“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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  • SeaanUiNeill

    I notice that even after Cyprus banks had to do a smash and garp on their deposits above €100,000, Ireland retains their unrealistic unlimited guarentee of deposits.

    This will all have to be changed when our return to recession, as reported today, forces the Banks to this final solution of “bail in” in the face of the conspicious failure of long years of “bail out” to achieve anything other than maintaining a semblance of normality for state-paid high earners.

  • Reader

    David McWilliams: it started years earlier when bank after bank abandoned prudence and risked everything for short-term profits and personal bonuses.
    Here’s why – during a boom, banks are punished by investors and bankers by their employers if they *don’t* gamble. When the crash hits, they are castigated because they *did* gamble. Not that I’m sympathetic – they should take the rough with the smooth and it wasn’t rough enough!
    However, the underlying problems are: (1) The boom; and (2) the incentives. Governments should take their share of the blame for both of those. I think, between us, we could have done with rather less of Gordon Brown (“No more boom and bust”) and the various cute hoors riding the Celtic Tiger.

  • GavBelfast

    I will say this for David McWilliams …. he’s been a panellist on a few things like ‘Let’s Talk’ or ‘Spotlight Special’ and continually spoke more sense and provided more thoughtful insight, on economic and other issues, than the rest of the (largely home-grown panellists) put-together.

  • FuturePhysicist

    Burning depositors is an option, but not a pleasant one.

    http://www.rte.ie/news/business/2013/0128/364945-iceland-bank-court/

  • sherdy

    Mick, does this mean that I’m not as broke as I think I am, or that I was broke a couple of years before I realised it?

  • Reader

    sherdy: Mick, does this mean that I’m not as broke as I think I am, or that I was broke a couple of years before I realised it?
    Probably the second. If you are broke because your income has been shredded, then that means your employer didn’t realise their plight until after their business was actually in trouble. If you are broke because your asset value vapourised, you were broke as soon you paid over the true value of those assets. Either way, you were in trouble before you knew it.

  • SeaanUiNeill

    And we haven’t even started being really broke yet! The banks are holding your money, not you!

    Just one word: “Cyprus.”

  • Seann,

    That’s a good point. A couple of months ago in it’s latest budget here, the Canadian government slipped in a line that no one noticed for quite a while. It said that, in the future, if a financial institution got into trouble, the Government would adopt a bail in stance rather than a bail out.
    A friend advised me to convert some of my holdings into gold. I hesitated and I’m sure glad I didn’t given what has happened to the price of gold over the past month.

  • sherdy

    Reader – Thanks for the elucidation, but will it help me to sleep better at nights?

  • aquifer

    A crisis of profitability, ie the wrong assets in the wrong place, or a crisis of liquidity with a shortage of cash?

    The bankers with their intelligence of the stupid obvious sort, put our short term money into bricks and mortar but long term.

    The lack of inherent profitability in burying money in rigid piles of burnt stone and clay instead of difficult to understand businesses in technology drained real money from the system.

    At the same time the megarich became so expert at tax-free accumulation that people of the workaday sort had too little money to spend, oiling nobody’s economy at all.

    Finally the good ship greed was left floating on a tide of bankers promises that quickly evaporated leaving everybody high and dry.

    And now our clown prince would prevent us from maligning those who have neither character nor clue.

    Good to live in a country where vegetables grow though.

  • SeaanUiNeill

    Hi Aquifer, its really a very easy equasion. Politicians start as local councillors, usually. They get approached by builders (who, in time, become developers) who need their help to get through a once strict planning regime. A relationship builds up. All the transparency requirements and code of conduct can be got around. Politicians are required to list their interests, but not the financial interests of their brothers or fathers in law, or wives, or their mothers. Such prying would be an invasion of privacy, particularly in Norn Iron where the privacy of politicians has been a life and death issue in the very recent past.

    Its not that real technology or manufacturing are harder to understand than rigid piles of breeze block, just less directly connected to political patronage. How many times have I heard the phrase “orders from above” about an unsuitable building proposal? With really easy access to planning permission the developers have been able to access very easy money on a rising market, and even loans for a holding action until the good times return.

    But were these developments really needed at all? The implosion of the building boom was the answer. And now, in the North, the OFMdFM have their very own rubber stamp for these projects that will revitalise our stagnant economy.

    The least they could have done was conclude the long delayed Standards and Privileges enquiry into Peter Robinson’s possible financial dealings with such people before giving him carte blanche on major developments, but perhaps his in house lawyers statement that Peter had no case to answer was good enough for the Brits, or perhaps they just couldn’t care less.

    Whatever…..

  • SeaanUiNeill

    Hi Mister Joe, I’d say keep it under the bed if one could trust any currency at the moment. Good luck in retaining what you’ve earned, don’t let the F€$£s rob you!

  • Red Lion

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

    …or didn’t exist in the first place.

  • SeaanUiNeill

    Hey Red Lion, that’s a real Emperors New Clothes posting! Stop right there! If we started attempting to demand proof that the banks could re-pay our deposits, where would we all end up?

    Attempting to explain the banking crisis to a seven year old, I told him to imagine that there are only two small cheese burgers and a dozen hungry boys. Each boy has a photo taken with the two cheese burgers, and go off and each individually offers a boy outside the group two burgers in an hour if they give him one burger now. The photo is proof. They then eat the burger and hope that they’ve been able to borrow another couple of burgers from other gullable kids in order to return the promiced two burgers when due. When con men do this we call it pyramid selling, but when bankers do it we call it “the creation of wealth” and sometimes even “national growth.” Frightening how very simple it all is!

    The seven year old now wants to take his small deposit out of the Ulster Bank. I’m toying with possibly telling him about Father Christmas, but do not want to sour his childhood prematurely.

  • Reader

    sherdy: Reader – Thanks for the elucidation, but will it help me to sleep better at nights?
    Probably not. I hope you didn’t think I was being flippant – I know plenty of people who have been hit hard – employees, self-employed and even a couple of property owners.
    The point is I agree strongly with the statement in the headline – the crash might have been softer, it might have been cleaner, it might have been less wasteful or more equal. But it was on its way for a few years before it hit home. Asset values were due to tumble; loans were going to dry up; businesses were going to fail. Governments were enjoying themselves taxing a boom, so when the bust hit tax revenues fell. I have seen people hit by all of those, many of them had never made any errors contributing to their plight.