I do believe that absent the State guarantee of bank debts, we could have forced Anglo into examinership and had a debt-for equity swap in a restructured bank in Q4 2008.

It was a time of ferment in global banking and the ECB wouldn’t have been in a position to stop us - - we had an independent fiscal policy and any deviation from that would surely have come at a cost for the ECB.

Last week, 2 years later, we were like Kenny Rodgers’ gambler - - simply out of aces.

CDS are instruments of destruction which ought to be outlawed …

People buy a CDS not because they expect an eventual default but because they expect them to appreciate in response to adverse developments…

It’s like buying life insurance on someone else’s life and owning a license to kill.”

Walter Munchau in the FT Feb 28th (behind a paywall) called for a ban. Nearly every rational commentator wnats them banned - if you have no interest in the underlying asset - i.e naked CDS. They are a disaster waiting to happen - probably the reason why ECB/EC ministers are so jittery.
Where’s Greg these days?

Thanks for the Tony Judt article link. I need to sit and have a good read of it. I listened to an interesting podcast recently, I forget who was the speaker. But it referred to that excellent movie, The Lifes of Others. The speaker stated, that in our attempt in the west to try to understand the eastern bloc society, we could not help betraying our values in our interpretation. Where we created the figure of the corrupt official, who was abusing his position in order to gain certain favours and priveleges. What the speaker said, who was obviously familiar with the society and the times, that in the old Eastern bloc society, it did not even require the imposition of these ‘listeners’ and spies etc, to create the environment. The feelings oppression etc, evolved quite naturally without any assistance from these hypothetical ‘baddies’ in the equation. Just a passing thought, I said I would mention. BOH.

I do a nice discount line in the Pill of Murti-Bing and could rustle up a few million for the population of Ireland. A snip at €85bn.

More on this worth reading here:

http://www.democraticunderground.com/articles/03/05/28_dying.html

But we’ll get there…..

no one is giving “your property (money)” to someone else, no more than the government is “giving” your income to public sector workers. The State makes agreements and runs up cost/expenses/liabilities, and then they levy the taxpayer (or borrow money) to pay for this. It can decide at any stage to not pay these costs/liabilities and deal with the consequences of this decision, but it cant simply legislate itself out of oweing the money in the first place.

That article is superb. Tony Judt RIP.
Where are the Irish thinkers at the moment ?
There is some momentous stuff going on.

I don’t follow the reasoning here - why do we need to change property rights? This is the Article - if any which would be used to overturn the guarantee. Why should anybody be able to take my money (property) and just hand it to someone else (the banks and via them the bondholders). It seems quite straightforward

gadge btw didn’t say a challenge would certainly fail -just his opinion that it might, but maybe like you he feels that bondholders property right have some sort of precedence over the average citizens, and over the common good.

But that doesn’t change the following either:

1. Legislation is not irrevocable.
2. Why do CDS exist?
3. Why are our lawyers such a bunch of pussies? They haven’t even TRIED to test this stuff. (McKillen case not yet at Supreme Court).

you could have saved yourself a lot of time there - i said “rightly or wrongly”, and then you appear to argue on the basis that it was wrong. Thats not my argument, im simply arguing that it DOES exist, and all of the actions of the EU and ECB (and the Fed/Treasury for a large, though not total obviously - WaMu & Lehman - part in the US) are proof positive of this. Even in Scandinavia in the 1990’s senior debt was for the most (total?) part made whole.

Re the guarantee - i am not aware of any legal argument in favour of revoking the guarantee that has been made by Tom Costello? He simply seems to express a personal opinion, which on the face of it could make sense, but constitutional law is very rarely as simple as that. Lots of people seem to think you can revoke any law by a simple act of parliament or even a referendum. You can’t if its protected by other rights in the constitution. You have to change THOSE rights first. In this case it would be the private property rights and fair expectations of them. I believe Gadge and others have made very detailed legal arguments, citing leglislation and boring stuff like that, as to why we can’t just revoke it. Changing fundamental property rights, which the Irish constitution is particularly protective of, could lead to an awful lot of other unintended consequences further on down the line. It would also, of course, still be a de facto sovereign default in terms of how the markets view us, and so changing the constitution doesn’t appear to actually change anything in real life - if we want to default on it, just default, not quite sure why or how changing the laws would change the actual situation?

http://www.nybooks.com/articles/archives/2010/sep/30/captive-minds/

I think the ECB or some other created entity should be looking to buy the most toxic junk imaginable and bury it somewhere for a very long time. Really, it can only be the ECB or some adjunct, because it is going to have to be printed away (i.e. the junk will be destroyed, not sterilised).

Why the most toxic stuff? Because however much good stuff you buy, you are doing it to suppress interest rates and make it cheap for governments to buy/guarantee the toxic stuff. This means that taxpayers will pay for it. This is bad for investment and demand. Which is bad for the economy. By buying good stuff (like sovereigns) and expecting those sovereigns to deal with the bad stuff, you are making the situation worse.

If they buy at market prices, even that might not be inflationary, but it will at least clear the junk away.

I was listening to the ‘Future of Finance’ podcasts from the LSE website recently. One point did strike me as interesting, and of some relevance to the Irish situation. I think it was John Kay, whose verbal contributions (and written in book publication for the conference) were very perceptive and understandable - spoke about our being captive to various orthodoxies, invented by ‘people like us’. I.e. He meant economists, who had invented the orthodoxies upon which modern finance was constructed around. I think it was Kay also, or one of the other contributors at the LSE conference who mentioned the fact that around 2006/07, a lot of comment in the United States spoke of the fact that banks were never, as well capitalised. That view had become the orthodoxy of that time. I think, that this essential point has failed to emerge in any of the debates I have listened to about Ireland.

Yesterday, is a previous blog entry, you linked to the famous RTE PrimeTime panel discussion between Morgan Kelly, Brendan Keenan, a guy from Bloxams and our own favourite, Miriam O’Callaghan presenter. Thanks for linking that video clip. When I watched it again, I realised, it just keeps getting better the more times I watch it. It is like watching a great prize fight like the rumble in the jungle or something. Each time, you know that Ali is going to knock out big ole George. But you can’t prevent yourself from shouting in support every time, just in case the ending is any different. Each time of course, Kelly comes out of the scrap looking more and more impressive.

But here is the point. If ever there was a snapshot of the global debate, in microcosm, it was that piece of RTE PrimeTime footage. It is quite obvious from watching the clip, that both Mr. Keenan and the guy from Bloxams were help ‘captive’ to the orthodoxy that prevailed at that time. And it is unfair to judge them in isolation, from the context that was in the world as late as 2006/07/08. Namely, the stubborn insistence, that Western banks were never in a better capitalisation position. The final thing I will comment on, in relation to the LSE conference, was another statement by one of the contributors. That, all of this will happen again. But what many sovereign states cannot afford, is a re-occurance of the same in the next 20 years. All the economists can attempt to do, is to extend the period to maybe the next 50 years. BOH.

1. The banks are private institutions - we have regulations - they broke them. You break regulations you pay the consequences. The bondholders as Philip Legrain and others have pointed out should just have been given the bank equity and the deposit insurance used to cover the depositors to whatever extent was in force.
2. We could never afford that kind of guarantee. I know virtually nothing about economics (which I haven’t learned in here) but when that guarantee was issued - in one of the first posts I ever put on here I questioned the use of a guarantee which we could not afford to underwrite - and why it should prevent a run on banks.

3. You raised the irrevocability of the guarantee in the past - but as Tom Costello says above:
“If adding ‘irrevocable’ to legislation made it so, then any government could extend its policies indefinitely.”
LIke the guarantee itself it’s a megalomaniacal delusion - authored by Brian Cowen as Jesus Christ and Brian Lenihan as Napoleon

Lets have an Icelandic type referendum and overturn this guarantee ASAP. The guarantee should be overturned anyway - but a 90% in favour vote should add weight to the decision.

agreed. But probably easier for bondholders to blame inflation for their underperformance rather than a restructure - inflation is the fault of the central bank, restructure is your bad investment choice.

Essentially amounts to the same thing and I’ve never understood why investors would prefer one to the other. The problem with QE is it is very crude and always ends with unintended consequences

Anyone interested in the wrongitude, and indeed anyone who wants an overview of where we are now, could read Ronan Lyons’s excellent article here:

http://www.ronanlyons.com/2010/11/30/irelands-economic-crisis-what-sort-of-hole-are-we-in-and-how-do-we-get-out/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+RonanLyons+%28Ronan+Lyons%29

bjg

Yes, they used Spain as a testing ground prior to WWII (for Stukas, tactical experiments, etc.). Perhaps they will use them for some kind of financial experiment when it all falls over.

I was in Spain recently. Lots of simmering anger/frustration over there. In several trips to Oviedo over the years, I have never seen a beggar in the town centre. On this latest trip, I was approached by three.

“the other alternative to debt restructuring is flat out QE, which is basically default via stealth (ie inflation creates the loss on bondholders).”

The explosion in debt post 2003 was driven by issuance of private financial debt of inferior quality to government debt but rated as of similar quality. The banking Ponzi scheme of 25% profit growth per annum is broken and the assets backing the debts have fallen in value unless one believes in fairies. The exercises necessary to ensure all debts are repaid mean austerity which itself destroys GDP . Debt can be defaulted on or reduced via inflation or repaid in full. Can you envisage any scenario where poor quality financial debt is honoured in full?

I thought he was very impressive - but then again, it wasn’t hard to look impressive given what he was lined up against last night! It’s just too awful to think that those other two currently are/might be in future running the country. Why do people vote for such clearly talentless people just because they wear a particular party badge?

It’s publicy available info. I have the list in front of me.