Resolution of Banking Crises: The Good, the Bad, and the Ugly

This quote: While these policies have reduced the real impact of the current crisis, they have increased the burden of public debt and the size of government contingent liabilities, raising concerns about fiscal sustainability in some countries.

The question that remains at the back of my mind, is how do many sovereign states manage, if we enter a new period of recovery and subsequently face another global, financial shock? It reminds me of the dot.com bust in the early 2000s. What were the real impacts of that financial collapse? We had thought we had got away Scot-free after 2001 and had entered a real recovery. But now it appears as though we had only entered an asset bubble which was unsustainable, and left us a lot worse off than before. In terms of the Irish context, I would like to link again to Richard Curran’s Sunday Business Post piece, The tax breaks that broke us. From the article I quote:

In the end, Cowen decided in December 2005 to extend the July 2006 deadline by six months for some and run it until July 2008 for others. Given the billions of euro of projects in the pipeline, a rapid termination without lengthy extensions would have saved the exchequer, the banks and the taxpayer a lot of money.

My question to all is this. To what extent, before the financial collapse dated late September 2008, was the Irish economy as a whole, receiving an enormous subsidy from the Irish state? All the discussion at the Irish Economy blog has focussed on the leniency of the state’s terms in dealing with financial institutions and private borrower, and private lenders, post September 2008. But where the question really lies, is what was the underlying stimulus driving the Irish economy pre-September 2008? That is the massive transfer of wealth which Richard Curran describes in his article, before such outlets as the Irish Economy blog even gained some traction. I haven’t many criticisms to offer of the Irish Economy blog, but I do have that one. It is intensely and overwhelmingly fixated on policies post, the state bank guarantee. Responses as always, are very welcome. BOH.

http://www.sbpost.ie/newsfeatures/the-tax-breaks-that-broke-us-49859.html

@ MH,

Diito for Ireland; how can one measure the impact on people who want to work but will never again?

To what extent was the second phase of the Celtic Tiger, the building boom phase, a regression into policies aimed at providing a huge employment scheme (at a huge and unsustainable cost to the Irish exchequer)? In other words, the Fianna Fail government attempted to create a false fix to the employment question in Ireland. By (1) expanding the public service roster to unsustainable levels at around 400,000 people, and (2) providing stimulus for a massive unsustainable building industry to the tune of 300,000 people. One interlocking with the other, to create flows of transactional taxes from (2) back into (1). After doing that for over a decade, it is like the snakes and ladders board game. We are back to where we began again, at square one.

I am sure you will agree Michael, the current focus by the FF and FG policy documents, on policies such as smart economy, the new era, or even the green party on things such as wave energy and renewable wind generation – all smells to me, like a solution to move large blocks of people on the island of Ireland from conditions of un-employment to employment, very quickly. The trouble is in Ireland we tend to panic, we try to create both wealth and employment in fits and starts. We tend to lose both through some massive hole in our trouser pocket. We have developing, evolved and fine tuned an entire national psychology to fit around this approach, we identifies our reality as easy come, easy go. The ‘hold in the trouser’ pocket mentality is all prevailing, and depends on our happy-go-lucky sense of humour on it all. I can tell you at age 35, I have lost most of my sense of humour. I think my references to SME employment creation in a recent IE blog post is worth linking to. BOH.

http://www.irisheconomy.ie/index.php/2010/06/09/the-honohan-report/#comment-56360

Auditors have got a free pass so far for rubber stamping questionable risk management in banks and in Ireland turning a blind eye to inadequate supporting documentation for large loans, which they had clearly encountered as part of bog-standard audit work.

Now that the money has been made as bubble cheerleaders, responsibility for banking solutions is passed to the Government.

Press release extract:

The continued reluctance of banks to release money to fund working capital requirements of viable businesses is now seriously threatening their long term survival and undermining the country’s prospects of recovery. According to Paul Kennedy, the newly inaugurated Chairman of the Chartered Accountants Leinster Society, if the situation does not change quickly, Government intervention will be very necessary in order to make it happen.

However, when it comes to corporate governance and risk management, Kennedy claims that stakeholders and companies must bear the primary responsibility and not devolve solely to auditors. “Companies must consider the significance of proper corporate governance and risk awareness in their own organisations and put sufficient resources in place to deal with managing this risk. They must work in conjunction with auditors, so that confidence can be restored in financial reporting and businesses can focus on performing and surviving in the longer term,” he concluded.

****************
So how bad would the situation be before auditors would risk losing a fat fee?

@Brian O’Hanlon
“some of the largest, most toxic borrowers in the Irish state, had no shareholders. They were not accountable to anybody.”
They were, or should have been accountable to their lenders. If their lenders didn’t care, their lender’s auditor should have warned their lender’s shareholders and the regulator. The auditors are supposed to be there to verify teh directors’ accounts which are supposed to present a “true and fair” picture of the business.

Given that NAMA has struck the value of many loans down to zero due to non-existent or invalid paperwork with only a cursory search (it can only require a cursory search to reveal this), it is clear the auditors were derelict in their duties. Whether they were incompetently derilict or complicitly is not for me to decide, but I know where my suspicions lie.

It galls the hell out of me that these same companies and their partners in, eh, incompetence, the big law firms, are the same now sucking at the 2.5 bn NAMA accounting and legal fees teat. I’d rather, quite frankly, that NAMA built that expertise up from scratch employing those untainted by the current scandals. Public service headcount be damned in this case!

For Sarah Carey
Hysterical? They do administer tests before admitting public servants …. For the private sector you must be attractive …..
http://www.dailymail.co.uk/news/article-1287497/Public-sector-staff-spend-9-fewer-years-work-earn-30-private-employees.html

There is no banking crisis. The banks are excess to our needs. We need smaller banks. We have destroyed the banks by encouraging them into max revs for too long. The money machine requires a decade or two of no money creation before demand will pick up. Idiots who want to borrow now just want money and cannot seriously intend to repay at real interest rates of 10% and increasing.

Fools who support pumping borrowed money into keeping land prices high should face the voters.

We do not need high prices!

Banks are not needed. Stop borrowing and reduce the deficit. NOW!

Competitiveness: is sacking a lot of time wasters in public office!

@ P. Q.

Colonial legacies matter. At the risk of boring the reader, I refer again to Michael Hudson’s classic Trade, Development and Foreign Debt.

It is one I will have to read, thanks. BOH.

@ pat D

‘Competitiveness: is sacking a lot of time wasters in public office!’

‘Time wasters’ are not that easy to identify from the outside. While productivity sure does matter, I am inclined to believe that the worst problem is conflict of interest. The curse of our public sector is vested interests and internal fiefdoms.

Unemployment is bad enough already and sacking low paid staff will worsen it. Many folk at the top of the public sector will be as happy shrinking the numbers of ‘time wasters’ as they have been in expanding them. Its just another turn in the dance of privilege.

In the former USSR, the state apparatchiks privatised their fiefdoms and expanded their operations to include western football clubs. The wealth released from Thatcher’s privatisations went, among other places, into a south of England housing bubble. The two Britains.
All very efficient perhaps, but only in the narrowest sense.

Start cutting education and encourage use of the internet.

Dfence? Look at what NZ did! Where is Cuts McCarthy? Justify their retention if you can?

@ All,

Of course, in all the debate and discussion about capitalisation of the banks in Ireland, during the past year +, we may have lost sight of something quite basic. It is quite tragic to see the shareholders’ wealth in Irish banks wiped out so quickly. But the point is, that was working capital which was available to the Irish economy, which no longer is. It is not only tragic for the individual shareholders, it is also tragic for the Irish economy. Without working capital, options do become very limited indeed. I regularly listen to stories from men and women I know, who have worked all their lives. The best opportunities they can find in Ireland today, are doing work for nothing, in the hope that someday, somehow, something will come about. The hope that something will change. The awful part also, is that many have taken advantage of the recession, to exploit left, right and centre. People who would drive hard bargains before, have the opportunity today to really test the resolve of those who work for them, and provide them with services. I believe in much of the academic discussion at the Irish Economy blog, though much of the debate has been technical and very instructive, we may have got lost a little bit in abstractions, terms and figures of speech. Re-capitalisation of the Irish banks has begun to sound like something bad. When in fact, it is the only action that will resolve the economic woes in Ireland. Feel free to hurl the rotten turnips etc. BOH.

@ Joseph,

I am 35, and old enough when this happened in Ireland in the past. This is the kind of thing which ultimately provides the impetus for many people to leave the country. People are actually quite tough, but the straw that breaks the camel’s back, most often, is the realisation that someone else is doing well on the back of your suffering.

It’s come full circle though. At the height of the boom in Ireland, I employed an undergraduate for summer work at a weekly rate of €500-00 after taxes. He phoned me from his bed, on the second morning of his employment and requested better pay and better hours. We parted company on good terms and I wished him well in his final year of education. I realised that most of his classmates in a very prestiguous Level 8 course looked at the world in the same way, at that stage. I was in the company of his friends in a social outing a couple of months later. And they didn’t know I had been the guy who had hired him. They told me, he gave up a job where they started really early in the morning. Granted we did start at 8.00AM and worked until 5.30PM. It was a long day, no doubts. But I know hospital interns putting up with much worse conditions.

The worst I’ve had to deal with though, was a public servant working in the museum or art gallery administration staff in Dublin, who told me she had a real job. Implying that anyone who worked in the private sector was only a fool. I remember at one stage, the public servants looked at themselves as being disadvantaged relative to private sector workers. Some needless to say, both public and private employees have had their moments, as you can glean from the couple of examples above. BOH.

@ Paul Quigley,

The examples I offer above, are from both the private sector and public sector of the workforce. Watching the two-part documentary series about the Progressive Democrat political party on RTE last night, I listened to them talk about benchmarking. Benchmarking the public sector to the private sector in Ireland. What occurs is, in reality, you produce a workforce which were busy trying to out-best one another. While in the meantime, everything went out of alignment with norms across other EU member states. We had no benchmarking against other EU member states. I understand that Charlie McCreevy still maintains that the social partnership was an essential early ingredient of the success of the Irish economy. But as time moved on, it got larger and larger, and extended far beyond what it was originally intended for. Colm McCarthy in the documentary makes the point the PD political party were in government for most of that era.

Now brush all of that to one side. We can appreciate today how the workforce in Ireland needs to be wrenched back into alignment with other EU member states. In terms of what one would expect for pay agreements and conditions. But beyond that step, what do we need to do? We have in Ireland at the moment, a situation where vast quantities of highly trained and highly experienced members of our workforce are priced out of the competition. They are side-lined and may never work again in any stable employment form. Those are the people who would generate the wealth necessary to begin a sustainable growth in the Irish economy. But it doesn’t matter what pay agreements we establish if the employment opportunities continue to deteriorate at current rates. Our state, corporate and personal debt burdens will simply submerge us.

I have attempted to prise some honest commentaries from folks myself. When we move the right people back to work, it is questionable if we are providing the right resources and support to raise productivity to its full potential – in either the private or the public sector. My inkling is, we are behind program in getting crucial sectors of the population into high-value added entreprise. We pay a lot of lip service to words such as innovation, and smart. But at the end of the day, innovation and smart-ness is about management of human resources. Allowing the right people the resources at the appropriate times to carry out daily tasks. As in many things, you can only manage what you can measure. My ramblings here don’t come even close to trying to ‘measure’. BOH.