion, where as you seem to take that as the total loan figure?

    €110 Billion in loans to property developers

    Morgan Kelly’s figures suggest that the loans to property developers and builders amount to around €110 Billion, four times the number you use.

    Morgan Kelly’s figures – http://www.irishtimes.com/newspaper/opinion/2009/0217/1224241278003.html

    Property loans 25% of government liabilities

    The government, either directly or via guarantees, is not on the hook for all of Ireland’s external debt. Estimates of the covered banks liabilities put it at around €400 Billion Euro. Which would mean developers liabilities make up around 25% of total liabilities. A huge proportion.

    Liabilities –

    http://uk.reuters.com/article/allBreakingNews/idUKL170872120081001

    http://www.independent.ie/business/irish/irelands-bank-guarantee-could-be-model-for-other-countries-1486385.html

    More than 30% of those loans funded externally

    Given loan-to-deposit ratios of 150-160% on average (much higher than 30% of all loans funded from wholesale borrowing, thanks to fractional reserve banking it could be 60,70 or 80%!), I can’t see how you can still believe lax regulation was not a factor in this current crises for Ireland.

    The Spanish Central bank forced banks under it’s regulation to increase their bad debt provisions, which has put them in a relatively robust position entering this crises.

    http://online.wsj.com/article/SB122627447630612005.html

  • Dr. Kildare

    Looking on the bright side…
    Interest rates are now lower than ever. Halifax are now offering a 5 year fixed rate of 3.81%APR.
    New houses are being sold at cost around here (that’s 100K and more off the original asking price). It’s now cheaper to buy rather than rent.
    Both AIB and BOI have started a TV ad campaign aimed at first time buyers.
    Believe it or not but there’s some anecdotal evidence that first time buyers are starting to put their head above the parapet again.
    The inflation bubble has been well and truly pricked.
    Irish banks have very little exposure to US sub-prime.
    Excluding property liabilities some of the bank guarantee covers liabilities I presume for funds managed by the likes of BOI for Barclays. A lot of these funds are index trackers whose aim is to track the likes of the FTSE100, S&P500;, STOXX50 etc. As I see it there is no risk for the banks/government in the likes of these – the risk is with the original investor who could be British, French, Italian etc . The more exotic financial instruments managed by other non Irish banks in the IFSC are not covered by the government guarantee at all.
    With regard to a house or a site or a field – it’s a physical asset and at the end of the day it does have residual value – it’s not worthless – the money isn’t a total right off.
    The money used to recapitalise the banks was yielding about 2% in the pension reserve fund. The banks will pay 8% for the privilege of using it. I doubt if the National Treasury Management agency would beat that by investing it elsewhere at present.
    On board snip has yet to report and you can be sure that after a 10-15 year boom there’s going to be plenty to snip.
    Finally while everybody (international financial press) has been talking about Ireland, much more serious storm clouds are gathering over Eastern Europe. As this story develops it will take the spotlight off Ireland.

  • Mack

    Dr. Kildare

    It’s now cheaper to buy rather than rent.

    LOL! You don’t believe that do you?

  • Dr. Kildare

    Hmmmm. Here’s the figures.
    Couple both earning €40K renting a small two bed apartment in the North city area of Dublin (say 10-20 minute walk from Heuston Station) rent is approx €1200 per month.
    A good three bed semi detached house in Naas (1250 sq feet – I know these houses they were built in 1995 – I used to live in one) on the market for €300K. A 90% mortgage on €300 over 25 years on a 2 year fixed rate is €1300 per month. Naas is a 25 minute train ride from Heuston Station.
    So you can rent a small 2 bed apartment for €1200 a month in the inner city or buy a good quality 3 bed semi for €1300 per month but live a 25 minute train ride away.

    I took these figures from daft.ie and Halifax.ie this morning. If you were to look at buying an apartment instead of house it would defiantly workout cheaper. If you were to throw any sort of decent offer on the house the vendor would probably take your hand off!
    By the way I have no connection with the property sector or banking – just stating the facts as I see them!

  • Driftwood

    Couple both earning €40K

    Public sector are they? Factor in de facto wage cuts, possible job losses, higher taxes, etc etc and who is really confident enough to buy. Few people are willing to even purchase a car at present. Until confidence returns,god knows when, few people will be buying anything more than basic consumer goods.

  • Dr. Kildare

    LOL! “Be greedy when others are fearful. Be fearful when others are greedy.”

  • Mack

    Dr. Kildare

    That’s an awful example, and the kind of sloppy thinking that got us into this mess in the first place. At the early innings of the biggest property bust in the history of the state, occuring smack bang in the middle of the biggest deflationary property related bust in Global history you think it is sensible / moral to advise others to buy property?

    Your figures are nonsense

    You’ve used a dangerous interest rate in your calcuations.
    I’ve found cheaper houses to rent in better locations – even using your mortgage figures!

    Naas is NOT Dublin
    You are comparing apples with oranges. Here is a 3 bed in Naas renting at €900 per month –

    http://www.daft.ie/searchrental.daft?id=681729

    Rents are falling, you can rent a 3-bed in Rathfarnham or Knocklyon for that price (to purchase you’d still be talking €400-500k). You’ll be able to rent one for much less in 12 months. In fact here’s a 3-bed in Dundrum renting for €1,200 per month!! http://www.daft.ie/searchrental.daft?id=681582&search=1

    http://www.daft.ie/searchrental.daft?s%5Bcc_id%5D=ct1&s;%5Ba_id%5D=ga3&s;%5Bmnp%5D=&s;%5Bmxp%5D=1300&s;%5Bbd_no%5D=3&refine=Refine&search=1&s;%5Bsearch_type%5D=rental&s;%5Bfurn%5D=&s;%5Brefreshmap%5D=1&search_type=rental

    http://www.daft.ie/searchrental.daft?id=681712&search=1

    http://www.daft.ie/searchrental.daft?id=654246&search=1

    Pricing with teaser rates is finicially innumerate!

    The best standard variable rate suitable for first time buyers in 4.02% on a <90% mortgage. For your 300 property that means a loan of 270k. That gives a monthly payment of €1,607.20 per month not €1,300!

    http://www.askaboutmoney.com/showthread.php?t=102022

    http://www.drcalculator.com/mortgage/

    Rents, Property Prices and Wages are falling, taxes are rising, the spread on variable rate mortgages are rising. There are 70,000 properties for sale on Daft, 22,000 properties to rent.

    http://daftwatch.thepropertypin.com/

    There are 350,000 empty houses in the state!

    http://www.finfacts.ie/irishfinancenews/article_1015142.shtml

    Prices and rents will fall for some time, you’d be off your rocker to buy now.

    Either we are entering a period of prolonged deflation, or the ECB will print money. In one case wages will fall in the other interest rates will rocket from historic lows in an attempt to stave of high inflation. Niether scenerio is without extreme risk for anyone purchasing property now.

    LOL! Be greedy when others are fearful. Be fearful when others are greedy.
    Might actually be worth your while doing some research on Warren Buffet (and the Irish property market), before you lose yourself or others a lot of money!

    VALUE investing.

    Some links, just for you..

    http://www.thepropertypin.com
    http://www.calculatedriskblog.com/
    http://www.ritholtz.com/blog/
    http://itulip.com/
    http://www.moneyweek.com/
    http://finfacts.ie

  • Mack

    And just to highlight, for the finicially innumerate. That you lose the interest on your deposit too. A renter could be collecting 4.5% from the Halifax on that 30k deposit. Which is an extra 1,000 in the first year (compounding there after) they’d lose if they followed Dr. Kildare’s extraordinarily silly recommendation.

  • kensei

    Mack

    Just to highlight, for the financially innumerate, that if you are going down that route then you have to consider the total cost of the mortgage over 25 years comapred to the cost of renting over the same period, and the fact at the end of said period you’ll own an asset if you buy and will own bugger all if you rent.

    Buying is traditionally cheaper of the longterm and only at the absolute peak of the boom I believe this became untrue. Ratioanlly, it might make sense to buy aside from the prospect of deflation. In which acse, we got big problems.

  • Mack

    Kensei

    Not so, the renter will have assets based on their superior savings / investment rate.

    The renter and the buyer are in different positions. The renter can purchase the house at any point over that 25 year period if they feel house prices are valued fairly or undervalued. In the mean time, they can save the difference between their rental payments and the mortgage payments. The assumption you are making for the buyer of course, is that property will hold it’s value. Consider this, in 1989 house prices in Tokyo were more than twice what they are now, 20 years later. I suspect, you may be able to say something similar (if not neccessarily at that scale) about Dublin residents in 2016.
    The purchaser, once they’ve made the decision to buy are locked in if prices fall (of course if prices become overvalued they could sell to rent).

    Once house prices become overvalued the only way to keep them going up at a higher rate than wage inflation is to loosen credit terms. This inevitably leads to a house price bubble (by definition, nothing fundamental is driving prices, just riskier lending). Which in turn will inevitably lead to a bust (as credit terms revert to the mean).

  • kensei

    Mack

    Not so, the renter will have assets based on their superior savings / investment rate.

    Your assumption is that the renter will save 100% of the difference. This is extremely unlikely in the real world. Buying is a commitment device. You’ll push yourself out to gett he house you want. And please note that other asset classes have been doing similarly as poorly of late. Holding value is not typically a big assumption for a house. Supply is limited and demand fairly constant. Jpan in the 80s was a special case. I agree we are potentially in another one but the generalise dargument you make a condescending manne ris not particularly warranted.

    Second, buying a home is more than simply a financial decision and I’ve never known anyone to feel as atatched to a rented property than their own home.

  • Mack

    The other big advantage a renter has is they only need purchase the space they need. A buyer has to make a long term decision (particularly in Ireland with punitive stamp duty rates) and purchase the maximum space they’ll need for the duration.

    A 25 year old for example could purchase that 3-bed house and pay out €1600 per month or they could rent a room for €300 or less per month. They’re still free in the future to move to a 1-bed with their girlfriend, then upgrade to a 2-bed apartment before a 2-bed house then finally rent a 3-bed house.

    In other parts of the country – especially Dublin itself, the savings between renting and buying are huge. A couple could easily save well over €2000 per month by renting to suit your current needs in South Dublin. At the higher end of the market the savings are spectacular, you can huge homes worth millions in Foxrock for a couple of grand!

  • kensei

    Mack

    Not all 25 year olds want to rent a room., or live in a space that is just perfect. Most people want to live somewhere bigger than their needs given the choice- few spare bedrooms, big bathroom, garden.

  • Mack

    Kensei

    I don’t think I was condescending to you. I decided to take a deliberately provocative line with Dr. Kildare, so that he would respond in detail and put down his thinking. (In my defence his blatant shilling in the current climate was also provocative).

    I take it you find the term financially innumerate offensive. Maybe it is, but I find most people don’t think about things like what interest rates will be when teaser rates end, and the loss of interest on money you would otherwise have on deposit. I’ve had this debate many, many times – and find some people are reluctant to even agknowledge these things are important.

    I accept it gives Dr. Kildare absolutely no room to back down, but given the bullish position he started in – I don’t think it was ever likely he would anyway.

  • Mack

    Kensei –

    Not all 25 year olds want to rent a room., or live in a space that is just perfect. Most people want to live somewhere bigger than their needs given the choice- few spare bedrooms, big bathroom, garden

    True, some people will also just want to own their own place – but we shouldn’t kid them that it is in their financial best interests to purchase now. If you have other strong reasons to buy go ahead, but I wouldn’t recommend doing it because you think you’ll be better off.

  • Dr. Kildare

    Nice rant there Mack!
    Who’s encouraging people to buy property? What I said was there is evidence that first time buyers are putting their head over the parapet again. I was surprised to hear this myself but it was on RTE radio1 yesterday morning. They interviewed several first time buyers who are thinking of buying. Maybe RTE are in some giant conspiracy with the banks, developers and the Government?
    The Halifax fixed rate will revert to their standard variable rate, “currently at 3.20% APR”, after 31st May 2011 – this is straight off their web site.
    You’re saying we’re entering a period of prolonged deflation or interest rates will sky rocket. What a gift you have, you’re able to see into the future!

  • Mack

    Dr Kildare

    That interest rate does look pretty good, but it’s still cheaper to rent than to buy at the minute. And yes the property industry will be making attempts to sell properties including PR in the media – their survival depends on it.

    You’re saying we’re entering a period of prolonged deflation or interest rates will sky rocket. What a gift you have, you’re able to see into the future!

    House prices have been falling for 2 years. 36,000 people were made redundant in January. Monthly CPI has been negative since September. The government is cutting spending and raising taxes into a recession. The ISEQ is 75% of it’s peak. The Irish banks are insolvent, bad loans are increasing all the time. All of this is deflationary.

    The Bank of England voted unaminously to print money yesterday, the Federal Reserve and Bank of Japan are doing the same. The ECB have so far refused to drop interest rates to near zero, because that leaves only Quantitive Easing as an option for them. The German finance minister said they won’t let a Eurozone country fail, with Austria, Ireland and the PIGs on the brink – with Eastern Europe faltering, with the IMF out of money for more bailouts, just where do you think that money would come from? Printing money normally causes inflation, one way to try and prevent that happening is to raise interest rates. Investors will demand higher interest rates on their bonds anyway in an inflationary environment..

  • Greenflag

    Apologies for being late to this interesting somewhat terrifying thread

    Dave’s ‘recurring ‘ thesis that somehow Ireland would have escaped the current crash if we were not in the Euro zone and Ireland had a stand alone currency sch as Iceland or Britain or Russia is simplistic , naive and at this point irrelevant.

    What matters is not Ireland or Britain but the entire world economy and how it responds to the current ‘stimuli’ which are being pushed forward by all the ‘advanced ‘ economies i.e the USA , Germany , UK , France , Japan etc .

    So far the measures taken in the USA have not born fruit although there are a few ‘green ‘ shoots emerging . Bush’s $ 500 tax rebate achieved nothing and Obama’s rescue plan will not be enough on it’s own . It will probably take a temporary ‘nationalisation’ of the American banking system backed up by similar policies elsewhere for the world economic system to ‘reboot’as it were. The Germans are close to bank nationalisation as well as bailing out Poland , Hungary and others from currency collapse . These countries have escaped from ‘Communism ‘ only to be flung back into chaos by the ‘international financial terrorists ‘ emanating from Wall St and the ‘shadow banking’ con men .

    Lack of regulations in the ‘shadow banking ‘ sector was the bottom card on which the whole financial services house of cards was built . We read of another Madoff like financial services criminal namely one Stanford of Texas who has ‘made off ‘ with a miserly 8 billion dollars only , and is now in ‘hiding ‘ . Performance standards are obviously slipping in the world of financial services con men  🙁 Perhaps there’s nothing left to steal ?)

    Just as well Ireland is in the Euro. When the proverbial shit hits the fan because of some crisis or other in the financial world and there have been several all around the world since the advent of globalisation and it’s attendant financial speculators from the 1980’s onwards , it makes sense to belong to a ‘world ‘ currrency . The lesson learned for all of the smaller and indeed for many of the larger emerging economies seems to be that you ‘devalue ‘ at your peril . Britain got away with it in 1990 under John Major so too did Australia . The Indonesians , Malaysians , Argentinians , Brazilians and other’s didn’t DESPITE following the IMF recommendations. It’s not clear that Britain would get away with so easily with another ‘official ‘ devaluation at this time it again . Once the rot starts the ‘investor’ world can , will, and has brought about the swift devaluation of any currency that is ‘prey’ . Even the IMF is powerless once the pack ‘attack ‘ 🙁

    It will take a new ‘world ‘ economic order to bring the ‘shadow banking ‘ under regulation in order to forestall similar crises in the future.

    As for Ireland we are far better off hanging with the Euro . Our property bubble bust was going to happen anyway. What Ireland and indeed what the world MISSED and STILL MISSES was and is the carnage which the unregulated shadow banking sector could and did wreak on all of the world’s economies . Even now the damage is still emerging and it appears that nothing less than a world wide ‘nationalisation ‘ of banking systems even if only temporary will be needed . International financial ‘terrorism ‘ has proved itself capable of greater destructive force than anything Al Quaeda could ever have dreamed of.

    1930’s come again ? Paul Krugman in his latest ‘The Return of Depression Era Economics ‘ seems to hint that a return to the 1930’s if still unlikely is not closed out.

  • Mack

    Greenflag

    That was a good read – I thought I recognised it’s premise throughout your post! (Except that Krugman was opposed to a world currency).

  • George

    Mack,
    while I am for the most part with you on the whole house buying front, I don’t know if Japan is a good example.

    If I was Japanese and had decided to put my money in stocks instead in 1989 I’d be 70% down rather than the 50% in property.

    Also, buying property isn’t always just about arithmetic. It’s about security, being able to put a nail in a wall, nesting etc. etc.

    People are willing to pay more for that “sense” of ownership/security.

    The problems only really start when you begin thinking of property primarily as an asset rather than a home.

    The majority of housebuyers in the last decade thought of their house as an asset first and home second. They might not want to admit this but they did.

    If they had thought of it as a home, they would have rented because the differentials were so huge. They are all paying the price now.

  • Mack

    George

    I agree with pretty much all you say.

    It’s true an investor in Japan would have been better of in a Japanese property fund than a Japanese stock fund. They’d have been even better off in cash – or if they’d had a diversified stock portofolio (i.e. Global stocks) they’d probably be up significantly since then. Also most people invest in stocks out of earned cash, while property investors use leverage. In the example above if our Stock investor piled all his money into a Topix tracker he’d be down on the amount he put in, the property investor would have lost a good bit more money than he had!
    Also even Japanese stocks pay dividends, if they were reinvested (or kept on deposit), over the long term even he still could come out ahead of even a cash-only property investor (particularly as investors in individual properties take on significantly more risk, than diversified investors).

  • Greenflag

    George,

    ‘The problems only really start when you begin thinking of property primarily as an asset rather than a home. ‘

    YOU ??? The entire banking /building society /financial services sector has owed it’s increasing status /role /power in the Anglosphere countries over the past several decades due to this way of ‘thinking ‘ . Had you gone into any bank over the past few years and asked to borrow 200,000 to buy some shares of a promising high tech company or purchase a failing business to turn it around or a large house -you don’t need to be a rocket scientist to figure out which ‘loan ‘ proposal the bank would actually even bother to look at ?

  • Harry Flashman

    Ah yes GF, Madoff and Stanford, two crooks who were massive contributors to the US Democrat Party, and as we see with Obama’s cabinet choices, paying taxes isn’t a huge priority among senior Democrats.

    Yet oddly you seem to believe that fiscal conservatives are the problem.

    Strange that.

  • greenflag

    Mack ,

    ‘that Krugman was opposed to a world currency).’

    Because of the immense practical problems of aligning the world’s economies on such a basis . But there is scope for ‘regional’ currencies where the politics allow it e.g Euro-land and later perhaps in South America and Africa . Current economic conditions have shown that small stand alone currencies are ‘prey’ to international currency speculators ,regardless of the underlying strength of their economies . Krugman goes to great lengths to explain how that actually happened in practice in countries as disaparate as the UK , Argentina , Mexico , Chile etc .

    Until such time as these ‘international financial pirates’ are brought under control or somehow become part of a responsible international monetary system these kind of crises will continually recur with ramifications for both the future of affected countries and future of ‘democracy’ as a political model worth ‘aping ‘?
    As I write I read the Super Neo Conservative Alan Greenspan former USA Chairman of the Federal Reserve Bank has now moved to the ranks of those calling for ‘nationalisation ‘ of the American banking system in order to reboot world financial stability ? He is also being ‘joined ‘ by some Republican Governors I kid you not . Greenspan’s words included ‘this kind of thing (crisis) happens once every 100 years or so ‘? Well lets hope 2014 is not a repeat of 1914 🙁

    While it’s not practical to have at this point a world currency the fact is that without extra regulation and even more cooperation between the worlds largest economies there will be no escape from this debacle or if there is an escape without such cooperation such escape will prove temporary . Whatever the outcome the future for stand alone ‘sovereign ‘ currencies of the type Dave favours looks bleak –

    Right now if the Chinese sold off their trillion dollars worth of support for the dollar the latter currency would collapse overnight but so too would the Chinese economy . However by chipping away or transferring their long term loans to the USA to short term the Chinese and others will be able to influence USA foreign policy and economy in a way which Americans may yet come to rue . This is just dilemma of many to which the globalisation of international finance has led. Just as the British , Irish & American Governments can’t allow any one of their large banks to collapse entirely neither can any of the major or minor economies afford to see their main trading partners go belly up .

    The world’s economies are now even more interdependent than ever before in history . The world’s political and financial regulations authorities have not only not caught up with but have in the past two decades stopped even trying to catch up and like lemmings just followed the rampant heard following the latest financial services/shadow banking con job ‘over ‘ the edge 🙁

    And it’s not as if it never happened before although perhaps not on the present scale . Neither China nor Brazil nor Mexico nor Russia were part of the world economy in 1930 . Nowadays they are and will be an increasing part of it whenever it is ‘rebooted ‘ assuming it will be of course ?

  • Greenflag

    ‘and as we see with Obama’s cabinet choices, paying taxes isn’t a huge priority among senior Democrats.’

    The Republican Vice Presidential Nominee is as i write also in ‘unpaid taxes ‘ water . The only solution to this kind of corruption temptation among the avaricious classes is to have the IRS flag publicly any elected politician in the House or Senate who is either behind his/her tax payments by 3 months say . Add in mandatoy jail sentences of 10 yeas with no paroe for convicted politicians of the ilk of the 18 Republicans forced into resignation suring the last Republican term of government and you might I say might get an increase in ethical standards .

    ‘you seem to believe that fiscal conservatives are the problem.’

    Not fiscal conservatives per se – fiscal Neo Conservatives who applied the policy of little or absolutely no regulation to the ‘shadow banking ‘ sector and who thus by reason of stupid ideology allowed this sector to virtually singlehandedly destoy the world’s economies

    For the record it has been revealed that Madoff as well as disembowelling Jewish Charities and many in the entertainment sector has also disinherited the Catholic ‘Redemptorist’ Order of their investments .

    At the same time as Madoof was throwing money at the Democrats as donations he was also throwing money at other organisations and charities that he later ‘disembowelled ‘

    Such greed is of course pathological and there must be many a research psychologist out there who would love to analyse Madoff’s motivations ?

    However if you are still upset about Madoff I encourage to purchase one of the new Madoff ‘dolls ‘ now hittig the market . While made of resin the doll comes in a box supplied with an accompanying hammer . The Madoff doll is suitably attired in satanic dress and breaks into pieces when attacked by the hammer .

    The Australian who came up with the idea retails it at 100 dollars approx 🙂 We do not know as yet whether this ‘item ‘ will take off with those who have lost millions nor whether the business was financed by Madoff himself . But it may provide temporary psychological relief and may prove less costly than numerous visits to the pub ;)?

  • Dave

    Your problem, Greenie, is a reverse of not being able to see the wood for the trees in that you can’t see the trees for the wood.

  • Mack

    Property shilling

    –>A friend recieved today

    Just a catch up to see how you are getting on, regarding your mortgage.
    You attended one of our First Time buyer’s seminars in XXXXXX.

    As you know the Irish banks were recently recapitalised which means that
    there is more money available for lending.

    Also with the low interest rates and the reduction in house/apartment,
    prices now is a good time to be looking for a mortgage as a first time
    buyer.

    Let me know if there is anything we can do to assist you with this
    matter or any other financial issue.

    My direct dial is below. Looking forward to hearing from you.

    Kind Regards

    ————–

    Jeebus, business as usual, wha? Credit crunch be damned. This is the black hole our tax Euros are into!

  • Dave

    Misuse of power by politicians led us into this mess. Therefore we need to give more power to politicians.

    Removal of sovereignty from states allows flawed practices and policies to infect a multiplicity of states. Therefore we need to remove the remaining firewalls of national sovereignty and allow future infections to infect to all of states.

    Private sector borrowing aimed at economic expansion has created a mountain of debt, preventing the private sector from borrowing more and causing a dramatic reverse of the expansion. Therefore we need to transfer the borrowing from the private sector to the public sector so that our debt-felled economic expansion policies can continue until the public sector cannot borrow either.

    That’s the ‘logic’ that drives these muppets.

  • Greenflag

    Dave ,

    ‘Your problem, Greenie, is a reverse of not being able to see the wood for the trees in that you can’t see the trees for the wood.’

    And your problem Dave is that chip on your shoulder . If you look up from the chip you’ll see even more wood.

    According to new US Attorney Holder messrs Madoff and Stanford may be just a couple of trees in the forest of thieves who have thrived on the lack of regulations in the shadow banking sector which was so much favoured by previous US administrations since the 1980’s and in particular since 1999. And today another name is added with the revelations of the Bank of Medici and it’s Madoffian lacky a lady named Kohn (you can read all about it on Bloomberg ). Venezuela has had to take over a ‘Stanford ‘ bank and Antigua the Commonwealth island nation that knighted Stanford has had a run on financial institutions that are connected with Stanford .

    It’s beginning to look as if the inherent stupidity of the neo conservatives and their gang of investment theives is ‘genetic ‘ and beyond redemption. Nothing for it but to bring out the guillotine for this lot . If they have a problem hiring somebody to drop the blade I’m available at short notice ;).

    ‘Removal of sovereignty from states allows flawed practices and policies to infect a multiplicity of states’.

    More of the same shite . This ‘financial’ crisis originated not in the EU but in the USA and more particularly in the USA’s shadow banking sector from which it spread into the ‘regulated ‘ banking sector and overseas into the international banking system infecting banks right across the world regardless of whether these countries had or had not a property ‘bubble ‘.

    It may have escaped Dave’s notice but the property ‘bubble ‘ plus credit crunch plus spiralling debt happened also in the USA which is from what we read one of the most supposedly if not the most ‘sovereign ‘ state on the planet ?

  • Greenflag

    Sonja Kohn, who used her relationship with Bernard Madoff to help build a Vienna private bank, was doing what she is known for at a Dec. 9 reception in Zurich: promoting her investment record. Swiss investment adviser Hans Kaufmann liked what he heard over goulash soup.

    “We agreed to meet in Vienna soon as I wanted to know more,” said Kaufmann, founder of Kaufmann Research AG in Wettswil am Albis near Zurich. He says he was impressed that Kohn reported investment gains during a year in which he was proud to keep losses to 7 percent.

    The meeting never happened. Two days later, Madoff was arrested in New York for allegedly running the biggest Ponzi scheme in history. Kohn’s Bank Medici AG managed and distributed funds that had $3.2 billion of client money with him. She says she was a victim of a “fraud that destroyed lives, life savings and companies.”

    Bank Medici funneled the most money of any firm in Europe into Madoff’s alleged $50 billion scam. It is now under the supervision of a state-appointed auditor. Kohn, 60, is a self- taught money manager who built her investment house by networking and creating the allure of joining an exclusive club similar to Madoff’s, according to interviews with more than 20 clients, former employees and acquaintances.

    “In the end, it was just a money-collecting company for Madoff that presented itself as a staid bank,” said Edwin Fischer, a professor of finance at the University of Graz in southern Austria. “The chart was just going up and up and people stopped being critical about the performance.”

    Kohn boosted the bank’s credibility with backing from 25- percent owner UniCredit Bank Austria AG, the country’s biggest lender, and by recruiting “respected” former government ministers as supervisory board members, Fischer said.

    And now Peru joins Venezuela and Antigua in the the rank of victims of Sir Allen Stanford who as yet remains in ‘hiding ‘ .

    These kind of ‘capital ‘ crimes of people’s retirement and investment funds need to be ‘rewarded ‘ following conviction with ‘capital ‘ punishment and state confiscation of the perpetrator’s entire family assets to the first generation 🙁

  • Greenflag

    More good news 😉

    ex cnn
    The Dow Jones industrial average slumped to a more than 6-year low Thursday, as fears of a prolonged recession sent stock investors heading for the exits.

    The Dow Jones industrial average (INDU)slid 88 points, or 1.6%, according to early tallies, closing at the lowest point since Oct. 9, 2002, the low of the last bear market. The Dow had dropped as low as 7,447.55 during the session.

    Wall Street has struggled lately on worries that the U.S. government’s various plans to soften the recession won’t work in the face of an accelerating global slowdown.

    “The government is doing everything and anything to right this ship, but the big liquidity players, the hedge funds and the mutual funds, are hoarding cash,” said Gary Hager, president at Integrated Wealth Management.

    Comment – Hager is not being completely frank . It’s not just the hedge funds that ae hoarding -it’s also the banks and virtually every financial institution and large corporation 🙁 Nobody trusts the banks anymore and it’s high time Governments worldwide moved decisively to ‘nationalise ‘ these institutions at least on a temporary basis and until such time as new regulations can be developed and implemented to regulate what’s called the shadow banking sector !

  • Mack

    Deflation / Inflation / Interest Rates

    From Moneyweek today, about the UK economy..

    Could quantitative easing herald the return of inflation?

    Falling prices are a more immediate concern. “QE won’t eradicate the threat of deflation,” says Capital Economics. But deflation may not be a problem for long. A recession-induced mix of stalled house-building, widespread retail casualties and factory closures has cut output back hard. Too much fresh cash pumped into the economy would chase this reduced supply of goods, which could re-ignite price rises earlier than expected. Further, global prices are currently weak. But they won’t stay down forever, and with the plunging pound raising import costs, retailers will have to hike their selling prices to survive. An inflation spike would force the Bank to raise rates sharply – a QE U-turn.

    http://www.moneyweek.com/news-and-charts/economics/what-is-quantitative-easing-42309.aspx

  • Harry Flashman

    “messrs Madoff and Stanford…neo conservatives and their gang of investment theives”

    You seemed to have missed my earlier point that Madoff and Stanford are not neo-cons but fully paid up Democrats.

    As were the shysters in Fannie Mae and Freddie Mac and the UAW who have bled the previously successful US auto industry dry.

    Furthermore I’m fairly certain that Gordon Brown believes himself to be a socialist as did Bertie Ahern in the Irish Republic, two men who oversaw the catastrophes now inflicted on their respective nations, neither of whom would regard themselves as conservatives.

    Try as you might GF you really can’t pin this mess on people who believe in the principle of small government and sound money. Conservatives ain’t to blame and we relish the chance to clear up the mess created by the money printers of big government.

  • Greenflag

    HF

    ‘You seemed to have missed my earlier point that Madoff and Stanford are not neo-cons but fully paid up Democrats.’

    Indeed . Democrats who also contributed to the Republican Party . Senator McCain being one of Mr Madoof’s more grateful recipients . Wise up HF Madoff was/is a financial con men who hedges his bets and who can read political outcomes better that you can drink a pint .

    ‘Try as you might GF you really can’t pin this mess on people who believe in the principle of small government and sound money’

    I was’nt . Rather I was pinning the ‘blame ‘ on those who in theory said that’s what they were for (i.e small government and sound money ) but who in practice delivered instead the biggest ramp up of government expenditure and debt in the history of the USA . Their version of ‘small ‘ government was to give the neo con thieves of the financial services sector full rein to commit what can only be described as the pillage of the world’s financial system .

    ‘Conservatives ain’t to blame and we relish the chance to clear up the mess created by the money printers of big government.’

    I’m sure the British people will be delighted to see the Conservatives do for the UK what Mr Bush has delivered for the USA these past 8 years .

  • Harry Flashman @ 01:16 PM:

    Here’s another promising thread that has long since run its course.

    Yet, Harry, your constant assertions do not convince. The notion that the likes of Madoff, Stanford, and their Irish pale imitators are all card-carrying liberals, bolshies and Rooseveltian New Dealers (or whatever) does not hold water.

    Yesterday’s [London] Times would dearly, dearly love to prove just that damning connection. The best that the Murdoch gripe-machine could come up with was the finding that Stanford’s political donations were $706,600 to Democrats (confusingly identified as the red blob) and $189,300 to the Republicans (with equally-inaccurate blue) Now, I cannot conceive of why it was necessary to invert the two Party colours, can you possibly help here? The same report noted that:

    [Stanford] has showered Washington politicians from both parties with contributions. A $4,600 donation to Barack Obama’s presidential campaign followed payments of $28,000 to his rival John McCain over the years.

    Again, a curious ordering of precedence. I’m sure there must be a rational explanation somewhere.

    OK: that’s accounted for some of Stanford’s largesse. However, consider this:

    Since 1989 [Stanford’s] company’s political action committee and its employees have given $2.4 million to candidates and their political action committees.

    All to Democrats, Harry? All through the years of the GOP hegemony?

    Equally, I suspect you misunderstand the nature of company PACs. My daughter, a UK citizen subject and voter, who turns a well-buttered crust as a senior executive for a US corporation, was told how much she was expected to put to the firm’s PAC. It was not a request. It was an unwritten requirement of the status.

    Now, can we move on?

  • Harry Flashman

    “Here’s another promising thread that has long since run its course.”

    You’re right Malcolm, it usually does when you show up.

    Mwah, mwah!