Should we allow the insolvent banks to fail?

The economic debate over the Irish banks has centred around what kind of bail out is best – a bad bank? a good bank? NAMA? or even temporary nationalisation?

All of these solutions run against the grain of the process of capitalism. Irish banks took undue risks with other people’s money and are now bankrupt. Profits were privatised in the good times, but now the banking oligarchs demand that their losses be socialised. For the first time since this crises began, a major Irish economic commentator is calling for the Irish banks to be allowed to fail. In yesterday’s Sunday Business Post David McWilliams outlined arguments for letting Creative Destruction and capitalism run it’s natural course

Let’s pose the big question: why are we bailing out insolvent banks? What economic model tells us that we should tax people who are struggling to pay for the mistakes of bankers who are now prevaricating? Could we not just let the banks go – guarantee the depositors and let the rest of the banks’ creditors experience the market? After all, these investors were very happy to take profits in the good times. This is what they did in South Korea, Thailand and Taiwan in the late 1990s.

The stark reality if we do not

I realise that this sounds radical, but think about the alternative. The alternative is to turn the nation into a large ‘debt servicing machine’ in order to bail out banks that we don’t need and which made basic commercial mistakes. The market will solve the problem, and the banks could work through their debts themselves. They lent the money, after all.

The topsy-turvy political climate today

So the right wing believe that the market’s not up to the job and should be supplanted by the state, and the left wing believe that it is right that the poor should subsidise the rich. Either way, we have the same outcome.

Confused? I’m not surprised. But when you see Sinn Féin voters in Celtic shirts with ‘Saor Eire’ tattoos, feeding the British exchequer by popping over the border to evade Irish taxes by shopping in Asda, Strabane, you know we live in a confusing world.

  • MacBeth

    The sooner the banks are allowed to fail and some discipline and perhaps a little integrity in introduced the better for everyone. You cannot rebuild based on criminality. The bankers do not understand this because they think they can return to the good ole days of the banking and housing bubble.

  • Greenflag

    If it were to be done then twere better it were done quickly or not at all .

    It’s not just the banks -it’s also the insurance companies and complicit or at the very least thick or negligent (probably both) politicians .
    We’ll not point fingers at our economists as they predicted what was going to happen ? did’nt they ?We must’nt forget also the greedy property developers and my house which I bought for 50,000 Punts is now worth 750,000 Euros crowd .

    IIRC the country operated fine without any banks for a 6 month period back in the 70’s or 60’s ?

    Instinctively I believe that McWilliams is making the right call . However I’d feel a lot better if other affected countries did likewise . Banks can be vindictive bastards, unless they are Swiss banks in which case they can be very vindictive indeed .

    It is true that the left in Ireland haven’t a clue what to do either side of the border and alas it’s also true that the centre and right are equally suffering from a type of political paralysis while the feeder lobbies – the public sector unions and corporations look the other way

  • 0b101010

    Yes. If the market is given the freedom to succeed then it must be given the freedom to fail. The system of “everyone’s a winner, everyone gets a medal” market intervention can’t work. Removing risk of failure will not teach anyone involved to become risk-averse.

    Could we not just let the banks go – guarantee the depositors and let the rest of the banks’ creditors experience the market? After all, these investors were very happy to take profits in the good times.

    …and depositors weren’t? That’s a rather convenient, populist exemption.

  • Mack

    0b101010 – Large depositors weren’t. There was a deposit protection scheme in place to protect small depositors prior to the crises.

  • barnshee

    YES

  • consul

    I’m not a professional economist or an amateur one but I agree that the wide boys who played fast and loose with other peoples money should be the ones left holding the baby. Solvent accounts and performing loans should be isolated from toxic defaults. Maybe two new banks should be set up with completely new boards, untainted by scandal, to take the healthy accounts and loans. The old banks should be left to face the consequences of their own greed. Can this be easily done or would it be open to a legal can of worms like NAMA?