http://www.irishleftreview.org/2009/02/16/february-16th-afternoon-recession-diaries/

There is a big difference in the accounting for holding of CMOs and other asset-backed securities vs. holding of old fashioned loans. CMOs etc are market to market (or marked to model, now that no market exists). This means that a good part of the losses on this stuff have already been taken. Loans are not marked to market; instead, management make a guess of the expected losses and make a provision, i.e., book a loss, for it. Most of these losses have not yet been taken. In the case of Ireland, probably only a small fraction have been taken.

You are right that the coming credit losses at German banks will be eye watering. But, those at Irish banks will be truly horrendous.

I agree wholeheartedly with many of the comments regarding the very poor bank regulation in Ireland, the weak oversight by the Central Bank which endangered Ireland’s financial stability, and the profligate tax and spend policies of the Irish government during the period of irrational exuberance. In the absence of the US credit crisis would these many bad policies have led to a crash or just a bumpy downturn? It is impossible to know for sure and perhaps futile to speculate.

My own concern is that too extreme a depiction of the pre-crash environment in Ireland will lead to over-treating of the problems, and a government cure worse than the disease. If these problems are addressed in a constructive and balanced way, there is a good possibility that Ireland can emerge from the current recession with a much improved finance and business regulatory system (I am less optimistic about any tax-and-spend improvements).

I accept Patrcik Honohan’s point that the deposit insurance scheme was more or less inevitable, but was flawed in its implementation.

Alan Ahearne asks me to be more specific what risks nationalization (of all the main banks) would give rise to over and above the risks we already face. My concern with AIB and BOI nationalization centres on their credit control and funds allocation while in state ownership. The dominant political party in the current government has long and very close ties to the property industry. The Irish taxpayer through its deposit guarantee scheme is now the residual claimant on all bank assets, and in particular a massive overhang of bad property loans to very sharp and politically-powerful developers. The banks need to collect on these loans wisely but ruthlessly, bankrupting whoever needs to be bankrupted, and credibly threatening with financial ruin any developer who does not cooperate in maximum repayment. This is not a job for civil servants reporting up to a Fianna Fail government.

The interesting impression is that (if bank behaviour is anyhting to go by) prudential warning fatigue seems to have set in soon after that report was released in mid-2003.

Here are some quotes from the 2003 IMF report I linked to some while ago. The last point deserves particular consideration IMO.

“The spectacular increase in house prices and credit to households over the past several years inevitably raises the risk that prices may unwind, possibly abruptly, especially if unemployment were to rise further

“Care would need to be taken that measures do not postpone the adjustment of house prices, given the risk of an even sharper unwinding later on

“The authorities were concerned about risks to banks from rapid house price and credit growth, but noted that high levels of capitalization and profits provided an adequate cushion to absorb the effects of potential shocks without systemic distress

“Staff agreed with the authorities’ concerns about risks in mortgage lending, particularly from a rise in unemployment and from differential risks within mortgage loan portfolios. Staff also noted that the concentration of large exposures to commercial property loans as well as insurance industry risks merited close attention.

“The authorities were concerned that persistently higher wage and price inflation would worsen competitiveness as the euro strengthened and external demand weakened…

“Staff cautioned against relying entirely on favourable economic conditions to eliminate the structural deficit…the structural revenue ratio could decline further…For instance a deceleration in housing turnover would adversely affect indirect taxes and stamp duties. More generally, tax revenue could decline if the house price boom unwound quickly.”

It was always going to be difficult for businesses and individuals to avoid the temptation of easy and cheap credit (debt!) but the Irish policy makers threw oil on the fire with its tax breaks, lax financial regulation and rubbishing of anyone who had the temerity to question the wisdom of the speculative frenzy.
Sadly we may have plenty of time (too much) to figure out the reasons for the recent “madness” .
“Men, it has been well said, … go mad in herds, while they only recover their senses slowly, and one by one.” Charles Mackay 1841

It is almost impossible to imagine any situation in which a soft landing could have come about.

It is even worth considering that perhaps our crash would have been all the more fiery had the global economy moved the opposite way in 2007/2008, because at least now we are cushioned by falling import prices and falling energy prices: whereas in a global boom our competitiveness would have been just as eroded and imports would have stayed dear.

You note that “[t]he alternative of full nationalization of all the banks (not just the rogue bank Anglo Irish) carries too many risks for the economy.” Could you be more specific about what additonal risks for the economy nationalisation would give rise to, over and above the risks we already face?

Perhaps, though, you understate the degree to which the scale of the Irish construction boom and of foreign borrowing to finance it have contributed to our problems — an interesting and unresolved question is how to decompose our problems into home-grown vs globally caused. For sure they are not simply additive factors.

On the guarantee, I agree that an extensive depositor guarantee was made more or less inevitable by the failure in September 2008 of Anglo-Irish bank. But it was still a flawed action:

(i) I would not have guaranteed subordinated debt;
(ii) I would have taken the opportunity at that time to place Anglo into administration;
(iii) I would have made more use of the long-standing network of communication and collaboration between central banks in Europe to get whatever assistance might have been available, and to avoid the kind of damaging international reaction that occurred.

In short, even in a slump good instincts in regulation and management save banks.

The Irish economic crisis is primarily our own making. The US crisis just revealed that the emporer had no clothes, it pulled the trigger but it didn’t load the gun.

There can be “disastrously bad decisions by US policymakers and the U.S. finance industry” as a root cause in the US but not in Ireland? I’m sorry, but that’s BS.

If lending was restricted to a low multiple of income, it’s pretty safe to say that we would not be in this crisis. If lending was restricted to a maximum of 80% of the value of a home, we would not be in this position.

One would imagine that this, in turn, would lead to banks looking for other revenue streams such as investment in business rather than the one way bet they had taken as they were sure to get a better return on property.

Consumption & investment would have been further diversified throughout the nation rather than focused on property.

Sure, we were exposed to low interest rates by the ECB that were beyond our control, but this could have been countered by the restrictions I mentioned. We would not be suffering to the extent at present and will in the near future.

This crisis is of our own making, it originated here, it’s Irish. Ireland is different. We, as a nation, did no have to follow the irresponsible practices of others. Just because the US put their hand in the fire, doesn’t mean our policymakers & banks had to.

The financial crisis is of course to a great (?) extent external (though not entirely) but we are in a much bigger mess, and this other part of the crisis is home made. In that context it is quite valid to wonder if other/better policies could have been adopted.

One of the big distinguishing features of our crisis is that the exchequer is in a terrible state. That has little to do with the US crisis. Instead it has a lot to do with the heavy reliance on construction related taxes (a large chunk of corporation tax also came from financial services - I suspect that there is not much coming in from there for a while) and a rapid expansion of public service employment and current expenditure. I don’t think we can blame the US for that. Nor should anyone pretend that there were no warnings - while 3 years ago nobody predicted the kind of deep crisis we are in now, quite a few raised the issue of the housing market and rapid growth in public expenditure. There is no evidence that these warnings were heeded.

What about the failures in banking regulation? Surely those are homemade too?

The Irish economy ‘went off the rails’ a long time ago (in my opinion sometime around 2003) and that has little to do with the US. Have a look at the sources of recent growth - largely construction, public sector, financial services and retail. Construction was bound to contract (crash) and you can’t keep on expanding the public service indefinitely so those two sources of growth were unsustainable (and were known to be so). We know what happened to third one!