“a crash doesn’t destroy wealth, it merely reflects the extent to which wealth has already been destroyed”

David McWilliams’ column yesterday showed the value of someone sticking with the long arc of a story, in this case the financial collapse which he tried to warn people in advance.

Let us not forget that every bank in Ireland went bust. It didn’t matter whether the banks were locally or foreign run and owned. They all indulged in reckless lending and they were all bailed out.

To date there hasn’t really been a satisfactory answer as to how exactly this happened deep inside each bank and why there didn’t seem to be even one dissenting bank. Nor is there any real answer as to why the Central Bank and the regulator ignored all the warning signs, or why those few who did warn and publically stressed the dangers of all this reckless lending were scorned and vilified.

The endgame of banking crises all over the world, if nothing is done in the boom to slow down lending, are bank collapses. These meltdowns are caused by bank runs. Those at the bottom of the queue – depositors – will lose everything without somebody plugging the hole in the banks.

And he asks…

In recent years, the notion has been raised – at ECB level – that depositors are “lenders” to the bank and therefore, when banks wobble, the depositor should expect to lose money.

But this is a terribly mistaken interpretation of what goes through a person’s head when they deposit money in a bank. Most people deposit money for safekeeping. You do this for the rainy day. Your savings are what you have when all the other bills are paid. It is your nest egg.

Yet, every time a loan was made, every time a bank in Ireland scrambled to extend money for some development or other, ordinary people’s deposits were risked because more and more wealth was being destroyed.

Deposits were not sheltered. Even after the Northern Rock collapse and the collapse of Bear Sterns on St Patrick’s Day 2008, neither the Irish financial regulator nor the Central Bank drew up a bank resolution mechanism to protect depositors in the event of a crash.

But how was the situation allowed to get so out of hand?

The focus on what happened at the end of the crisis, he reckons, is somewhat misplaced…

The Irish banking crisis didn’t start in September 2008; it started years earlier when bank after bank abandoned prudence and risked everything for short-term profits and personal bonuses. It ended up as a hostage situation with kidnapper/bankers threatening the economy and deposits, leading to the state guarantee. This option was the consequence not the cause of the financial meltdown.

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