183 replies on “O’Callaghan: ECB Must Share Blame”
@all
‘First, the causes of the crisis include the nefarious activities of a few individuals but are mainly comprised of mistakes by honest people who were lulled into complacency by an incomplete understanding of the new European monetary system. These honest people include many that still work for European institutions.
Second, the crisis was not expected to take the form that it did and European institutions were not — and are still not — equipped to deal with it. As a result, mistakes were made and are still being made.
Third, the Irish programme will have to be revised because it cannot be implemented as planned and the debt level is unsustainable. ‘
Fully Agree on the Second and the Third – I leave O’Callaghan’s ‘charitable gloss’ on the First for another day’s deconstruction …. on the crass ideological bent of the PD/FF neoliberals of the noughties.
The line: “First, the causes of the crisis include the nefarious activities of a few individuals but are mainly comprised of mistakes by honest people who were lulled into complacency by an incomplete understanding of the new European monetary system.” sets the tone of a bizarre article.
Basically, our problems can overwhelmingly be put at the doors of EMU and the ECB.
The first of the 2 examples of monumental mismanagement that wrecked the lives of tens of thousands of our citizens in a generation, happened long before EMU.
The second started with payback time against the backdrop of a broken system that resembled Japan’s in terms of cronyism and construction.
To hold an inquiry where the appearance is that most of the blame for the crisis is on Europe, would make a laughing stock of the country.
Any chance that the slow-motion response to the crisis reflects deeper problems that have nothing to do with Europe?
O’ Callaghan writes,
The ECB has acted as lender of last resort, on behalf of the entire eurozone banking system, but Ireland is liable for all the sums that have been expended in this effort.
I suppose this is where the political should meet with the economic? And by political, I don’t mean any joint European council or committee effort. But rather something more like the Icelandic variety, which would involve a referendum etc. O’Callaghan also wrote, As pointed out in the Honohan and Watson-Regling Reports, people honestly thought that we had achieved a new level of wealth. Is it also the same passive, herd instinct which operates in Ireland today? Not so long ago, there was a communal acceptance of the fact we were all vastly wealthy, even though we were not (barring top level management of semi-states, who are wealthy still, and getting more so as we all get poorer relatively speaking). Now, the consensus of agreement seems to be that the ECB is footing the bill for all of the liquidity, and it has nothing to do with ordinary Irish folk. That is as much a mis-perception, as was the mis-perception during the boom that we were all wealthy. We are all on the tab for the ECB’s expenditure, but the consensus seems to be, that it doesn’t affect us, and doesn’t fall to the bottom of our balance sheet, . . . which it no doubt will. BOH.
The current fetish for blaming the ECB is pathetic. We have just suffered a high speed crash and are in intensive care and yet we seek to blame the Gardai and the absence of proper enforcement of the traffic laws for our speeding in the first place.
@Micheal Hennigan
Cast your mind back to the late 90s and the misallocation of resourses that was in the very nature of EMU entry.
Low public debt levels was the mantra for convergence.
Again – the low public debt levels meant that private individuals had to get into extreme debt – they had no choice.
Remember the massive Gold selling in the late 90s and early 00s with the SNB selling over 1000 tons !!! – this gave a false signal to the sovereign debt markets as the price of Gold and sovergin debt interest levels are closely linked.
The low servicing costs of public debt was a price signal to commercial banks to give credit on a massive scale as under the previous sovergin money systems this was the norm but the financial ecosystem had changed……….
The acedemic community here (I hope ) simply did not understand the structure of the euro as they had sovergin money teachings which were now obsolete.
Ireland is not to blame – the root lies in the banking rules themselves – Basel for instance considers deposits to be real reserves when they are nothing of the sort.
@Dork
Can you explain what you mean about Basle and deposits? I dont understand the point being made.
Karl , deposits are a function of credit creation – it is not money as in Goverment money.
Old style banks as far as in am aware multiplied credit on the back of this Goverment money.
That was a fractional system.
But Basle changed the rules – it considered credit deposits themselves as money which could be multiplied.
A system where you multiply credit on the back of credit is not a fractional system – it is a ponzi.
I would recommend the works of Steve Keen who is a expert on these matters and one of the few amateurs who truely understood the nature of the crisis.
Honestly Dork, I’d recommend finding out what the Basle rules actually are because, trust me, they’re not what you think they are.
What are they in layman’s terms so – the byzantine nature of the banking industry completly mystifies me.
Please use English rather then financial Latin.
@ All
anyone seen whats being suggested for the Portuguese support package? Not gonna go down well in either Dublin or Athens methinks. Particularly liked these lines:
*IMF SAYS FASTER DEFICIT CUTS WOULD MEAN DEEPER PORTUGAL SLUMP
*IMF SAYS PORTUGAL HAS FISCAL SPACE TO GO SLOWER ON DEFICIT CUTS
*EU SAYS EFSF, EFSM INT. RATES TO DIFFER SLIGHTLY FOR PORTUGAL
*EU SAYS THERE IS EFFORT TO ALIGN EU RATES WITH IMF RATES
@ BW2
“We have just suffered a high speed crash and are in intensive care”
You forgot the ending
….and are in an ECB isolation ward where we have contracted a lethal dose of MRSA.
It is hard to keep up with everything that has been going on but I try and I have a collection of cuttings from the FT Saturday edition going back to February that I am filing slowly. And what comes out most clearly is that the market has given the ECB and the deciders so much time and patience and confidence and that every so often someone in the market, such as Gary Jenkins of Evolution says “this time we think the Euro authorities have grasped the essence of the problem”
“There are high expectations of a comprehensive solution to the sovereign debt crisis and an outline of the structure of such a mechanism would be welcome at this stage,” said Gary Jenkins at Evolution Securities.”
And they never do. The crisis just staggers from bad to desperate. I feel so sorry for anyone who held or is holding Irish sov bonds. The bank bondholders got the lifeboats and the ship is slowly filling up.
It is remarkable how little in depth analysis there has been in relation to the ECB decision/opinion/recommendation/veto (we still don’t know what exactly they did) that Ireland not be allowed impose losses on seniors and the inclusion thereof in the terms of Ireland’s bailout.
Surely this is a question that is outside the scope of their competence – I can see them making a recommendation that these bondholders not be ‘burned’ – but to go further and ‘veto’ on the implicit threat of the withdrawing of liquidty support must at very least be highly contentious.
Most fundamentally, the ECB appears to subscribe to a view that a systemic failure of a member’s banking system requires that member state to bail out bondholders – this is a remarkable position to take.
First, it is an ex post facto position – member states never signed up to this and can’t be expected to sign up to it after the fact.
The truth is, of course, that this position was only adopted by the ECB after Lehmans
The further truth is that there is little political reality to getting member states, such as France and Germany, to pay to bail out bondholders in an Irish bank.
The follow on from this for the ECB is that this fact, when combined with the fact that they view defaults on senior debt as dangerous, is that individual member states must bail them out because they may view it as the only way to get the bailout done.
But the fragility of the financial system is the root cause of the problem and large scale re capitilisation and segregation of institutions is the answer.
And it is not the role of the ECB to decide where these losses fall – that is a political question – it might be difficult for Ireland to impose losses on seniors against teh wishes of Germany etc – it might be difficult for Ireland to get germany etc to contribute to the cost of this bailout – but the ECB have effectively removed Ireland’s opportunity to attempt to get them to bear some share of these losses
Second, it is entirely inconsistent with a single market for financial services and pan european funding of banks
Third, the fact that this is the stated position of the ECB is as clear an example of moral hazard as you are likely to see – banks tend to fail in groups – lenders to these institutions need to know that if a bank follows the herd into a sector or type of asset and then suffers losses that they are potentially on the hook for some of the losses.
@ All
The troika press conference on Portugal from this afternoon is available at:
(It slips in Portuguese for a minute or so but quickly switches back to English).
It does seem to me that the tone is more helpful. Especially the ECB emphasis on ensuring the banks have sufficient liquidity.
@ The Dork of Cork
The argument can be made that the ECB rate of 1% was too low for Ireland.
However, the goose was well cooked by June 2003.
The benchmark rate was as high as 4.75% in late 2000 and by the launch of the euro in 1999, McCreevy had opened the throttle full blast with big tax cuts and a massive extension of property incentives — covering apartments, hotels, car parks, nursing homes.
The year 2000 was also the year when FDI peaked and after that, keeping the property bubble in fuel was as the Chinese say, like riding a tiger.
There is no mystery why Spain’s biggest bank, Banco Santander, remains one of Europe’s biggest and most vibrant while its Irish counterpart is bust.
Some Irish have form in trying to believe in fairytales – – it resulted in a Civil War.
@Dork
Maybe you should spend some time by yourself trying to figure out what’s going on. It’s preposterous to try to get someone to explain something like that in a comment in a blog
PS Karl , only goverment money is money.
If it were not we would not be taxed more to bail out the fictional credit money that was created.
How can you not say changing the capital requirements and reducing the role of Goverment money in banks capital bases is not a ponzi ?
Honestly , economics is the only “science” that strives for complexity.
It is a damning indictment of the economics profession that only trained engineers in the physical world has called the crisis for what it is – a debt crisis created by artificial money.
@BWII
Such facetious analogies are total useless and inaccurate.
The anger directed at the ECB is due to the way they have exarcebated the crisis by preventing restructuring of unguaranteed senior bank bondholders. In addition, O’Callaghan is blaming the ECB for cause last autumn’s run.
To continue your foolish analogy, if there was a major car crash that was caused by bad roads, poor signaling and a lack of appropriate speed limits, then the NRA would be blamed for the crash and correctly so.
@Christy
One of the central tenets of science is to simplify everything down to its basic form – then you can add complexity on to that model – not before
You are falling for the classic jesuitical trick of trust me its too complex for your simple mind.
The basis of the European scientific revelution was a rejection of the financial Latin that only the chosen could interpret and the reading of the Bible by simple but not unintelligent folk.
Skepticism is the key to progress.
Many things are much simpler then you think ,when you subtract the economic embroidery from this farce you will find the emperor has no clothes.
@Micheal.
I think the interest was secondary to the outcome.
It was credit creation itself – remember credit is just savings from the future brought back to today.
Credit is therefore artificial savings – limited credit creation is useful to generate wealth but only if it is used for capital increasing uses and not consumption.
There is simply too little savings now as we have entered that future and it ain’t pretty.
Again the only metric useful is the ratio of Goverment money to credit and you will find during the history of the EMU the shadow banking sector has exploded relative to until recently a static or falling goverment debt.
But we know all this….
Weber knows that all this ridiculous bailout does is change a manageable default now into a major one in a year or two with Germany picking up the pieces.
But there is good in this current mess. Let’s use the IMF to implement much needed reforms and make us leaner and more efficient and then let’s just default in a year or two. We should use this time to position ourselves to recover well after a default. That’s why we should continue all efforts to get rid of the real deficit (i.e. the cost of running the state less the ridiculous bank recapitalization). If we are not reliant on borrowing by the time of default we could go for 100% haircut
I’m on the move now and can’t tap out long replies on my phone. But banking is a lot simpler than the Dork seems to think. I have lecture notes on Basle and capital requirements on my website. If the Dork wants to read them and offer criticisms he’s welcome to do so.
@dork
You are not far wrong. The multiplier effect due to the fractional reserve system is in effect an institutional form of embezzlement. The main reason this is tolerated is because Government debts can be hidden within this miasma. Central banks monetize government debts and inflation does the rest. The expropriation of purchasing power of money through inflation (promulgated by the CB) is the means by which Governments get away with an ever expanding national debt. Taxpayers would not tolerate explicit provision for government extravagance otherwise.
Whether you know the ins and outs of the Basle rules is not that important. You are on the right track when surmising that the professional economic community in Ireland was caught with its collective pants down and never truly understood the workings of the money men. They still do not.
If you want a really good book on this I would recommend “Money, Bank Credit and Economic Cycles” by Jesus Huerta de Soto available from The Mises Institute. Price about $35:00 from them. Well worth it and despite the ponderous sounding title, I found it a “page turner”.
At his press conference in Helsinki, Trichet said the level of commitment of the Eurosystem to Ireland, has no precedent.
‘The facts speak by themselves.’
Karl –
It would be like a pre – copernican and post copernican scientist and layman engaging intellectual banter.
Unless you accept that credit money is in orbit around goverment money there is little point to our discussion.
@Eureka,
Thank you. I’ve being banging on about this for ages. All this bank restructuring, bondholder, liquidity stuff is out of our hands. It’s just displacement activity – avoiding the things we could and should be doing – pointing the finger at external players (even if it makes many people feel better in themselves). There is so much we can do ourselves for ourselves to get into shape. But to get into shape I believe we should be going further and faster than the IMF requires. And it seems we are falling short and moving more slowly: http://www.irisheconomy.ie/index.php/2011/05/03/revised-euimf-mou/#comment-144077
@Dork
Yep forget it. But since you’ve no interest in understanding how things like Basle actually work, you’ll have to forgive me for thinking you’ve no idea what you’re rambling about.
Okay, I’ll steer clear of the metaphors as I do subscribe to the view that if you have to resort to metaphor it is a sign that the primary argument might be weak.
So the premise is that the ECB caused the bank run. What the ECB indicated last autumn was that the extraordinary and unprecedented “temporary” emergency assistance could not last forever.
The government was naively asserting that there was no problem until mid 2011. No problem? The ECB must have been in disbelief at this complacency. Time for a reality check. Did we expect the ECB to give a blanket guarantee that liquidity support would be available no matter what the circumstances? Interesting that those on this blog calling for such unconditional support are ardent critics of our own government’s blanket guarantee.
The ECB cannot be blamed for sounding that reality check. Yes this has accelerated what was a slow motion but presistent bank run in any case but any suggestion that most of our woes are a result of ECB bad management and Teutonic favoritism is really self delusion.
Thanks Robert – I will look it up.
But the point I am making is if you believe in a debt system of money , the ECB unlike the FED is not monetizing enough as the ratio of money to credit withen the Euro system is even more extreme then the States.
However the FED has the exorbitant privilege of increasing its base but externalising the cost to everybody else through inflation.
Anyhow commerce is breaking down in Ireland as people are hoarding fiat rather the Gold with devestating consequences to employment and business.
If we are to remain on this crazy path I would recommend the reversal of fiscal policey to simulate a synthetic devaluation with a reversal of tax increases on labour and a major tax increase on petrol and diesel.
This may relocalise the domestic economy and as as our multinationals are high value exporting industries it would not effect them to a great degree.
@Karl
Yes Father.
In regard to relative blame on an issue like the Irish crash, there are people who have a self-interest in pandering to public ignorance/or desire for external scapegoats, for political gain or personal popularity. There are also people who likely comprise the bulk of ECB critics on this forum, who appear to see issues in black and white terms and it helps when the external party can be blamed.
For example, it’s common for people who see issues through an ideological prism, whether of Left or Right to have blindspots for inconvenient facts.
Claiming EMU is what wrecked the hope of a generation avoids addressing causes that would require tackling vested interests and sacred cows.
I saw where the trade union Unite is funding research into identifying who are holding bank bond debt.
Is that to help the unemployed of the private sector get work or stall public sector reform?
Not entertaining this Karl but it would actually be interesting to hear your view on the fractional reserve system and the repercussions it did have on our crisis? Its almost seems like an issue that ‘economists’ wouldn’t even dare question.
If this was an ingredient to the level of money we are repaying than to me this is an obvious talking point that I’ve failed to see on this blog, although the argument for this thread is… ECB..blame…bla bla bla… it might be worth commenting on this subject in the future.
@ Dork…are you sure you’re not Jim Corr no?
ECB are holding interests rates steady. This at least is good but might suggest that they are beginning to understand the fragility of the current set up.
It’s also interesting to see their focus shift a little from inflation to overall economic management. It should always have been like this.
@Consaw
If I was I would be campaigning to repeal the incest laws rather then trying to shed a light on credit creation.
I should point out I believe we do not have a fractional banking system anymore – its just pure credit now.
@Finfacts
For sure there are many issues that need to be addressed in relation to domestic policy – but this thread is entitled “ECB Must Share Blame”
Also, if you think Irish people are trying to blame the foreigner then it is better to meet the arguments they make rather than trying to point out an overarching theme to their arguments (such as blame the foreigner) that you believe displays a bias or incorrect way of thinking or approaching issues.
Too often when people disagree with each other one or both sides simply puts the disagreement down to bias or self interest on behalf of the other guy. You say;
“In regard to relative blame on an issue like the Irish crash, there are people who have a self-interest in pandering to public ignorance/or desire for external scapegoats, for political gain or personal popularity. There are also people who likely comprise the bulk of ECB critics on this forum, who appear to see issues in black and white terms and it helps when the external party can be blamed.”
I think such conclusions about people you disagree with are best made after you have explained why in your opinion they are wrong – not as a sort of starting point.
Yeah we got screwed by the ECB and incompetent/corrupt stakeholders here in Ireland, cf overlapping above:)
@Karl,
I wonder about this here in context….
During the debate on the Dodd-Frank legislation, consideration was given to making the Fed the pinnacle financial oversight authority. The discussions in [4.2 Fed lending to facilitate the acquisition of Bear Stearns by JP Morgan Chase] and [4.3 Federal Reserve support for AIG] above make clear, however, that the pinnacle financial oversight authority cannot be lodged in an independent central bank. To grant or deny taxpayer support for the financial system is fiscal policy. To force a central bank to make fiscal policy, especially such contentious fiscal policy decisions, would politicize the central bank and destroy its independence. The Dodd-Frank law chose correctly to lodge the pinnacle authority in a Stability Council outside the Fed.
I wonder, as we stepped over this line of CB’s undertaking fiscal policies, purchasing bonds etc., is there an equivalent of Dodd-Frank existing or even planned in the realm of the EU?
Forgive the bluntness of a non-economist, but overall, it would appear to me as a diligent observer of this tragedy unfolding in slow motion, that the forces at play in the EU are rather acting like headless chicken running around.
Thanks
Georg
Are not Bank Bonds “risk capital” under the Basel rules ?
Is not Bank Bonds deposits now ?
Where is the rule of law ?
@ Dork,
Karl’s site has a lot of interesting material in deed, highly recommended.
The European Union needs to accept the seriousness of current problems and that dealing successfully with these problems may require writing down existing debt.
When I was a child, and someone tripped on a footpath, the general admonition was ‘watch your step’ rather than ‘someone else is to blame for that’. Of course, compensatitis changed all that.
I don’t recall the ECB and fellow travelers prodding McCreevy and Cowen, especially the latter, to stoke public expenditure year on year ’til the flames shot through the roof. Neither do I recall the ECB recommending ever greater tax incentives for property investment. Witness the hotel zombies dotting the country. Their existence was all driven by capital expenditure write-off against an existing revenue stream. As for generous tax treatment of rental income. Also the ECB? Many of these incentives predated 2000 – e.g. anyone care to trawl through their BES returns and note how many were property backed? The IMF warned the Regulator in a 2006 report that a property bubble was likely on the horizon. But the Celtic Wise Monkey syndrome prevailed among the elites.
It really is time that the Cluedo solution – it was the ECB that did i!t – was flushed away. Our own gentry did it in Spades, Clubs, Heart and especially Diamonds. Get over it and get on with it.
Karl Dork
Guys one of you think that the whole financial system is a giant Ponzi scheme and the other doesn’t. When it gets to that level it’s not really about facts. You both have a belief system. A bit like Darwinism V Creationism but less scientific evidence is available. Maybe in a few years Ponzi v non ponzi economists will be the new Keynesians V Friedmanites V Austrian School?
@ M hennigan
“For example, it’s common for people who see issues through an ideological prism, whether of Left or Right to have blindspots for inconvenient facts.”
It not just common its basic human nature. I don’t think I have met many people at all who can stop themselves falling into that trap.
But there remain certain things that are hard to escape. The amount of good euro money thrown after bad in this country by European banks is more than the Irish can afford to pay back. That is what we are being expected to do. It wont work. As the man in the Rolo ad says ‘I can not give you what I do not have’.
But they are to blame too! I am not saying that to let Irish people off the hook. I am saying it because it is true. The euro banks were making larger returns than they could by investments in their own countries and they under-priced the risk.
The ECB has refused to allow bond holders or banks be burned. The injections they made in Irish banks were not made for the benifit of the Irish Banks they were made to prevent collapse. The fact that the periphery will have to go through sovereign defaults and that the restructured money will be replaced by ECB QE benifits who most? who are the people who loose least? I would suggest it is bond holders and banking elites.
I find the article very strange and disjointed, and the tendency to blame the EU seems unreasonably strong.
If we reverse the perspective of the article one might say that the problems were these
(i) The Irish banks and many Irish people borrowed money as if there was no tomorrow. Some was greed, some was fear, some was mania, some was plain foolishness, but it was Irish borrowing. The European banks lent to Irish banks (wrongly) assuming that Irish banks were properly run.
(ii) The Irish govt didn’t have an effing clue what was going on and guaranteed all bank debt at a time when that was a hugely bad idea, having missed every opportunity to plan a better solution.
(iii) The ECB has lent huge treasure against collateral that is likely to crumble if you pinch it too hard to banks which are solvent only if you look sideways and squint. This is and was an unstable situation.
In this view the bail out was primarily to avoid a situation where the ECB was acting as lender of last resort to insolvent institutions which (AFAIK) it’s legally not allowed to do, and to provide the Irish government with money to mispend that it can’t borrow from anyone else.
If ECB lending was not allowed the banks would have collapsed in the Autumn and if the Irish govt couldn’t raise money then the Irish state would have collapsed in June. On this view, the Europeans are trying to help us…even if they’re not always doing it perfectly.
The idea that the Europeans shouldn’t get their money back is reasonable when it comes to the bank debts…except that it was our govt that guaranteed most of it, not the Europeans. Our fault, not theirs. The debate over the unguaranteed debt is a smaller issue and there should be a better deal worked on that, for sure, but it’s a smaller issue.
The idea that the Europeans shouldn’t want their sovereign money back but that they should continue to lend to the Irish state to mis-spend is bizarre in the extreme.
Domestically the moves to protect some people and screw others is typical of banana republics at their worst. For instance, Enda’s proclamations that taxes will be raised on people in the private sector in one of the world’s most open economies to continue to pay bubble level welfare and public sector pay is an example of grotesque injustice.
Similarly, the continued insistence that we should borrow even more money on the basis that this would magically stay in Ireland and stimulate our economy in a sustainable way is (IMHO) denying our economic and geographic reality…that our trade exceeds our GDP and that we need to import almost everything we need to live comfortably. Money will flow out as fast as you pour it in unless there’s business bringing it back in.
Ultimately, the Euro may not be an optimal currency area and the ECB/EU may not always have acted perfectly, but it was and is predominantly stupidity and greed in Ireland that caused and are continuing to cause our problems.
@Georg
I have a problem with this concept of “burden sharing”
Correct me if I am wrong but is not bank bonds part of the Basel risk capital structure of banks ?
If the loses are greater then the equity the loses should flow down the capital structure – yes ?
I realise you cannot default on term deposits today given the flawed nature of our monetory architecture but to not default on defined risk capital structure of banks is taking the piss.
@Eamonn
Believe it or not I am not a extreme Austrian
I believe in a national currency and not free banks so that should clear that up.
Lets just follow the logic of the capital structure first before we engage in philosophical discussions.
@Hugh
Lets deal with the basic mechanics of this first.
When a bank creates a loan it does not borrow off anybody – it just creates credit.
This credit flows into the physical economy – the borrower does not create any credit – the seller gets a deposit which he spends into the economy or saves in a bank which adds to the deposit base of a bank.
The Irish banks were conforming to the legal reserve requirements as far as I could tell – therefore there is something wrong with the legal reserve requirements.
What is the function of reserves again Hugh ? – yes to take a loss in the event of default.
Yet no losses amongest the Seniors … Hmmmmm strange isnt it
The problem as far as I can make out is that Irish banks held very little real money – all their reserves were artifacts of credit both inside and outside the state.
And why did France and Germany and other core banks have credit to give out you say ?
Because the Euro limited the production of real money (goverment debt) – this gave a flawed signal via artificial demand withen the euro area.
Kaput
Dork,
where I have a problem to take BIS serious in the whole context is the very structure including the Board of Directors of the organisation itself, IMHO this leads inevitably to results that Martin Wolf from FT described eloquently on Basel III :
Martin Wolf of the Financial Times says that “Basel has laboured mightily and brought forth a mouse. Needless to say, the banking industry will insist the mouse is a tiger.” He adds that trebling of capital reserves “sounds tough”, but “trebling almost nothing does not give one very much.”
All in all, it would appear to me that the sands are shifting quicker under our feet than those responsible for policies would want to admit to the public, they rather be seen to be in control where there is only chaos and war.
The History and results, or better lack of the same, of the G20 meetings is another indicator to me in that respect.
Not only capital has been destroyed and enormous wealth shifted, but trust was even more so destroyed on levels beyond comprehension, and it is here where I see no clear lines of communication by policy makers that would reach the people who are asked to cough up.
I fail to see how the current administrations will succeed to regain this basic level of trust, something which in my opinion is required to go forward.
@Colm
It looks to me the new Rome is entrenched withen the system – you get bad priests and you get good priests but unfortunetly they serve wether they know it or not a dysfunctional system.
If things get really bad they will engage in a second Cather crusade against the non-belivers – we must brace ourselfs for the worst.
@ Dork
Senior Bonds are not reserves, never were…Hmmmmmmmm
@Georg
If the BIS want to remain the one and only church they will have to clear the debts via a physical cash only gold auction with themselves as the dealer.
Nothing else will cut it in my opinion – that is probably their fall back postion anyway.
@The DoC
What you’re in effect suggesting is that the credit created by the banks i.e. loans which ends up as deposits/income/capital gains in the hands of say construction workers, those who disposed of land, building material suppliers etc etc are actually artifical deposits because the bank should not have been creating the credit in the first instance as they didn’t have sufficient Govt Bonds to cover the credit creation?
In other words the Banks’ loans to Govt Bonds ratios were off the scale?
Under the assumption that the above is correct – what deposit exactly buys the Govt Paper in the first instance surely the ‘cash’ artifically created or otherwise, flows from bank ‘deposits’ back to Govt and IOUs in the form of bond notes flow the other way?
Given this flow how is one ever able to determine whether the cash coming from ‘deposits’ flowing back to Govt has not being generated by way of sales of previously issued Govt paper or newly created credit by the bank?
@Brian Woods II
Give me a reference please – as I can’t find it amongst the financial Latin.
@Yields or Bust
What I am suggesting is that banks capital base should only be goverment bonds so therefore they are compelled to buy them and Goverment remains in debt at a high level.
They produce credit off this base only and only that is a reference – nothing else.
This high level of debt needs to be serviced by tax so therefore less money is available for malinvestment.
I am not in favour of this system but without Gold in the mix there is no other way to save and not to spend as my bank deposits are just credit.
As far as I could make out before basel banks were required to keep a large amount of goverment debt on their books – but this got replaced by other forms of capital which gave a false signal of demand in the real economy.
Ps @Brian Woods
Just looked up the definition of reserves and it seems to be checking accounts and the like – fair cop it was a bad choice of words from a layman.
But the substance of my argument remains – the function of risk capital under Basel is as a capital buffer in the event of significant loss i.e insolvency.
Are you suggesting that Irish banks are not insolvent and if so what is the purpose of these bonds ?
@ The Alchemist
Cheap credit and tax breaks helped boost hotel bedroom numbers 150% from 1996 to 2007 while tourist numbers rose just over 70%.
The tax breaks were simply putting oil on the fire and the halving of capital gains tax coupled with 10 year interest only buy-to-let mortgages, made buying additional properties look like a slam dunk.
@ christy/Eamonn Moran
What I’m saying is that the primary responsibility for the carsh is within Ireland.
Whether the blame elsewhere is 20% or 30% – – it is hardly more.
Gary O’Callaghan’s 2010 narrative ignores the fact that ministers decamped in late July as concerns about the banking situation were mounting. We were told that yields were rising because the markets were thin but the key catalyst was that there was no bottom line for Anglo losses.
Before Lenihan scrambled in Sept to get a grip on the situation, the NTMA went apoleptic because S&P downgraded Irish debt.
This was 2 years of slow-motion after the bank guarantee was issued.
Trichet again referred today to the fight with Schroeder and Chirac on weakening the stability pact in 2004.
The guarantee and the rising liquidity from the ECB gave them all the aces on bondholders but remember, it was Ireland that had foreclosed on bond restructuring for 2 years and in Q4 2008, at a time of ferment in international banking, the Eurozone had no fixed policy on the banking crisis.
We did join a currency union and as I said earlier this week, it is not only the ECB that sets the rules of the game.
We have little support from other countries and surely commissioning a report on the ECB would hardly be a recipe for winning friends.
@ The Alchemist
“When I was a child, and someone tripped on a footpath, the general admonition was ‘watch your step’ rather than ’someone else is to blame for that’. Of course, compensatitis changed all that.”
When I was an adult going to collect my daughter from her friend’s house late one evening, I tripped on a footpath and was lucky not to get more than the bruised ribs I suffered from for another six weeks. On daytime inspection, a tree had raised the level of one section of footpath about three inches above another section. The footpath was concealed under shadow tree foliage from a streetlight and so was an accident waiting to happen. I spoke to the householder whose house adjoined the footpath: he said he had been on to the local Council communicating to them by letter and phone numerous times.
Irish citizens should not be liable for the profligacy, incompetence and corruption in the Irish politicised banking system the ECB gave regulatory carte blanche connivance to.
As the ECB hoovers up any remaining credit from our Pension reserve fund, state assets, profits from CT and exports, expect many more damaged roads and footpaths. No doubt Irish citizens, not the politicians, banks, will be blamed for crap infrastructure, declining standards in education, health care, because they didn’t watch their step or because they joined in the party!
I posted this last weekend to namawinelake forum while this forum was resting:
“If we had not joined the euro then we could wreck our national currency as we pleased and any bondholders would know that the Irish nation was the lender of last resort and the regulator of the value of its currency.
However, we share a common currency and the lender of last resort and the regulator of the value of the currency is the ECB and it does not wish to wreck the Euro as our recent national policy makers might please.
So, given that we joined in the common currency we should exercise a social conscience towards it.”
(I see in the second video of “Video from EUI Conference on Sovereign Default” that Martin Helligm seems to agree with my first paragraph).
I suspect that recent FF governments ‘got FF smart’ with the common currency, in a way that they would not have done with a national currency – note the surge in ratio of borrowings to deposits, subsequently loaned effectively for consumption (and perhaps three in a row). One might say they ran a common car up a tree at 100 m.p.h and some here are saying the group owners should have had more invested in speed traps.
I think it is very much a FF culture based crisis. (Should be interesting to see the report on Anglo, if it ever is completed).
Thank you to Karl for the thread and to all others for comments.
Please understand that I am not trying to absolve Ireland of any blame in this mess. Those of you who live in Ireland know better than I what went on and I defer to you. And Ireland has serious corrections to make.
But we all seem to agree that the ECB also had a role to play. I do not know what percentage that was but I think it important to highlight this while, at the same time, we take our own share of the blame. If nothing else, this could help those EU leaders on a populist thread to explain why some cross-euro-zone burden sharing is required and fair. Also, it might prompt the EU/ECB to deal with the very real banking problem in the euro zone and that would be to everybody’s benefit. People will listen to us.
A bigger problem is that our financing programme will not work. Poul Thomsen of the IMF described at the Portuguese press conference today how a programme should give the economy room to breathe while adjustments are made. (It is not about punishment). But our programme lacks credibility and is suffocating the banks. It will be changed eventually, because it cannot be implemented, but the earlier we can get it changed the better.
We need to get back on the road to recovery … and quickly.
Addendum: I think my current position is that it is a co-responsibility matter.
“The guarantee and the rising liquidity from the ECB gave them all the aces on bondholders but remember, it was Ireland that had foreclosed on bond restructuring for 2 years and in Q4 2008, at a time of ferment in international banking, the Eurozone had no fixed policy on the banking crisis.”
I think its fair to say that the ECB was set against losses on seniors in the wake of Lehmans
By the way – I completely agree that the crisis was and is primarily, perhaps overwhelmingly, an Irish created beast but I don’t think that the actions of the ECB are therefore undeserving of comment.
Just because we implemented bad policies does not imply that we should simply ignore what I would view as, well, potentially illegal, and misguided exercises of power by the ECB that are detrimental to the interests of the State
@ Dork
Karl is one of the good guys and attacking him is most unseemly. If you want to pull someone up with reason there is always Richard Tol on climate change. Apparently he is one of Bjorn Lomborg’s gurus.
@Peter
The credit came before goverment largess.
A typical FF redneck does not make regular trips to Switzerland to finesse commercial banks capital structures.
The central bank war model has been around for 100s of years.
I recommend you read Professor Antal E . Fekete paper on the British / China Opium wars – its quite illuminating.
Tea , Opium and silver have more in common then what you may think.
In modern times the Banks merely flooded their host countries with credit money and got them addicted to the stuff and then took the surplus.
Unfortunetly most of the productive elements of the economy are no more and so our banker friends are struggling to extract a surplus from what remains , poor little dears.
The lesson I guess to learn from this debacle is that you don’t shit in your own nest.
@Gary O’Callaghan
“But our programme lacks credibility and is suffocating the banks. ”
I’m a bit lost as regards this assertion. The banks are only alive courtesy of 180 billion of ECB money. So why keep the patient alive only to suffocate him or her slowly?
“What I am suggesting is that banks capital base should only be goverment bonds so therefore they are compelled to buy them and Goverment remains in debt at a high level.
They produce credit off this base only and only that is a reference – nothing else.”
What do you mean by capital base here – surely a banks capital base is the excess of its assets over its liabilities – it doesn’t really make sense to think of this as a specific type of asset but rather as a proportion of its total assets – what may be getting you is the risk weighting that some assets assets get under Basel agreements when calculating risk adjusted capital ratios
@Seafoid
I think Karl is a nice guy – but I believe his altruism is mistaken – he is serving the wrong church.
Anyway I like forcefull arguments – there is nothing wrong with that in todays age.
Brian Woods II won a round by pointing out my use of financial latin is grossly mistaken – thats how it works baby.
PS Brian woods II – my central point about risk BANK CAPITAL remains – I understand to some extent the time function of money but the banks simply cannot earn their way out of this hole.
@ TDOC,
The largesse came via the borrowing- -credit.
You make an interesting point about the state of the productive economy, here and in the Anglo-Saxon world. Liberal liquidity and low interest rates may be more a recipe for speculation than wealth development. It might be worth a thread of its own
Also, re your exchange with Karl, with whom I have sympathy, about banking: Perhaps a forum such as this should have a thread entitled: “Post your Theory of Economics”.
@ Hugh Sheehy
I agree 100% with your comment.
@ Georg Baumann
There is such a “Fiscal Council” in the making and it is called the European Stability Mechanism. The details can be found at pages 22 to 35 of the link below.
The page to which you refer covers the activities of the Council (of Finance Ministers) known as ECOFIN and which represents governments on economic and monetary issues in the triangular decision-making process between (i) the member governments of the EU (ii) the European Parliament and (iii) the Commission. In very rough comparative terms with the US federal system, the Senate, House of Representatives and the White House – US Administration.
The comparison cannot be carried too far. The EU is not a federation i.e. it is not a sovereign state in its own right and there is no watertight distinction between federal and state areas of authority. Its unique characteristic is that it is the “states” that largely implement the decisions of the “federation”.
The US does not need a Fiscal Council. It already has one. It is called the US Treasury. However, in the case of the EU, the Treasury’s equivalent responsabilities would be shared between the governments of the member states of the euro area and the ESM. A European solution to a European problem!
One can but hope! If not, the euro will fall apart and the EU with it. A return to national currencies would see the DM return to the status of a refuge currency, it would shoot through the roof, the German economic boom would be ended and Europe would face an indefinite period of economic stgnation. Even with the present collection of senior European leaders of such mind-boggling incompetence (Merkel, Sarkozy and Berlusconi in particular), I do not see this happening.
@Peter
The real disaster in the States came from the Clinton strong dollar , low fiscal debt policey – this forced American consumers into massive debt and malinvestment.
It also exported Americas capital base to Asia – which I believe was a delibrate policy by the CBs to favour their corporate clients via global wage deflation
Similarly the Euro stipulated low fiscal debt ratios with the obvious chronic malinvestment that followed.
Just cast your mind back to EMU entry in the 90s and the change in the feel of everything – I remember it vividly – something was not quite right with the place although I could not put my finger on it at the time.
Now we Know.
The evidence is in and is conclusive – low fiscal debts result in a inefficient allocation of resourses in this monetory system.
Its over because the system cannot give credit anymore – the demand can only be served by wage increases that will uncover the latent inflation in the system or under a freegold / low monetory inflation system in the eurozone a rise of Gold to offset the inability of consumers to pay for their debts.
Its all about the flow………………….
@ George Baumann
P.S. I do actually know how to spell responsibility but I forgot to use the spellchecker.
@All
Lord Goldsmith ” who benefits ? , I tell you who benefits ……”
@ Eureka,
that would be great -but unfortunately, we will still have to live with our european neighbours after all this is over.
@ Al,
the comment he makes about weber resigning because of disagreements with the rest of the board -is this a new rumour? I haven’t seen it anywhere before.
@ dork
The purpose of Senior Bonds is exactly the same as the purpose of Deposits, to give the banks the funds to lend to the economy.
The banks are insolvent, i.e. they have insufficient assets to pay back their creditors who include depositors and bondholders.
A normal company in like position would cease trading and divi out its assets amongst its creditors.
However, it has been decided, righltly IMHO, that to close down the banking system, fire sell off its long term assets and divi them out among bondholders and depositors would not be a very smart idea. Banks are not Waterford Glass.
It is interesting how the populist Joe Costelloe “burn the bondholders” line has taken root amongst the profs in this blog. Of course the correct title for this mantra is “burn the bondholders and depositors and damn the economy”. Not quite so populist, would you agree?
@DOCM
Thanks for the link to EUCO.
I was mistaken to think you refer to the European Chamber Orchestra but while I am at it, they do play in tune very well, and this is a result, besides the fact of the individual excellence and virtuosity, of the many diligent rehearsals they undertake when they meet.
The EUCO you refer to meets four times per annum, and is not necessarily composed of excellence, but current Head of States plus the Foreign Affairs Rep.
If memory serves, they came up with the ESM 2013 deadline.
Still, it is my impression that this might just be another G-20 style debate club keen to pretend and present unity where there is none.
I shall be excused for thinking that this ‘crisis’ highlighted the true inner makings of this Union, based on and never appropriately addressed the inherent economical imbalance of export surplus countries and weak importing countries that were gladly served with debts, as long as one could sell more tanks and submarines, as in the Greek case.
The turf wars inside the Union are immense, the latest amazing ‘E’U-Turn on nuclear power plant stress tests is just one of many examples where Lobby pressure dictates political decisions, or even reverses them entirely.
As for political excellence, you have to raise those leaders, identify and nourish them early, those leaders we are so badly missing, you can not recruit them form conformist civil servant battalions.
Just my impressions.
Best
Georg
@Brian woods II
You never answered by question – whats the point of buffer capital if it is not drawed down during insolvency ?
The losses are embed into the system – the question is who pays.
In a reformed banking system that I would favour all commercial bank deposits would be vulnerable to loss – buyer beware and all that.
But the rules were the rules – bank bonds were defined as buffer capital. under Basel – yes ?
I personally withdrew a portion of my savings from the Post office because I believe paying out this risk capital will risk the sovergin – thats the real result of this crazy policey.
Anyway banks or the state do not need actual deposits to give credit – that is not what happens in a bank lending transaction anyway.
Its just that the real economy cannot take anymore credit – it needs to default on these liabilties or print more goverment money
The leverage between money and credit is just too extreme now and its pretty much as simple as that.
Attempts by banks to earn their way out by not selling houses and the like for cash is creating massive inefficiencies in the real economies.
I keep thinking of a perfectly located apartment complex between UCC and CUH – efforts to not sell this property may save a bank balance sheet for a while but it just transfers bigger losses into the physical economy that even the bank has to operate in eventually.
@ Georg
The orchestra is all that we have got.
They may play out of tune but play they will have to.
P.S. Can you imagine Mitterand and Kohl behaving in the same manner as the current leaders of the EU?
@Ger
Thanks for the comment. European neighbours have put worse than bank default behind them.
@Michael Finnegan
One day you will understand the meaning of “false dichotomy”. Yes, Ireland has its problems. Europe has too. I suspect all countries (even Malaysia) have their problems.
@Karl and Eoin Bond
Thanks for posting this article and providing a forum to discuss it. It has been really interesting.
Very interesting. Meanwhile, back in the wider world, there would appear to be a commodities top with implications for central bank and bond market rates…….just in case anyone missed it.
@ TDOC,
Your second paragraph about trade liberalisation may have much going for it.
However, your monetary theory is another matter.
My first principles:
A society’s money- -currency represents its tradable wealth (and developed as an alternative to barter). (This former is something A. Greenspan did not seem to know in a 1966 paper, where he talked of it as a means of exchange and store of wealth). Changing the quantity of money without changing the amount of wealth only changes the value of the currency and the wealth of those who hold the currency. Vica versa: changing a society’s quantity of wealth changes the value of its units of currency.
Some of this wealth- -currency is deposited in a bank for a rate of interest and the bank loans it to others for a fee, at perhaps, normally, X amount of loan per Y amount of deposit. (Are our banks now allowed only loan 80 of ever 100 euro?). If banks are allowed loan more than their deposits then they borrow the extra.
If wealth grows then the quantity of money may be increased accordingly. (Of course if things go askew, as currently, then that’s another issue).
The quantity of money may be increased also by approx. 3% per annum to encourage keeping it working and also as a means of redistribution of wealth.
Other than that I see little reason for changing the society’s quantity of money, such as your advocating of high fiscal debt *, except perhaps in times of extreme stress such as war – in which case it is directed to survival as distinct from affluent consumption.
* “The real disaster in the States came from the Clinton strong dollar , low fiscal debt policey …”.
Sorry Michael – I meant Hennigan
Apologies
@Peter
Both the strong dollar policey and trade liberalization was linked very closely.
For industrial growth you need demand – that can be created via two mechanisms – you increase wages / benefits or increase credit.
The markets wrongly thought that low fiscal debt was the signal to increase credit as they were working off a obsolete Gold standard model of fiscal prudence – but without Gold you cannot save so you must increase fiscal debt even though eventually that wealth will flow back into the system.
The idea is that with high fiscal debt you reduce malinvestment and thus carry wealth to the next decade and the next…..
But the objective of the CBs was to foster globalisation – their clients got badly burnt during the 60s and 70s inflation so they needed a mechanism to bypass western wage inflation – so they invented derivatives.
This kept sovergin yields low and credit production high – therefore the western peasants could sustain consumption eventhough their wages were stagnant and their capital base was disappearing to the east.
Therefore the western banks could make money via usury and the western industrial corporations could reduce labour costs and increase profits – wining on both ends of the debt and production spectrum.
That was the real reason for the global equity explosion of the 80s and 90s – but there was no real wealth created – it was just transfered.
The problem now is that global trade is unsustainable – hence the collapse of credit and the rise of base money aggregates – it makes no sense to manufacture steel in China when perhaps the Great lakes can do so more effeciently when labour costs are negated and the higher energy costs are factored in.
Even so if the dollar really does die it could create a commodity crash in non reserve currencies in everything but Gold as there would be much less demand for commodities as the dollar enters hyperinflation but those dollar reserves will have to go somewhere………………
@ Peter Kinane
I think this is the nub of DOC’s argument. You say:
“If banks are allowed loan more than their deposits then they borrow the extra.”
No. AFIAK, and I believe what the DOC is arguing, is that under the fractional reserve system, they CREATE this money. It does not have to come from anywhere, as it is created both in postive mode (a cheque is issued to the customer, who does with it as agreed with bank, eg buys car), and negative mode (the customer’s debt is entered into the bank’s books).
If the customer lodges this loan at the same or a different bank, the process starts again, as the deposit counts as part of the banks reserves.
If we ignore interest and inflation – though actually these are crucial – then the positive and negative money are equal, and when the loan is paid off the money vanishes.
Now what I gather is that DOC is now arguing that under Basel III, that even this system has been supplanted (which at least required a factional reserve of the initial government deposit that starts the chain off), and that a reserve is no longer required and pure debt money can be endlessly created. I’m not equipped to judge on that. I may have got him wrong.
By the way, I work across from the Central Bank, and I tend to judge exciting developments in the Irish Economy by the amount of lights there are on at this time of night.
Tonight the lights on the top floor are on, (and only a few lower down which appear to be redecorating). I wonder what’s up?
@ Gavin,
“AFIAK, and I believe what the DOC is arguing, is that under the fractional reserve system, they CREATE this money. “:
Yes indeed. I was somewhat intending to cover that here:
“Some of this wealth- -currency is deposited in a bank for a rate of interest and the bank loans it to others for a fee, at perhaps, normally, X amount of loan per Y amount of deposit.”.
The X amount of loan may be, or perhaps used to be, greater than the Y amount which the bank loans.
In which case if wealth is developed to match that extra money then the value of units of currency per wealth is maintained.
Regardless of TDOC’s point re Basel III, it would seem that the crucial point is the degree to which wealth is developed to match any such new currency.
@ TDOC,
I’ve put foreward my frist principles. You have not directly commented on them nor, in much detail, shown your own.
You say:
“For industrial growth you need demand – that can be created via two mechanisms – you increase wages / benefits or increase credit.”:
It would seem that we subscribe to different models. I find that concepts of models (the concepts which comprise models) do not translate or transfer across models. In which we case we either both put foreward our models and collide them and see which stands and which fades away or we waste go on like this without making a connection.
Directly to the quote: For industrial growth profit or surplus is necessary – indeed growth is profit or surplus.
In contrast your position seems to be that consumption, via higher wages or credit, makes growth. No, it makes consumption. Consumption above production makes decline- -regression.
Re “The real disaster in the States came from the Clinton strong dollar , low fiscal debt policey …”: I should think that a strong currency and low fiscal debt policy is a real sound policy.
@Gavin – yes a reference point.
What I am saying really is that you need a reliable reference point before you can spin credit- in one sense it does not matter what it is although the difference between Goverment money and private money is significant.
Before Goverment money represented the core taxable base of a country as banks held a large amount of domestic sovergin debt on their balance sheets.
This was a accurate reference point which reflected the market they were supplying credit into over a long time period.
Without a solid reference point you cannot determine value so therefore I cannot save, spend or loan with confidence that I know what something is really worth.
Banks are no different – they need a core asset which is a reliable metric.
Here a interesting but frustratingly cryptic Gold Blog that deals with this subject.
fofoa.blogspot.com/2011_03_01_archive.html
@Gary O’
Two of the main issues in developing a better exit from our situation are our relationship with the EU and our willingness to understand the proportion of the causes of the crisis that can be related to Ireland and to non-Ireland.
There’s a rather scary tendency in Ireland now to insist that the whole crisis is Europe’s fault for lending us so much money, that we shouldn’t have to pay it back, but that Europe should continue to lend us money at low interest rates so that we don’t have to experience “austerity”. This line is unlikely to play well with the strangers from whom we need kindness.
Linked with this (as Michael H and Paul H and other point out) is a vast institutional reluctance to accept that Ireland is corruptly run and that it needs to experience huge change. Money is still handed out to those with clout or friends rather than to those who create hard-to-substitute value.
If I was a German or Finn and I saw Ireland wanting to borrow lots of my money to mis-spend while simultaneously threatening not to repay whichever bill suited me, I’d be really reluctant to lend.
We need to be able to show good faith for the future before we are likely to be let off the hook for the past (or at least the banking debts). So far Ireland is (IMHO) showing too little good faith.
@Peter
Oh Peter I did not say that Industrial growth increases wealth – you are jumping the gun there.
For instance if I deplete more resourses then what I create I am net energy negative.
If you could use the example of a primitive peasant – he may live a better life through cutting down a nearby wood and enjoying the comfort of a constant fire but if he does not create a more effecient wood burner he may soon out pace photosynethesis and thus destroy his wealth base.
Your comments on money maybe true for money but we do not hold money in banks – we hold debt – it has a counterparty risk with a exponential function
If on a Island of 100 a group of 3 bankers hold all the hybrid debt / money then pretty soon commerce will break down unless the bankers adopt a plantation system of governance.
Changing the quanity of money changes how much real wealth is owed to each island member.
@TDOC
All money is a bit nonsensical really. Why Gold for example? Why not match wealth to uranium?
Bottom line is money is not equal to wealth. Resources and commodities are the first line. Skills with which you can acquire the commodities of others are the second line. The success of a country depends on these.
@ Eureka
Promise a someone you will give them a uranium ring and you will know why; not to mention specific reactive/non-reactive physical properties of same element of course !
Great thread @ BEB, KW et al.
@Eureka
Yes Money is just a symbolic representation of energy yet to be used.
Its just Gold is somehow recognized as private money , don’t get me wrong I am a big fan of goverment money but it has a counterparty risk if for example debt levels or corruption get out of hand such as now.
Anyhow Gold seems to stimulate our primitive primate brains for some reason – we seem to like trinkets.
But there is a good reason for Gold as a monetory rather then a industrial metal – it unlike Uranium does not get used up for the most part – it just sits there very still like.
That stillness gives it huge monetory potential – for example during periods of high debt stress it can be used to absorb that debt without pushing up the cost of essential items.
If uranium was a monetory metal we could not use it for nuclear reactions .
In essence its where debt goes to die…..
It happened during the 30s and indeed 1980 at least until Volcker decided to take down the usury laws by pushing the dollar interest rates into kamikaze mode.
@Karl
One question if you care to answer it – what does it matter wether the bank bonds are liabilties or assets really ?
Goverment securities are classed as assets but bank bonds are liabilties – ok that makes sense but……
Is not bank bonds pretending to be liabilties when in fact they have some characteristics of assets.
Did they not replace the functions of goverment bonds in many ways but their “taxes” were in form of tribute called the mortgage.
But bank bonds cannot be defaulted on as they are considered systematic.!!!!!
So bank bonds were in effect performing the primary duty of goverment bonds which is the control of inflation but this “Mortgage Tax” was not recycled into anything but outside rewards for the shadow bank sector.
The situation is farcical – huge liabilties are extracting a enormous yield off a tiny real base.
Is that not the definition of extreme risk free leverage ?
Is it possible to sustain such a system in the real physical world ?
@ OM
The reason I chose it was because it is inherently more useful – it can be used for energy. Gold, in this regard, is useless.
The thing about Gold is that it was in effect a global currency. And it had its equivalent FIRE economy in the form of adventurers and conquistadors intent on increasing the supply and their portion of it.
However aside from fulfilling the criteria of a usable currency it had no inherent value in itself.
At the moment there is an increase in the price of Gold.. With actual money having been adulterated so much through credit generation there seems to be a belief that Gold will emerge as the best kind of money again. But in stable democracies wealth resides in the goods and services produced by a nation. A token entitling an end user to some of these services/goods would be more valuable than an over-rated metal only good for making trinkets.
“bank bonds were in effect performing the primary duty of goverment bonds which is the control of inflation”
Honestly, Dork, give it a break. You obviously have your own theory of the world, or one you’ve borrowed from someone else, but you don’t explain it. For instance, who says the “duty of government bonds” is to control inflation apart from you or some guy you’ve read?
So really you’re wasting your time. And mine, so no more replies.
@Karl
I will finish with this Karl.
Goverment bonds is just money with a time component , ask yourself why is it a asset rather then a liability?
Because a goverment bond prevents another from consuming by taxing consumption – this defers consumption / inflation for another day.
Liabilities however depend on consumption for a yield – its a true private investment.
But what if Bank bonds were chiefly extracting a private consumption tax (mortgage) rather then getting a true yield from a productive underlying asset ?
What if the cost of a house in real terms was much cheaper then the cost of a mortgage ?
Is this not a private consumption tax ?
If defaulted on would not consumption and inflation rise ?
@ Dork
You seem to have a lot of jargon which individually sounds impressive but in aggregate is coming across as a tissue of nonsense. Or maybe its over my head.
But lets take a simple example: you say “banks don’t need funding they simply create credit”. To me this is non sequitur from a simplistic half truth.
So let us take an example. I go to my Irish bank and ask for a loan to buy an apartment in Bulgaria. You are correct at this point, the bank simply issues me with a loan document and credits my current account – instant creation of credit out of nothing. I then write my check to Bugaria Investments. The Irish bank has a problem. That credit it created out of nothing has come back to bite, it needs to transfer funds to Bulgaria. And so it needs to get foreign funding. Ergo banks need funding to create credit.
The ECB has been far too generous to Ireland in that it has allowed the Gov’t of the day the luxury of conducting business as usual. Blame applies to the ECB in the sense that one one could lay blame on donors to a Mother Teresa charity for prolonging misery and not letting the beneficiaries die an early death without prolonged suffering. In Ireland things get curiouser and curiouser as we cast around looking for a foreign Patsy to lay blame on.
The Gov’t continues to dither pointing to Portugal and the ECB and claiming that the Portuguese got a better bail out deal. It would never occur to anyone in Irish Gov’t that Portugal has taken a more prudent and responsible tack than Ireland has. Our Gov’t is still deep in denial as it puts more energy into trying to scapegoat the ECB than it is putting into remedial actions. The Irish Gov’t in a sense is in jail having been convicted of irresponsible behaviour and instead of expressing remorse and promising to behave it is denying everything and blaming the judge and jury. To a fair minded foreigner we look like common criminals.
As for the ladies and gentlemen of the mass media, every country has its gutter outlets as there is money to be made catering to the baser instincts of society. As we all know profits are not what they used to be as the media cash cows are drying up and since they are infertile taking them to the bull will not restart the cycle.
Could we pretend that we are fine upstanding and decent people and we will come out of this with our heads held high. Or as the saying goes we could fake it ’til we make it.
@ Paul Hunt
re the Pye piece in the Irish Times. Unfortunately that piece comes without citations or reference to other papers or resources. Its also unfortunate this Whistle Blower because of fear of his job, didn’t go public at the time.
A far more interesting and remarkable story from within DOF, is the following cited on the internet recently by George Baumann, I think from a link provided him by Dr Constantin Gurdgiev of TCD
In the case of Jeremy James, he did plead for permission to publish in the IT, but it was refused.
Both instances above clearly evidence the need for strong whistle blower protection in our society, both alert to the danger of stakeholder elites setting an agenda in snuffing out debate, criticism, questioning; both show how hidden agendas can negatively target true analysis based on empirical analysis and rigorous scientific method; both show how so-called elites set out to destroy their critics in a Big Brother environment that is designed to hide and bury the truth.
Unfortunately, our society is not run on talent which typically is often regarded as a threat; unlike, as in the US, where talent is a merit that is cultivated. Though many exceptions exist to that pattern in the US, eg the case of Brooksley Borne. The Frontline documentary, The Warning, well worth a look….
This shift in values against freedom of debate, criticism and stakeholder elitism in Ireland is evidenced in recent years in the stance taken by government against large numbers of academics petitioning against government policy on the banks and NAMA; greater secrecy laws regarding the banks and NAMA; and further erosion of freedoms evidenced in today’s IT report on Croke Park,
Socialism for the banks has come at a great cost to democracy and the cost continues to be extracted!
@Dork
If there is great insight in your remarks, it seems that you may have to express yourself in a different way so that people on here can understand what you’re talking about – or that they can believe you have any idea what you’re talking about.
Right now, at least, I haven’t a clue what any of your posts mean. Others too, apparently. Sorry about that.
@ Paul Hunt,
These comments have a ring of substance to them:
““The government had no incentive whatever to take corrective action. It was reaping a colossal revenue windfall, most of which it then channelled into current expenditure. As an egregious violation of the most basic principles of economics, this is probably impossible to beat. Many commentators bleat about the need for greater specialist skills in economics and financial management in the department, but this is nonsense. The mistakes that were made had nothing to do with skills. They were due rather to the appalling inability of the department to impress upon the government the sheer recklessness of its policies [emphasis in the original].””
“Given that the financial sector accounted for 35 per cent of corporate profits (up from 15 per cent in 1975) and the irresponsible removal of important legal restrictions on the kinds of activity that financial institutions could engage in, the opportunities for trading recklessly in a rapidly expanding money supply would prove irresistible. This in essence was the main thrust of my argument.”.
“In the course of the 1990s, however, as the public coffers expanded, a polar shift occurred and the department began to see itself merely as a provider of “advice” to the government. Its defensive role was forgotten.”.
He does not offer much in support of this categorising:
“… the sharks and jackals who control the international banking system.”.
@ Eureka
I don’t wish to ‘nit pick’ on the industrial usefulness of gold (or the difficulties in promoting nuclear power) because I cannot disagree with your broad point ( the post was actually my poor attempt at humour 🙂 ).
But the fact is that the base acceptability of the material, globally transferrable as it is into almost any local ‘currency’ is my real point – there is broad human demand for it’s ‘percieved value’ derived from actual demand.
I think I said that right !
@ Dork
Even i’m starting to bite at this nonsense.
“Goverment bonds is just money with a time component , ask yourself why is it an asset rather then a liability?”
Huh?
@Brian Woods II
You are trying to make the transaction more complex by involving foregin transactions.
Where does it need to get funding withen a independent legal juristiction ? – it has created the funding itself and has been given a legal entitlement by the state to do so.
(this would at least be the case for the Libyan central bank but perhaps the ICB is junior to the SNB or the FED-Why is this ? Are we not sovergin ?)
Anyway the commercial bank has been trusted by the parent central bank that its credit investments are wise and if not the central bank can create money to bail out the commercial bank.
Given the nature of globalisation there has probably already been agreements to recognize this credit abroad.
Perhaps what you are driving at is that a foregin central bank may not accept the full credit and faith of another CB and its sister commercial banks.
But that equation revolves around the nature of sovergin currency and its role has a backstop to commercial banks lending operations.
You may remember that I stated that if the physical economy cannot take anymore credit it will not take anymore credit period.
The nature of the physical economy and the mechanics of funding are very different – hence the crisis in the real economy.
Dork: Goverment bonds is just money with a time component ….
Try buying a carpet with government bonds. Describing something which is clearly not a medium of exchange as money is just abusing language. You might as well say that land is just money with earthworms in it.
In fairness though, the Dork is shaping up to be one of the great trolls. Not up there with the legendary Troll of Sorrow, but one sees the potential.
I’m not often tempted to abandon the only good rule for such cases: DNFTT. But the really good trolls can always suck you in.
@Peter Kinnane,
Thank you. That’s why I thought it useful to bring this op-ed to the attention of readers here. I think he sums up the situation and the problem more succinctly than Regling, Honohan, Nyberg and Wright have done. And, implicitly, he has generated the seeds of a solution. We can no longer rely on the good offices of the DoF to restrain venal and imbecilic governments ‘behind the scenes’ as it were. We need appropriately resourced and empowered Oireachtas Cttees with permanent staff of the calibre of the author of this op-ed piece and the ability to commission research and analysis to scrutinise government proposals and to hold government to account.
But I’ve been round the block on this many times previously and there are few, if any, takers.
Re the ‘sharks and jackals’ I suspect a limitation on the number of words has restricted explanation. And there seems to be some conflation of the situation in Ireland and that in the global financial arena. Ireland’s was an excessive, lunatic, but BOG standard set of bubbles in property and banking facilitated by fiscal imbecility. The layer of excessive financialisation is global financial markets was and us much more malign, is insufficiently understood by policy-makers and regulators (and economists!) – and is certainly not under sufficient oversight or control – and frightens the bejaysus out of politicians everywhere.
Our friend ‘grumpy’ has mentioned the end of the bull run in the commodity markets. But this looks like look a temporary correction as the ‘paper’ commodity markets had run way ahead of the underlying physical markets – and disbelief may be suspended for only so long. The frightening thing is that this enormous layer of paper trading based on all and every underlying asset or commodity has a life of its own; lack of transparency, thin trading and absymal price reporting mean that future/paper prices are often pasted back on to the underlying physical markets.
I suspect the author of the op-ed piece had the shadow banking and investment banking community (who can play profitable games on both sides of the deal in these financial markets) in mind when he referred to ‘sharks and jackals’.
@Bond Eoin Bond
So you are saying that when more goverment bonds are present on a commercial banks balance sheet there is not a drop in consumption to service the interest off this money ?
When I pay tax it goes to service this interest yes ? – a tax on labour , petrol etc = a drop in consumption on my part – yes.
You must agree with the above as it is patently obvious.
But when I service a liability such as a Mortgage I first have to consume – yes.
I actually buy a good such as a House with all its raw materials.
This is a huge difference
The point I am trying to get across is that finance has been corrupted.
Finance now does not create a real yield as its investments do not increase productivity.
It is acting more like a tax or a rent – hence my questioning of karl and the role of bank bonds in the global depletion journey.
Look at it like this – if a house does not improve the productivity of a nation the only mechanism to extract a yield is to engage in rent seeking.
Collectively there is a negative real yield to society.
Banks no longer invest in windmills to create more land – they chiefly invest in consumption sinks.
@ Kevin Donoghue
🙂
What does DNFTT actually mean?
Sorry to go off thread.
I observe a fascinating Babylonian aspect in the exchange with the Dork of Cork here.
To the Dork:
I do think that society at large certainly would benefit from demystifying the financial language, and in that respect, I would like to challenge the Dork to try to avoid using the ‘Insiders language’, in an attempt to clarify his point, which might be very valid after all, but currently, I don’t know this.
To the Insiders:
I remember Frederique Soddy in this context. 1921 Nobel Price in Chemistry, he even predicted atomic fission as early as 1909, and turned economist.
As an outsider to economics from an academic perspective, I would always try to translate stuff that I think I understood correctly, into a language that is able to be understood by anyone.
This is not easy for an Outsider, and open to all kind errors of course, but we live in times where we, as in we the people, are literally forced to look down the throat of the this monster, or in other words, one can only fight an enemy that he understands.
For example, and please, of course I stand to be corrected:
In my view debt should be a claim on the economy’s ability to generate wealth in the future.
The lack of restructuring solutions, mainly ideologically driven imho, and the decisions to bring together sovereign and private banking debts in this crisis has severely distorted the relation of debt and future wealth.
Hence I would assume that the equations used in modeling for future wealth prediction, the ‘positive economic output’ changed equally, but did they?
The relationship between the prospective future wealth of a nation and the currently ‘imposed on’ debt level, is one aspect of this distortion.
The other important aspect is the relationship of social stability within Europe and ROW at large.
Personally, I find the exclusion of the public opinion on the matter of banking debts wrong. I do believe that we need to have a referendum like Iceland did.
Best
Georg
@Kevin Donogue
Remember those Japs a few years ago crossing the Swiss / Italian border with US treasury bills .
Goverment Bonds can be used as a medium of exchange if there is no title to them.
They just may not be respected as a medium of exchange as the other party may expect higher inflation then the interest.
There is really very little difference other then time and its variables.
@Ordinary
DNFTT = Do Not Feed The Trolls
@ Hugh
Ah. Thought it meant Do Not F…… Touch That! Same basic meaning! 😀
@ Dork
a government bond is sold to a commercial bank. The funds are used to build a road, or an airport. This is unproductive rent seeking? Or investment, as George Bauman says, in the future economy’s ability to generate wealth? Consumption may reduce now, but it is for the aim of increasing consumption later due to higher productivity via use of these new assets. It’s patently obvious that you are talking nonsense.
@ Dork
I used the foreign example as it makes things more clear, but it applies to an internal economy as well.
Look, I could swop IOUs with you. Instant creation of credit. However, next week when the Mercedes dealer presents me with your IOU, I have a problem. I need real funds.
I think you are arguing that this was never an issue for the banking system. They could get the funds from fellow banks or as a last resort from the CB. Okay, some truth in that.
But back to topic. Senior Bonds are Funding not Equity. Do you understand that point but disagree or do you not understand the point, coz I can’t tell whether you are simply a Troll or a misunderstood Genius.
Come on folks. The Austrian school did once provide some valuable insights. Those that had some empirical validity have been absorbed; those that didn’t have been abandoned or have migrated to the wilder shores of libertarianism. Time to move on.
Wouldn’t it be better to focus on what we need to do get in shape to access this – rather than finger-pointing at EU institutions or losing ourselves in Austrian praxology?
@eoin
Consumption may reduce now, but it is for the aim of increasing consumption later due to higher productivity via use of these new assets.
I intend to think, It is not only reduction in consumption, but the opposite of wealth, poverty that is the result of late to the game, or failed policies to tackle this crisis.
Increase of poverty needs to be measured, but it is evident, and I would include the thousands of people forced to leave the country into that equation of a national poverty level, as they more then likely will not return to contribute to the wealth creation.
Somehow it all comes back to the same term over and over again, sustainability, and the opinions here are multifold, and often mixed with ideology.
May be we should start asking the question how we can avoid further increases in poverty before we claim to have a plan that increases future wealth, which is dependent on more than our national decisions alone, or is the poverty emerging all around us collateral damage accepted in academic economy circles?
It’s amazing how the narrative has changed. Remember how many on this site were mocking various Fianna Fail TDs who were going around parroting how the ECB was going to pay for NAMA…oh, how we laughed at their misdirection, their naivete and their duplicity. Turns out, though, that the joke wasn’t funny…that was indeed their strategy. At a time when the ECB were looking to wind back their ELAs, the Irish were grabbing more and more liquidity and treating it as a medium to long-term funding source.
This strategy, such as it was, allowed uis the the ‘luxury’ of the world’s slowest bank bailout. Contrast with other countries who found their banking systems in extremis: over a weekend, you…you…merge…boom…done. Entities infinitely more complex than any Irish bank restructured overnight.
By the end of his tenure, most here wouldn’t have believed Lenihan if he told you the time of day; now, while spinning for his legacy, we suddenly become receptive to his narratives?! Why?
Trichet’s response to the Irish Indo lady yesterday was telling: “the level of commitment of the Eurosystem to Ireland has absolutely no precedent.” And then, for emphasis, he repeated it word for word. And looking at the numbers, the case seems irrefutable.
And yet, on this site, we read repeatedly that the ECB is the cause of Ireland’s malaise. I even read that the ECB is responsible for the deposit flight from the banks! Now in fairness to the author of this particular piece, he seems to concede in his comments that while the bulk of the responsibility lies at home, it is important to highlight the (negative) role of European institutions to redress the balance, and hence, I would imagine, provide a more balanced understanding in order to allow future discussions to progress in a spirit of mutual contrition, rather than a spirit of beating the red-headed stepchild of Europe.
That’s all well and good, but when ‘ECB sux’ already outnumbers the contrary position by about 9-1 on this site, it seems that any redressing of the balance should occur on the other end of the scale, before everyone here manages to convince themselves that it’s all the fault of the perfidious Hun, and the time has come to round up the posse with the burning hurleys and give old Fritz a good working over, lest he forget the day he ever tangled with the sons of Cuchulain.
By failing to redress this balance, the promoters of this site also provide a space for nationalistic wingnuts and economic illiterates to flourish and degrade the comments; witness the proliferation and increasing assertiveness of crass ignorance since this topic took wing.
@ Paul Hunt
@ Paul Hunt
re “We can no longer rely on the good offices of the DoF to restrain venal and imbecilic governments ‘behind the scenes’ as it were. We need appropriately resourced and empowered Oireachtas Cttees with permanent staff of the calibre of the author of this op-ed piece and the ability to commission research and analysis to scrutinise government proposals and to hold government to account.”
The problem with that is Oireachtas committees can be controlled to sing to the tune of whichever party is in power. They’re pretty toothless in Ireland. They’ve had bankers in already who ran rings around them. Often, just like our banking reports from Honahan, Nyberg, they end up being coverup political and banking charades controlled by insiders.
Instead, we need committees with far more wide ranging powers, similar to the US senate committee system that investigated McCarthyism. OR the committee below that in the ’50’s in the US investigated organised crime across the US calling 600 witnesses in public hearings that were televised. This also holds the methods, procedures and expertise of committee members up to public scrutiny.
I’ve said before the money trail through the banking sector in Ireland should be investigated by CAP, better still above. Call 20 people including fingers, Seanie, Drumm, directors of banks, upper management, developers and lenders and we would have a much better picture of what happened than the nonsense coverups we’ve been given.
None of the above should become an excuse for not putting in place world class management teams in the DOF with the expertise and professional systems required to withstand contamination from the infection that led the DoF and Minister for Finance to be the worst performing disastrous financial team in EU financial history:)
Where the heck did this guy spring from? Well its about time!
What do the “dont blame the ECB camp” have to say about this man?
@ Michael Hennigan
Given you think that those outside Ireland are 20-30% to blame do you think they should pay that portion?
@ Hugh & BEB
🙂 Thanks lads.
@ Eamonn
he seems to apportion the blame evenly as follows:
– the global financial system (not just the ECB) for creating the crisis
– the Irish political system for ignoring its likelihood
@ Eamonn Moran
‘Where the heck….?’
Ex. DoF I believe.
Check out Colm Brazel and his links above for the full history (Thanks by the way Colm)
@ The Other Andrew
Re “the Irish were grabbing more and more liquidity and treating it as a medium to long-term funding source.”
Either you erroneously misread the comments above, or you choose to ignore the acceptance on behalf of the majority of contributors, that there is not the either/or scenario you depict.
Most contributors are as vehement against the mistakes made on the Irish side by Lenihan et al as they are against the disaster brought by the ECB.
As regards the laughable liquidity support you mention, all it props up at present is the IMF, lack of economic sovereignty, future austerity and eventual default.
@Eoin Bond
I did not disagree that goverment bonds can be held by commercial banks – where have I not said this ?
The funds can then be used for goverment expenditure etc.
But I engage in austerity through forgone consumption to pay for the interest but if I pay for the principle the money supply shrinks.
I have not got a serious problem with this if you read my above on the role of goverment bonds in a economy.
It essentially represents the wealth of a country expressed in paper form.
However where I do have a problem is the nature of liabilties such as bank bonds – as I said above the consumption comes first with these vehicles not after.
The owners of these liabilties can both improve a business or not – if the business goes under the rules state that they take the loss first or at least I hope they do.
@Brian Woods II
We Are going around in circles again – this is buffer capital under Basel wether it is equity or bank bonds – it means you should follow the rules baby.
and follow the capital structure.
What is the point of Basel if the sovergin takes the loss before all risk capital ?
Yee “Capitalist” queens baffle me.
If you continue with this nonsense capital will continue to be wasted in unproductive capital consumption sinks.
There should be a knew world created for yee lot – maybe subsidists my be appropriate.
@Colm Brazel,
I think we’re on the same page here. The inability of the Oireachtas and its Cttees to scrutinise government proposals and to hold it to account effectively is the single most important deficiency in democratic governance in the modern era (and, to varying extents, it is the case throughout the EU – and in the EU itself).
This is not something for government – governments everywhere will avoid scrutiny, transparency and restraint like the plague. It is for all backbench members of the Dail to take the lead – and for citizens to compel them to do this. TDs are fully empowered to do this if they were so minded.
That’s where the pressure needs to be focused, but there seems little interest. And I’m a little bemused that it attracts little interest from the principal contributors on this board as it would allow them to showcase their analytic capability and influence public policy-making – and be adequately remunerated for the effort!
..and here we go: ECB liquidity support is ‘laughable’….sure dude, BostonorBerlin has always been at war with Eurasia…
I suppose this is all consistent with the Kubler-Ross model…we’ve done denial, now for the anger phase, next comes bargaining…but this is not a psychological counselling blog; I believe that function is provided by politics.ie…we should be attempting to cast a cold eye over the economic issues of the day…heated rhetoric (a) won’t progress the debate, and (b) attracts the wrong kind of posters.
@The Other Andrew
Get off the stage mate – the last time the private banking cartel was given such free reign was the run up to the Great War
The ECB is merely trying to peserve the value of its assets which have only a cash price in many cases given that they are non productive consumer goods in the main (yes houses are consumer goods)
This overvaluation of unproductive assets is robbing the real economy of investment.
They are killing us with debt kindness.
Ireland is a total lost cause.
@ The Other Andrew
re “ECB liquidity support is ‘laughable’” I meant in the sense that rather than increasing our economic independence it has made us further dependent on the ECB. The ECB is using it as a backstop to shore up the falsehood that we can repay such lending or fulfill the terms of the bailout. In effect its a form of quantitive easing. Its also laughable to the extent that it has failed to bring growth back to our economy. As DOC says above in one of his infrequent moments of lucidity:) “They are killing us with debt kindness” At the EU level they are quickly pulling the plug on this as it increasingly exposes the ECB to our own contagion.
Its just more evidence of ECB crack house magic that that has failed and done irreparable damage to Ireland’s economy.
Ladies and Gents,
Allow me a pledge, by just offering a thought…. and then I leave you to it, as I do not wish to dilute the excellence of the fora contributions by my own economic illiteracy as ‘The other Andrew’ above put it. – Pffff-
Allow me to make my point by starting with something different than economy.
It is 30 years ago that we sent two probes into space.
Voyager 1 and 2 are now in the Heliosheath, the point where the solar wind is slowed by the pressure of interstellar gas, and they are now at the edge of the solar system. This means, that for the first time, we send a craft that was constructed on earth 30 years ago into Interstellar Space, this will probably take place in 2015.
If anyone around here is not humbled by this accomplishment and it’s significance, well, you need not to read any further.
What an outstanding accomplishment this is, and it is certainly not the only, but unique in it’s way. The challenge to achieve this was enormous, and what brings me to this example is simple.
Current policy makers often are to be found out of their comfort zone, overwhelmed and incapacitated to deal with the complexity at hand.
Perhaps, this global crisis needs to be understood as a conglomerate of five major crises to peak at the same time.
1. Economic – System breakdown –
2. Environmental – Climate change, Peak oil –
3. Cultural – Clash of belief systems, Western Cultural dominance –
4. Political – democratic deficits –
5. Security – Increasing military expenditure
Interdisciplinary efforts are required to stand a fighting chance to tackle the problems, and it is clear to me that time is of the essence, it is very pressuring.
The council questions I raised earlier was asked on purpose, as the current status quo does not leave me with a great deal of hope in the quality of the council available to date. There are many examples of such extract groups such as the G-20 et al. and their lack of results and execution.
If I rewind back to 2007 and fast forward to date, the results presented, policies implemented and progress achieved are rather embarrassing, are they not?
It is clear to me that the economic part is only one aspect, and that lines of communication are getting worse, hence the quality of decisions is not of a standard that is convincing for the public, or even would regain hope and trust.
I think, it is fair to describe the public feelings, opinions and reactions as somewhat hopeless and and in paralysis. They shall be excused, and that includes myself, to think of those in charge as headless chicken.
Those in charge are responsible for the wellbeing of Nations and future generations, and fours years later, the situation has not improved, on the contrary, it would appear that there is only a forced upon delay of the inevitable, the re thinking of our ways and our future actions.
Power dynamics are changing, and although it should not be this way, change is always a scary event to most of us.
Looking at the five aspects involved, I come to think, there is no Plan B, or if there is, you tell me about it, I certainly do not think that there is one.
We can not continue to act the way we acted in the past, if we continue this way, and just apply bandaids to inner bleedings, the possible results are very predictable.
This is one of many reasons why I say that we need to involve the public, especially on the banking matter in form of a referendum. The process of consultation with the public is missing, or in some parts can even be described as misleading, and as an example I would point out the second Lisbon referendum and the PR surrounding it as misleading.
Politics has changed in the past 20 years, and where we had charismatic leaders once, regardless the political fraction, we now have mediocracy, at the very best, administrative career civil servants have replaced charismatic and competent political personalities, to the benefit of a structure that can be described as democratically dysfunctional because it is based on overwhelming Lobby pressure that dictates policy decisions.
We are endangered to slip back into a somewhat feudalistic scenario, where key positions in politics are held by conformist Yes-Sayers with mediocre competence, an sorry excuse to hold up the democratic Flag, but in reality it is just a logical progression of this new reality. Dr. Jens Weidmann’s appointment to Germany’s CB comes to mind as one example, and there are many others.
Some of you here are in positions that have access to the halls of power, and have a little influence on the developments, it is to those that I would say, we need your council and your words of truth, your courage not to be politically correct, your wisdom to accept that we badly need better council on the pressuring issues at hand, and your courage to enable the public to have a voice on these matters.
On the economic front alone, to refuse this referendum on banking matters to the public is morally wrong, and we should stop the separation of the moral aspect from the daily decisions by statements like…. Yes, to burden the taxpayer with the the entire private banking debts might be morally wrong but…. There is no but possible!
We are at a cross roads, and it is morally wrong that an unelected and unaccountable for Institution that changed the goal posts by loosing their independence and neutrality forces policy decisions for all of us.
Thanks for your patience.
Best
Georg
@Colm
Again the mechanism to finish this is simple
Separate the “risk liabilties” from the term accounts – let the term accounts become goverment money.
This goverment money can seek the true cash price of these “assets”
These assets may get 5 -10 cent on the Euro.
The money saved by not serving debt interest to failed institutions can be used for either consumption or investment.
What the hell is complex about this ?
If we don’t do this soon we will not have any money for consumption or investment.
Whats happening now is madness squared or even cubed
Is there a feature on this site to ignore users or minimize the comments, the likes of Dork are adding way too much noise to an otherwise great debate.
Do we really need constant posts on the evils of fractional reserve banking or various conspiracy theories.
Once its entertaining, twice its ok, but hundred times it gets rather annoying
Dork please start your own blog and let the big boys do some debating while the rest of us mere non economist mortals read and learn and maybe provide occasional input.
Oh I thought it was the 30years of tax breaks for property schemes
Dammit the ECB is sly
@Pongo
Yee guys have won , but what spoils will remain after you let the big guys do the talking I have no idea, but I can make a reasonable guess.
It seems to me the situation will have to get even worse before most of you will come to your senses.
Good luck for now lads.
@ Georg Baumann
On referenda, check out the experience in California, the biggest state in the American union and send your best wishes to Sacramento, where the once youngest governor and now the oldest governor, is struggling to get out of a fiscal mess that had a long gestation.
A referendum in Ireland where Europe was the scapegoat, would give a platform to the ignorant and could brand the country ovrseas as a failed state — it is that but it would hardly help the unemployed if we broadcast it to the world.
@Eamonn
I also reject utterly the despicable arrogance with which this country is being treated, and the servile ineptitude of those who pose as our leaders.
Unless we take a stand and defend our sovereignty, our integrity and our children, we will be destroyed as a nation.
A clarity of speech that is long overdue and it is only such clarity that has a chance to break the apathy of this Nation!
It is difficult to see what will spark people in developed economies to free themselves from the comfortable captivity and the increasing constraints on liberty they experience – even if it is becoming much less comfortable for many people in Ireland. It took constant harassment by authority figures in Tunisia that drove a casual vegetable seller to ignite the flame (literally and tragically for him) that initiated the Arab Spring.
Unfortunately, in the rest of the EU we are seeing the rise of populist, nationalistic, xenophobic parties. It is, perhaps, to Ireland’s credit that there is little evidence of that here. But is it really, if it is the result of an overwhelming, de-energising and stultifying apathy?
@all
Conservative German Die Welt writes:
“There are good reasons for bailing out Portugal…. But there is a fundamental problem in the European Union. Despite months of discussions, EU political leaders have still not reached a consensus as to the path out of the crisis…. Indeed, top politicians still haven’t even been able to answer the vital question as to whether investors should bear the risks of their ill-advised investments in bonds from Greece and Portugal or whether banks should be granted a free lunch.”
“The fact that there is no clear position on the issue is shocking. Many would like to see the banks get away scot-free. And that may be advantageous when it comes to the stability of the financial system. But that would mean that euro-zone taxpayers would once again have to assume the costs of a crisis which began with bank stockholders making good money. That’s not how the free market economy works. It would be nice if the EU were to realize that fact.”
Irish Political & Governance System failed abysmally ……… little sign of real change or any radical restructuring or real burden-sharing from the gouging upper-echelons around here …….. let alone a whiff of responsibility or accountability …….
Nor – as Die Welt notes above – have the EU UpperEchelons in its Governance System got any substantive handle on its BankingCrisis …. this is not an either/or – it is a Both/And problem and entire European Project remains in some jeopardy ……. we are well beyond ideology here ….
@ Paul Hunt
Don’t bother about the article, but does this picture assist you at all? It sums up the Government and DoF strategy since Autumn 2008.
For what it’s worth, I blame the ECB for giving our government an alternative to repudiating the bank guarantee and putting the banks through a resolution process. I blame it for its contribution to demonstrating to investors in sovereign debt that their interests will always come last while Ireland continues to use the euro.
The ECB deserves to lose every cent it has put into achieving this.
@DO’D
Sounds about right.
A interesting (You may be aware of it) interview with Former German Finance Minister Peer Steinbrück 09/14/2010 in Spiegel Online
SPIEGEL: It’s been almost two years since the financial crisis reached its climax. Has the worst been overcome?
Steinbrück: No one knows. There are still deep-seated structural problems that threaten the economic balance in the world: Between the United States and China, for example, but also within Europe. We have taken a few steps toward taming the financial markets, but we haven’t come nearly far enough to rule out a repetition of the crisis. The most important question hasn’t been answered yet: Who’s in charge, politicians or the financial industry?
@Paul Hunt
Why do think apathy prevails?
My view for what its worth is that those with the economic wherewithal to keep their heads above water (i.e. the employed) just continue on that vein and hope the problems dissolve away. The I’m not too bothered community as long as the monthly cheque rolls in.
Those who are economically drowning are otherwise too occupied in restoring their economic well being. They don’t see formal or informal protest as a mechanism at improving their economic lot in any material fashion any time soon keep their head down and slog and hope but rarely engage in anything other than very formal change processes such as General Elections etc.
Those who are economically drowned are too fatigued by polictical failure upon polictical failure to muster enough energy to believe their is potentially a better way – and harsh as it may seem the Social State has done an extremely good job at cushioning their economic blows.
Others at either end of the extremes of society are or were never engaged in good or bad times so probably not likely to adjust their stance.
So it turns out the ‘silent majority’ are very much inclined to live by their name and economic circumstance dictates everything. I really mean everything.
I see todays voter turnout in the NI Elections will be about 50%. It must really make a lot of folk on the island wonder what the hell was all the fighting really about when you see such miserable numbers bothering to participate in the ongoing rehab of NI. Maybe I’m just getting old.
@grumpy,
Oh no! Not Bambi. Please say it isn’t true.
@Ordinary Man
Sanity, increasingly from within the Financial System, appears to be emerging in Germany …. and without German Political input – EU ain’t goin anywhere …. this sanity transcends political ideology so pragmatism and realism may be on the up …….. but elections not to 2013 …..
As for France – not so good – all Sarky is doing is bombing North Africa, hammering North African immigrants, playing the local family affairs card, insulting French citizens of Islamic origin, deporting Roma, bullying Ireland, facilitating far-right – all in a VAIN attempt to keep DSK at bay ……… to elections in 2012. How far the Great French have fallen …. embarassing really ……..
@DO’D
You may be right but the fundemental problem is as Steinbruick asks above ‘Who’s in control?’
Maybe below from the Economist yesterday is what they really fear in the Banks of Europe and is a driver in bringing some sainity to the situation.
‘America’s Justice Department filed a lawsuit against Deutsche Bank and one of its subsidiaries for allegedly hiding the poor quality of some of the mortgages it submitted to be covered by a federal mortgage-insurance scheme. The government claims it has paid $386m in insurance claims on 3,100 mortgages because of the German bank’s actions, but is seeking damages of more than $1 billion in its suit.’
Sounds like a start.
@Yields or Bust,
Apologies for multiple posts. Maybe wisdom accumulates with age 🙂
I find it hard to disagree with your assessment. There are numerous ginger groups seeking to encourage the engagement of ordinary citizens in reform of the process of democratic governance, but they seem to be getting little traction. The one making most noise – the ‘We the Citizens’ iniative funded (allegedly >€600K) by Chuck Feeney’s Atlantic Philanthropies – has attracted an interesting collection of national and international polsci academics and elements of official and non-official civil society. The effort is focused on demonstrating the ability of a Citizens’ Assembly to frame and advance constitutional, institutional and procedural reforms of democratic governance that government and the Oireachtas are either unwilling or unable to contemplate.
In all likelihood it will generate a bit of a buzz, produce some interesting output, get a pat on the head from the government – and then…nothing. Alternatively, should it really seek to force the pace and try to get citizens to engage with backbench TDs/Senators en masse (and get the latter to do the jobs they’re supposed to do in terms of scrutinising and holding government to account) it’ll probably be crushed as, reportedly, was the previous foray in to the public sphere funded by the same source.
But disbelief can be suspended for only so long and a tipping point always arrives. Think Ceaucescu on his balcony blinking in disbelief as the crowd below him started to chant against him..ordinary Berliners taking hammers and sledgehammers to the wall..Mubarak on television wagging his finger at his people….
Very enjoyable thread, apart from the mumbo jumbo TDFC is coming out with. A deathmatch between himself and JTO would draw quite an audience.
Dont think I’ve ever agreed with apportioning blame to outside parties, the overwhelming responsibility for it all rests on the shoulders of our own delinquent leaders. IMO. But then others have their own view, which is fair enough. Having said that, i do think its time to wrap this particualr discussion up, as it has been in the public forum for quite a few months, and no doubt is permeating abroad to those same outside parties.
I believe our best approach to getting the most help and most favourable terms is to admit unreservedly how badly we got it wrong, stress how intent we are to put things right, and then look for as much help as we can, with as much humility as we can muster. I would leave it to other, uninvolved outside parties to highlight the failures of the ECB, EU etc.
Whining about how badly we’re treated and how its not really our fault is a sure fire way to turn even more people against us…..those who have’nt already turned that is.
@ Paul Hunt,
I should think that if the wrong people, or people without much higher intellectual faculty, come to power then they get to express themselves throughout the life of the society and have a mandate to do so. Perhaps it is very difficult to do much against a strong manifestation of such a scenario; it may just have to run its course to collapse- -implosion. At least the electorate, when they waken up, can rather easily but the phenomenon out of its misery – perhaps the major advantage of democracy, the major disadvantage being that people have an input to issues of which they know, and want to know, nothing and vote for those with whom they identify.
We’ve had comparatively independent academia – for what good it was. So, I should be reluctant to form a new group to do this DoF work – presumably society as a whole is well alert to that rather narrow matter now.
(In 2007 I started to have an interest in theory of economics. That same year I decided to run for election to a board of management of a company whose management I was becoming concerned about. Twice in my canvassing letter I urged, due to concerns about the USA economy, that “we drag our feet” on a new investment project. I got one vote, though it was one more than I directly asked for – I did not even vote for myself, anticipating that the competition who were stating that all was well with the world would have a sweeping victory, as they did, but at least they could see that I anticipated it. Of course we now know what became of many such investment projects).
Here, through my name in this forum, is a link to the introduction to what I state is a radically original, coherent philosophy system. I’ve had no expressions of interest in it.
Philosophy is a bit like economics and perhaps everything else in that one is rather wasting one’s time in talking to someone about it if they know nothing of it. They need some cultivation in the subject, though this is not something I feel should be my role.
I’ve brought my system to specialists in the field, since the system came together in 1997. They, or at least many of them, could see its worth instantly. Yet, it immediately became trendy not to openly comment on it – probably for one hundred and one reasons, one of which may have been that they did not like to recognise that they had a circular posture and were looking our at the world through their navels for millennia, until an outsider, albeit a comparatively sub-literate one, came along and made them aware of their condition. They probably needed to be propped up to acknowledge it, not having the necessary spine and grace to do so of their own accord – again, not something I would be inclined to do.
Philosophy has a bearing on economics, as on all issues. I should think, indeed A. Greenspan acknowledged when being questioned about the meltdown, that his policy that the markets would self regulate in the interest of self interest was based on Randist theory – Randist rubbish.
Indeed, since A. Einstein took the world by storm at the age of 26 (in 1905, his “annus mirabilis”) with so much (non)sense then and in 1916, academia does not know its head from its posterior – but I’ll pass on trying to support that claim now.
Another issue is that the modern world seems to involve much specialisation. I find that no issue is an island.
And a post such as this risks being regarded as in bad taste.
for whats its worth my view is that after one month in office the FG/LAB
goverment has been seduced by the Dept of Finance and forced by the ECB and EU that for Ireland it would be fool hardy to try to impose loses on the senior bank bond holders or we will lose the cheap liquidity to the irish banks
we are heading for sustainable debt levels ? of total 2015 soverigne dept of 118 % GDP which is where we were in the late 80s going to be tough but managable in to the future,
can any body really beleive that
Ireland is being squeezed dry and there no plan B
CAN THE PEOPLE OF IRELAND HAVE A REFERENDUM PLEASE
Pathetic is the mildest term I can come up with, for delusionists who want a referendum to effectively highlight our demands/divine right to have international funding to pay Europe’s most expensive lawyers, medical consultants and many more of the Irish chapter of the Golden Fleece.
@micheal hennigan
what is pathetic is that irish people have been rail roaded in to this mess
by our political leaders ,dept of finance ,irish central bank ,regulaters ,banks ,ECB and yes our EU partners
imho if we were dealing with IMF on its own we would be looking at way forward and yes there would be a lot of pain and adjustments but we would most proberly have a future to look forward to as a citizen in a republic i beleive decisions that were made can only validated by the consent of the people
Story going around about Greece leaving the Euro!
I’m not sure whether I want a referendum. The part of me that does want one wants it mainly in order to force the government into a position where it will have no choice but to move quickly to a positive primary balance, steamrollering the Golden Fleece folks along the way. And disappointing the referendum proponents who think there’s a free lunch at the end of the rainbow.
148 comments on “ECB must share the blame”. It does not seem like a very productive activity. Granted, designing a scapegoat is a way to relieve frustration but, long-term, it will not improve the situation one bit .ECB’s board must be scared stiff of its present exposure to Irish risk .Fortunately it is too late now for them to disengage themselves ,but it is not very helpful to remind them how gullible they were.
@Eamonn Moran
Der Speigel
EU Commission holding crisis meeting tonight on Greece leaving euro
We live in a parliamentary democracy. The people delegated their ultimate authority to 166 TDs on 25 Feb and that delegation of authority holds until the next time of asking within the next 5 years. Probably more than most, Ireland’s voting system reflects the intent of the people reasonably faithfully. The direct consent of the people is required when a change to the Constitution is advanced or there is a contest for the Presidency.
This process of democratic governance (which should be perfectly adequate and sufficient) isn’t working very well – and is obviously not functioning to the satisfaction of many people. But rather than put the effort in to make it work better they seem to want to over-ride it via a populist referendum – the tool of demagogues and would be dictators always and everywhere.
From Wikipedia:
“In Europe, where the popular referendum (commonly known as abrogative referendum) was first introduced (in Switzerland in St. Gallen canton in 1831)[9] it now exists in Albania, Denmark (since 1953), Italy (since 1970), Malta, Russia and Switzerland (since 1874).
In Latin America, the popular referendum exists in Colombia, Uruguay and Venezuela.
In the United States, such a process exists, as of May 2009, in 23 states and one territory: Alaska, Arizona, Arkansas, California, Colorado, Idaho, Maine, Maryland, Massachusetts, Michigan, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Utah, Washington, Wyoming and the U.S. Virgin Islands.”
Every single one of them a hotbed of demagogues and would be dictators …
@paul hunt
the people have been pushed aside the EU have more control in this country
than ever before thanks to the bailout that our leaders did not even feel the need to put through the dail at the time if you remember they reluctantly agreed to some FF back benchers ,
the decisions are of huge scale importance to every citizen yes we should have our say warts and all
Greece may be showing the way in focusing the EU attention to the Euro crisis and hopefully outlining the resolution
@ Jarlath
Spoken like a true Irish government minister. Gary O’Callaghan’s article asks for the ECB to share ‘some’ of the blame, not all, most or even much of it. As such, this could be entirely consistent with your opinion that the “overwhelming responsibility rests on the shoulders of our own delinquent leaders”.
I don’t blame the ECB for Ireland’s inept banking system, for the ghost estates or for the grossly out-of-whack public spending – nor can I recall a post here blaming them for such things. I do blame them for adding pressure to a weary government to get them to use tax payer money to bail out the Irish banks and, by implication, their European bondholders.
The ECB broke its own rules by loaning money to bankrupt Irish banks in an attempt to keep the European banking system afloat. Once it realized it was going to get caught doing this it ‘bounced’ Ireland into a bailout, forbid it from haircutting bond holders and began to transfer its potential losses on the banks to the Irish taxpayer. This may be in the past, but now that we are on the hook for the banking liabilities, there is a fair chance that we will be sitting down with our sovereign creditors in the not-too-distant future. If that conversation happens, I’d prefer it were framed around the idea that when the ECB/EU/IMF bailed out Ireland, Ireland bailed out the ECB and the European financial system.
While there has been the odd flutter out of Germany echoing this narrative, I do not believe it’s one that’s been widely heard outside of Ireland. In my opinion, leaving the dispersal of this view to some deus ex machina in the form of “other, uninvolved parties” is a continuation of the ongoing causes of this crisis – the idea that we taxpayers/politicians should all sit quietly like good girls and boys and not bother the grown-ups in Dublin/Frankfurt. As far as I’m concerned, the more publicity this view gets in Europe the better.
Once again, I have no interest in blaming outsiders for the bursting of the Irish bubble or the dire state of the economy – Ireland needs to match its income with its outgoings and drastically reform itself – but based on the reported commentary of those involved in the bailout discussions, I most certainly blame the ECB for their part in transferring 100% of the losses of the banks onto the Irish taxpayer. The shortfall in the banks should had been paid for by bondholders (after the expiry of the 2008 guarantee or the government could just take the guarantee away with the same of the same pen that granted it) rather than taxpayers and why some might call that view cribbing and moaning, I call it capitalism, and I believe that view may resonate with the average German or Finish voter even if it offends their unelected technocrats.
@ Paul Hunt
What this thread shows to me is the absence of grip on the notion of class politics.
To be clear, the rich and profit taking end of European societies have taken their pleasures, blown their wad, and now expect – and are succeeding in getting – the working people to clean up their mess. So they can do it again.
This is class war.
Ideas based movements around citizens campaigns generally run into the ground as they don’t know which side they are on. They just want things to be better.
Where working class movements are strong politicians pay attention.
In Ireland, the legendary lack of an industrial revolution, combined with a union movement which is strong on rhetoric, but historically unwilling to stop the state in its tracks, means that the actual vehicle for popular opposition to the direction the state is taking, is not going four to the floor with the government/ECB/IMF.
Thus Marx is on the blogs, not on the streets.
We live in a state formed by DeValera and McQuaid, not Connolly and Larkin.
@Gavin,
I agree. Ireland suffers from the failure to present two power blocs competing for power with each defined by differing views on where the boundaries of the state should be drawn. Good governance requires that these blocs successively persuade voters to rotate their periods in power. This ensures that the excesses and imbecilities of one may be reversed and remedied by its successor, while those policies that have lasting value and benefit are embedded – and so on over time.
But again, it’s for the people to decide to move on from the anachronistic configuration of factions – and they made some progress on 25 Feb.
Union leaders on €150k+ per annum?
Kind of sums that one up for me Gavin – don’t start me!
🙂
Some of us are concerned that the banks are getting away scot free. It could could be said that in most countries banks do get away scot free but with limitations. A deposit insurance scheme funded by the banks and administered by an arms length trust is the norm in most countries. The amounts covered are usually Euro 50,000 to Euro 100,000 per depositor (not per account). Stockholders are usually left with nothing, with bondholders in the higher tranches getting no more than 1/3 of face value in a lot of cases. The regulatory arm of Gov’t usually take over the bank within 72 hours of a collapse and fire the top three layers of management as well as the board of directors. There is no automatic pension or severance unless it is in an arms length trust. The bank continues to do business now managed by the regulatory agency with a majority of its work force still employed but under conditions of employment that begin on the day the regulatory took over. In other words they were unemployed for 72 hours and now have a take it or leave it job offer. If it is deemed that the bank had any net positive value on dissolution the bondholders, management and employees get paid accordingly. The bank continues to do business and in that sense it does get off scot free.
In Ireland we march to the beat of different drummers so disregard all of the above. We have a new commandment number eleven- The taxpayers shall prop up the banks. That includes the bondholders, directors, management, unlimited depositor insurance.
greece leaving euro area der speigel playing games?
I would like to recommend to you this Greek film (english subtitles:
I was referring to the desire out there for people to blame the ECB and EU for our banking crisis….the aftermath and the steps taken to deal with it are a different conversation. The ECB has been very poor in that regard, my initial point was that we are responsible for the mess we created, regardless of how cheap credit was or who was giving it out, we had choices, we chose poorly, we’re responsible…the responsibilities for dealing with the whole mess and putting things right can be spread across a very wide field, that most certainly would include europe.
Oh and by the way…dont ever call me a government minister again, thats probably the worst slur i’ve ever seen on this site. shame on you.
@ Jarlath
My apologies for the minister comment.
@Edward v 2.0
I see some report today that Trichet accepts that propping up the banks was (is) legally dubious. Now that gets us into interesting territory.
the only problem is we still owe him 180billion .
@Georg Baumann
Short Film – 1hr.14min long ! 🙂
Thanks for that I will give it a go after Ulster slay the Dragons.
Some great posts today by the way.
@ Jarlath & Edward v2.0
Smiley faces guys (colon then back bracket) – keeps it fun.
Ooopsa second half.
@ George Baumann
Quote from Brian Lenihan “Lets be blunt about it, we all partied”.
u wouldnt be as quick to smile if u were called a government minister!!!!
@OM and DOCM,
why to date no one from the ‘new’ political leadership in Ireland has claimed large portion of the debts to be ODIOUS is astonishing.
Well, to be honest, it does not surprise me when I look at the ingredients of this ‘new’ political leadership.
@ Jarlath
If I was implementing their cowardly policy, maybe not. 🙂
@ Georg
Because they were pushing the ‘Spend, spend, spend’ policy at the same time as Bertie et. al.
@All
Let me clarify something that people may not be aware of .
When I pay my tax none of it goes to the exchequer – I repeat none of this money goes to services – you see the money is already there.
The tax stubs is just a accounting entry in the tax office..
All I repeat All of my tax goes to pay interest off the goverment debt through my efforts to be austere via the tax system but not directly – but that money flows back into the economy – the problem with Ireland is that maybe people do not have much of these and therefore have to export the kitchen sink to pay for these coupons
I realise people get upset when they are told this but that is a integral part of the monetory system now – unfortunetly the Euro is restrained from engaging this system to the full extent with predictable consequences.
The ECB /ICB are making monkeys of us as we do not understand the monetory system.
Anyway this can be very hard to explain using plain English as it is very counterintuitive – I would recommend this guys analysis as he is very down to earth in his explanations. http://www.youtube.com/watch?v=EB55ER44JMQ
Anyway I personally am not a fan of this system but we do have that system now – although we have a strange hybrid MMT / gold system / limited fiscal debt system under the euro and it is perhaps even more flawed.
This is a weird system but it is manifestly the monetory system so I would recommend all economists try to get your head around this system as it is very hard to explain sometimes
Sorry for the abuse fellows but thats what Dorks do……….
Anyway this guy explains the process in a elegant fashion.
Please check out the “hidden in open sight Video ” he made a few days earlier – its the simplest explanation of MMT using the 3 Buildings analogy.
@ ordinary man
admitting we f**ked ourselves up would not be cowardly. thats the only point im making
@ ordinary man
i dont know if they are even being cowardly. I think its a case of not knowing what else to do at this stage. Maybe if Greece head off into the sunset, we can watch them and take notes
the Greeks have upped the stacks and Germans are responding by gathering
like minded countries together and planing their responce
right now there is a war of wills where brinkmanship will determine what percentage rate structuring will take place
Why would Greece be coming to head today ? It isn’t even 2012 yet.
or even a head
@Dork,
I would recommend this guys analysis as he is very down to earth in his explanations.
When I was young, I remember one of those parties where some people popped some LSD and this chap might just have been on the same party, only, he never left it.
Sorry, but this reference just does it for me, total Lunacy.
@Georg
Because the financial system is so divorced from reality – people are repelled or bamboozled – this is understandable.
The Physical economy is still physical but its productivity is being ripped apart by false price signals.
If you want to get your head around MMT I would also recommend the Pragmatic captilism blog -believe it or not this crazy system IS THE MONETORY SYSTEM – theres really nothing there – its just accounting baby and the accounting is seriously flawed.
@Dork
I also do think that the financial systems are inherently flawed, forces at play stretched laws or even created laws, and used opportunities to create ever so more financial instruments that can be understood as outright fraud.
I do have some understanding on the history of money and the events that took place in markets around the world, the impotence of political representatives, whether deliberately because of vested interests, or just because they were out of their wits.
However, as I indicated earlier, we need better council, much better council and in all honestly, I do not think that your ‘modern mystik’ has any capacity to offer serious council on the matters that concern us all.
Yes, people are overwhelmed, scared, utterly disappointed in their representatives, fearful for the future and changes that will come, but honesty, clarity and integrity is required and not the mambo jambo of a late to the 60s LSD left over.
Sorry to be that blunt, but the situation is so bloody serious, and unfortunately most people do not understand the seriousness at all, there is no time to waste with false prophets, whether they come from central banks or from the woods.
Thats all I have to say to your reference.
Best
Georg
@Georg
What happens when the goverment subtracts tax from you ?
The money in your bank account is less all of a sudden
The money is transfered to the tax office and recorded – therefore no net money was created – yes ?- the quanity of money remains – its just that you don’t spend it
How does a goverment raise extra money ? – it does not go into the tax office and take it believe it or not.
The goverment / treasury states that it will spend a certain amount in the budget – it gets a bank wether a central or commercial to give it a piece of paper with interest and thats it!!!!!!!!!! – all of the principal and the interest
( Unfortunetly the situation in Europe is unique – the central bank dictates how much a country can spend – in America the Fed merely monetizes the congressional debt if there are no commercial bank customers)
You do not pay directly for this new Bond – the money is already there – you pay indirectly for the interest via austerity.
The holder of the bond spends the physical surplus you created. ( for example the non bond holder burns less oil and in the future the bond holder burns more)
What happens when the ECB decides not to create money – a larger ratio of your physical wealth goes to pay the interest……….. – your buying power is effectively subtracted by another with more buying power
Now can people understand the vice that the ECB holds over sovergin states.
The function of tax in a MMT world is to control demand only – not to service debt – Public debt is only money.
The situation is appalling –
Simplified example >
The ECB tells the Irish Goverment it can spend 30 billion a year for the next 10 years
The Irish goverment says yes masser.
Lets assume that there was no goverment debt before this and we are starting afresh with this new system.
The Irish goverment gets 20 billion off the commercial banks and the ECB gives us 10 billion every year through monetization.
We need to pay 6% interest for 10 year money.
Remember the amount of money is static in the system.
Who gets the money after many years of this policey ?
Yes the holders of the bonds.
The Irish citizen gets less and less of this money.
The Irish commercial banks have less and less deposits for reseves and capital and therefore cannot legally lend out any credit money – causing a bigger contraction again
Thats why the goverment is finding it harder and harder to tax (although tax is just a accounting entry – the money is simply not there in the economic system to tax – more and more money is held by the bond holders.
If you follow this to the logical conclusion there would be famine in Ireland as people will not have any money for food eventhough the money is still there.
Remember the amount of money is static in this example but because of the function of exponential interest most of the money is owned by the bond holders eventually.
Thats why in a system without commercial credit production the Irish citizens should convert their term deposits to post office goverment accounts.
Some of the money will flow back into the domestic system then – the commercial bank money has no velocity now – its just sitting in term accounts with a ficticious asset on the other side of its balance sheet.
183 replies on “O’Callaghan: ECB Must Share Blame”
@all
‘First, the causes of the crisis include the nefarious activities of a few individuals but are mainly comprised of mistakes by honest people who were lulled into complacency by an incomplete understanding of the new European monetary system. These honest people include many that still work for European institutions.
Second, the crisis was not expected to take the form that it did and European institutions were not — and are still not — equipped to deal with it. As a result, mistakes were made and are still being made.
Third, the Irish programme will have to be revised because it cannot be implemented as planned and the debt level is unsustainable. ‘
Fully Agree on the Second and the Third – I leave O’Callaghan’s ‘charitable gloss’ on the First for another day’s deconstruction …. on the crass ideological bent of the PD/FF neoliberals of the noughties.
The line: “First, the causes of the crisis include the nefarious activities of a few individuals but are mainly comprised of mistakes by honest people who were lulled into complacency by an incomplete understanding of the new European monetary system.” sets the tone of a bizarre article.
Basically, our problems can overwhelmingly be put at the doors of EMU and the ECB.
The first of the 2 examples of monumental mismanagement that wrecked the lives of tens of thousands of our citizens in a generation, happened long before EMU.
The second started with payback time against the backdrop of a broken system that resembled Japan’s in terms of cronyism and construction.
To hold an inquiry where the appearance is that most of the blame for the crisis is on Europe, would make a laughing stock of the country.
Any chance that the slow-motion response to the crisis reflects deeper problems that have nothing to do with Europe?
O’ Callaghan writes,
I suppose this is where the political should meet with the economic? And by political, I don’t mean any joint European council or committee effort. But rather something more like the Icelandic variety, which would involve a referendum etc. O’Callaghan also wrote, As pointed out in the Honohan and Watson-Regling Reports, people honestly thought that we had achieved a new level of wealth. Is it also the same passive, herd instinct which operates in Ireland today? Not so long ago, there was a communal acceptance of the fact we were all vastly wealthy, even though we were not (barring top level management of semi-states, who are wealthy still, and getting more so as we all get poorer relatively speaking). Now, the consensus of agreement seems to be that the ECB is footing the bill for all of the liquidity, and it has nothing to do with ordinary Irish folk. That is as much a mis-perception, as was the mis-perception during the boom that we were all wealthy. We are all on the tab for the ECB’s expenditure, but the consensus seems to be, that it doesn’t affect us, and doesn’t fall to the bottom of our balance sheet, . . . which it no doubt will. BOH.
The current fetish for blaming the ECB is pathetic. We have just suffered a high speed crash and are in intensive care and yet we seek to blame the Gardai and the absence of proper enforcement of the traffic laws for our speeding in the first place.
@Micheal Hennigan
Cast your mind back to the late 90s and the misallocation of resourses that was in the very nature of EMU entry.
Low public debt levels was the mantra for convergence.
Again – the low public debt levels meant that private individuals had to get into extreme debt – they had no choice.
Remember the massive Gold selling in the late 90s and early 00s with the SNB selling over 1000 tons !!! – this gave a false signal to the sovereign debt markets as the price of Gold and sovergin debt interest levels are closely linked.
The low servicing costs of public debt was a price signal to commercial banks to give credit on a massive scale as under the previous sovergin money systems this was the norm but the financial ecosystem had changed……….
The acedemic community here (I hope ) simply did not understand the structure of the euro as they had sovergin money teachings which were now obsolete.
Ireland is not to blame – the root lies in the banking rules themselves – Basel for instance considers deposits to be real reserves when they are nothing of the sort.
@Dork
Can you explain what you mean about Basle and deposits? I dont understand the point being made.
Karl , deposits are a function of credit creation – it is not money as in Goverment money.
Old style banks as far as in am aware multiplied credit on the back of this Goverment money.
That was a fractional system.
But Basle changed the rules – it considered credit deposits themselves as money which could be multiplied.
A system where you multiply credit on the back of credit is not a fractional system – it is a ponzi.
I would recommend the works of Steve Keen who is a expert on these matters and one of the few amateurs who truely understood the nature of the crisis.
Honestly Dork, I’d recommend finding out what the Basle rules actually are because, trust me, they’re not what you think they are.
What are they in layman’s terms so – the byzantine nature of the banking industry completly mystifies me.
Please use English rather then financial Latin.
@ All
anyone seen whats being suggested for the Portuguese support package? Not gonna go down well in either Dublin or Athens methinks. Particularly liked these lines:
*IMF SAYS FASTER DEFICIT CUTS WOULD MEAN DEEPER PORTUGAL SLUMP
*IMF SAYS PORTUGAL HAS FISCAL SPACE TO GO SLOWER ON DEFICIT CUTS
*EU SAYS EFSF, EFSM INT. RATES TO DIFFER SLIGHTLY FOR PORTUGAL
*EU SAYS THERE IS EFFORT TO ALIGN EU RATES WITH IMF RATES
@ BW2
“We have just suffered a high speed crash and are in intensive care”
You forgot the ending
….and are in an ECB isolation ward where we have contracted a lethal dose of MRSA.
It is hard to keep up with everything that has been going on but I try and I have a collection of cuttings from the FT Saturday edition going back to February that I am filing slowly. And what comes out most clearly is that the market has given the ECB and the deciders so much time and patience and confidence and that every so often someone in the market, such as Gary Jenkins of Evolution says “this time we think the Euro authorities have grasped the essence of the problem”
http://www.ft.com/cms/s/0/782f247a-2d0a-11e0-9b0f-00144feab49a.html#ixzz1LTr8opXE
“There are high expectations of a comprehensive solution to the sovereign debt crisis and an outline of the structure of such a mechanism would be welcome at this stage,” said Gary Jenkins at Evolution Securities.”
And they never do. The crisis just staggers from bad to desperate. I feel so sorry for anyone who held or is holding Irish sov bonds. The bank bondholders got the lifeboats and the ship is slowly filling up.
It is remarkable how little in depth analysis there has been in relation to the ECB decision/opinion/recommendation/veto (we still don’t know what exactly they did) that Ireland not be allowed impose losses on seniors and the inclusion thereof in the terms of Ireland’s bailout.
Surely this is a question that is outside the scope of their competence – I can see them making a recommendation that these bondholders not be ‘burned’ – but to go further and ‘veto’ on the implicit threat of the withdrawing of liquidty support must at very least be highly contentious.
Most fundamentally, the ECB appears to subscribe to a view that a systemic failure of a member’s banking system requires that member state to bail out bondholders – this is a remarkable position to take.
First, it is an ex post facto position – member states never signed up to this and can’t be expected to sign up to it after the fact.
The truth is, of course, that this position was only adopted by the ECB after Lehmans
The further truth is that there is little political reality to getting member states, such as France and Germany, to pay to bail out bondholders in an Irish bank.
The follow on from this for the ECB is that this fact, when combined with the fact that they view defaults on senior debt as dangerous, is that individual member states must bail them out because they may view it as the only way to get the bailout done.
But the fragility of the financial system is the root cause of the problem and large scale re capitilisation and segregation of institutions is the answer.
And it is not the role of the ECB to decide where these losses fall – that is a political question – it might be difficult for Ireland to impose losses on seniors against teh wishes of Germany etc – it might be difficult for Ireland to get germany etc to contribute to the cost of this bailout – but the ECB have effectively removed Ireland’s opportunity to attempt to get them to bear some share of these losses
Second, it is entirely inconsistent with a single market for financial services and pan european funding of banks
Third, the fact that this is the stated position of the ECB is as clear an example of moral hazard as you are likely to see – banks tend to fail in groups – lenders to these institutions need to know that if a bank follows the herd into a sector or type of asset and then suffers losses that they are potentially on the hook for some of the losses.
@ All
The troika press conference on Portugal from this afternoon is available at:
http://ec.europa.eu/avservices/player/streaming.cfm?type=ebsplus&sid=179072
(It slips in Portuguese for a minute or so but quickly switches back to English).
It does seem to me that the tone is more helpful. Especially the ECB emphasis on ensuring the banks have sufficient liquidity.
@ The Dork of Cork
The argument can be made that the ECB rate of 1% was too low for Ireland.
However, the goose was well cooked by June 2003.
The benchmark rate was as high as 4.75% in late 2000 and by the launch of the euro in 1999, McCreevy had opened the throttle full blast with big tax cuts and a massive extension of property incentives — covering apartments, hotels, car parks, nursing homes.
The year 2000 was also the year when FDI peaked and after that, keeping the property bubble in fuel was as the Chinese say, like riding a tiger.
There is no mystery why Spain’s biggest bank, Banco Santander, remains one of Europe’s biggest and most vibrant while its Irish counterpart is bust.
Some Irish have form in trying to believe in fairytales – – it resulted in a Civil War.
@Dork
Maybe you should spend some time by yourself trying to figure out what’s going on. It’s preposterous to try to get someone to explain something like that in a comment in a blog
PS Karl , only goverment money is money.
If it were not we would not be taxed more to bail out the fictional credit money that was created.
How can you not say changing the capital requirements and reducing the role of Goverment money in banks capital bases is not a ponzi ?
Honestly , economics is the only “science” that strives for complexity.
It is a damning indictment of the economics profession that only trained engineers in the physical world has called the crisis for what it is – a debt crisis created by artificial money.
@BWII
Such facetious analogies are total useless and inaccurate.
The anger directed at the ECB is due to the way they have exarcebated the crisis by preventing restructuring of unguaranteed senior bank bondholders. In addition, O’Callaghan is blaming the ECB for cause last autumn’s run.
To continue your foolish analogy, if there was a major car crash that was caused by bad roads, poor signaling and a lack of appropriate speed limits, then the NRA would be blamed for the crash and correctly so.
@Christy
One of the central tenets of science is to simplify everything down to its basic form – then you can add complexity on to that model – not before
You are falling for the classic jesuitical trick of trust me its too complex for your simple mind.
The basis of the European scientific revelution was a rejection of the financial Latin that only the chosen could interpret and the reading of the Bible by simple but not unintelligent folk.
Skepticism is the key to progress.
Many things are much simpler then you think ,when you subtract the economic embroidery from this farce you will find the emperor has no clothes.
@Micheal.
I think the interest was secondary to the outcome.
It was credit creation itself – remember credit is just savings from the future brought back to today.
Credit is therefore artificial savings – limited credit creation is useful to generate wealth but only if it is used for capital increasing uses and not consumption.
There is simply too little savings now as we have entered that future and it ain’t pretty.
Again the only metric useful is the ratio of Goverment money to credit and you will find during the history of the EMU the shadow banking sector has exploded relative to until recently a static or falling goverment debt.
But we know all this….
Weber knows that all this ridiculous bailout does is change a manageable default now into a major one in a year or two with Germany picking up the pieces.
But there is good in this current mess. Let’s use the IMF to implement much needed reforms and make us leaner and more efficient and then let’s just default in a year or two. We should use this time to position ourselves to recover well after a default. That’s why we should continue all efforts to get rid of the real deficit (i.e. the cost of running the state less the ridiculous bank recapitalization). If we are not reliant on borrowing by the time of default we could go for 100% haircut
I’m on the move now and can’t tap out long replies on my phone. But banking is a lot simpler than the Dork seems to think. I have lecture notes on Basle and capital requirements on my website. If the Dork wants to read them and offer criticisms he’s welcome to do so.
@dork
You are not far wrong. The multiplier effect due to the fractional reserve system is in effect an institutional form of embezzlement. The main reason this is tolerated is because Government debts can be hidden within this miasma. Central banks monetize government debts and inflation does the rest. The expropriation of purchasing power of money through inflation (promulgated by the CB) is the means by which Governments get away with an ever expanding national debt. Taxpayers would not tolerate explicit provision for government extravagance otherwise.
Whether you know the ins and outs of the Basle rules is not that important. You are on the right track when surmising that the professional economic community in Ireland was caught with its collective pants down and never truly understood the workings of the money men. They still do not.
If you want a really good book on this I would recommend “Money, Bank Credit and Economic Cycles” by Jesus Huerta de Soto available from The Mises Institute. Price about $35:00 from them. Well worth it and despite the ponderous sounding title, I found it a “page turner”.
At his press conference in Helsinki, Trichet said the level of commitment of the Eurosystem to Ireland, has no precedent.
‘The facts speak by themselves.’
Karl –
It would be like a pre – copernican and post copernican scientist and layman engaging intellectual banter.
Unless you accept that credit money is in orbit around goverment money there is little point to our discussion.
@Eureka,
Thank you. I’ve being banging on about this for ages. All this bank restructuring, bondholder, liquidity stuff is out of our hands. It’s just displacement activity – avoiding the things we could and should be doing – pointing the finger at external players (even if it makes many people feel better in themselves). There is so much we can do ourselves for ourselves to get into shape. But to get into shape I believe we should be going further and faster than the IMF requires. And it seems we are falling short and moving more slowly:
http://www.irisheconomy.ie/index.php/2011/05/03/revised-euimf-mou/#comment-144077
@Dork
Yep forget it. But since you’ve no interest in understanding how things like Basle actually work, you’ll have to forgive me for thinking you’ve no idea what you’re rambling about.
Okay, I’ll steer clear of the metaphors as I do subscribe to the view that if you have to resort to metaphor it is a sign that the primary argument might be weak.
So the premise is that the ECB caused the bank run. What the ECB indicated last autumn was that the extraordinary and unprecedented “temporary” emergency assistance could not last forever.
The government was naively asserting that there was no problem until mid 2011. No problem? The ECB must have been in disbelief at this complacency. Time for a reality check. Did we expect the ECB to give a blanket guarantee that liquidity support would be available no matter what the circumstances? Interesting that those on this blog calling for such unconditional support are ardent critics of our own government’s blanket guarantee.
The ECB cannot be blamed for sounding that reality check. Yes this has accelerated what was a slow motion but presistent bank run in any case but any suggestion that most of our woes are a result of ECB bad management and Teutonic favoritism is really self delusion.
Thanks Robert – I will look it up.
But the point I am making is if you believe in a debt system of money , the ECB unlike the FED is not monetizing enough as the ratio of money to credit withen the Euro system is even more extreme then the States.
However the FED has the exorbitant privilege of increasing its base but externalising the cost to everybody else through inflation.
Anyhow commerce is breaking down in Ireland as people are hoarding fiat rather the Gold with devestating consequences to employment and business.
If we are to remain on this crazy path I would recommend the reversal of fiscal policey to simulate a synthetic devaluation with a reversal of tax increases on labour and a major tax increase on petrol and diesel.
This may relocalise the domestic economy and as as our multinationals are high value exporting industries it would not effect them to a great degree.
@Karl
Yes Father.
In regard to relative blame on an issue like the Irish crash, there are people who have a self-interest in pandering to public ignorance/or desire for external scapegoats, for political gain or personal popularity. There are also people who likely comprise the bulk of ECB critics on this forum, who appear to see issues in black and white terms and it helps when the external party can be blamed.
For example, it’s common for people who see issues through an ideological prism, whether of Left or Right to have blindspots for inconvenient facts.
Claiming EMU is what wrecked the hope of a generation avoids addressing causes that would require tackling vested interests and sacred cows.
I saw where the trade union Unite is funding research into identifying who are holding bank bond debt.
Is that to help the unemployed of the private sector get work or stall public sector reform?
Not entertaining this Karl but it would actually be interesting to hear your view on the fractional reserve system and the repercussions it did have on our crisis? Its almost seems like an issue that ‘economists’ wouldn’t even dare question.
If this was an ingredient to the level of money we are repaying than to me this is an obvious talking point that I’ve failed to see on this blog, although the argument for this thread is… ECB..blame…bla bla bla… it might be worth commenting on this subject in the future.
@ Dork…are you sure you’re not Jim Corr no?
ECB are holding interests rates steady. This at least is good but might suggest that they are beginning to understand the fragility of the current set up.
It’s also interesting to see their focus shift a little from inflation to overall economic management. It should always have been like this.
@Consaw
If I was I would be campaigning to repeal the incest laws rather then trying to shed a light on credit creation.
I should point out I believe we do not have a fractional banking system anymore – its just pure credit now.
@Finfacts
For sure there are many issues that need to be addressed in relation to domestic policy – but this thread is entitled “ECB Must Share Blame”
Also, if you think Irish people are trying to blame the foreigner then it is better to meet the arguments they make rather than trying to point out an overarching theme to their arguments (such as blame the foreigner) that you believe displays a bias or incorrect way of thinking or approaching issues.
Too often when people disagree with each other one or both sides simply puts the disagreement down to bias or self interest on behalf of the other guy. You say;
“In regard to relative blame on an issue like the Irish crash, there are people who have a self-interest in pandering to public ignorance/or desire for external scapegoats, for political gain or personal popularity. There are also people who likely comprise the bulk of ECB critics on this forum, who appear to see issues in black and white terms and it helps when the external party can be blamed.”
I think such conclusions about people you disagree with are best made after you have explained why in your opinion they are wrong – not as a sort of starting point.
Some overlapping discussion here:
http://www.irisheconomy.ie/index.php/2011/05/05/greek-restructuring-divergence-in-views-among-policymakers/
@DOC
The cause of the volcano to come
Nixon drops out of Bretton Woods gold standard:
http://www.youtube.com/watch?v=iRzr1QU6K1o
Hudson particularly on deregulation and Glass Steagal aka CDO’s derivatives:
http://michael-hudson.com/2011/04/greenspan-returns-to-de-regulation/
http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act
Yeah we got screwed by the ECB and incompetent/corrupt stakeholders here in Ireland, cf overlapping above:)
@Karl,
I wonder about this here in context….
During the debate on the Dodd-Frank legislation, consideration was given to making the Fed the pinnacle financial oversight authority. The discussions in [4.2 Fed lending to facilitate the acquisition of Bear Stearns by JP Morgan Chase] and [4.3 Federal Reserve support for AIG] above make clear, however, that the pinnacle financial oversight authority cannot be lodged in an independent central bank. To grant or deny taxpayer support for the financial system is fiscal policy. To force a central bank to make fiscal policy, especially such contentious fiscal policy decisions, would politicize the central bank and destroy its independence. The Dodd-Frank law chose correctly to lodge the pinnacle authority in a Stability Council outside the Fed.
Source here: http://preview.tinyurl.com/6f45mqc
I wonder, as we stepped over this line of CB’s undertaking fiscal policies, purchasing bonds etc., is there an equivalent of Dodd-Frank existing or even planned in the realm of the EU?
The only thing I can think of in terms of council is this:
http://www.consilium.europa.eu/showpage.aspx?id=250&lang=en
But it is not really the same, or is it?
Forgive the bluntness of a non-economist, but overall, it would appear to me as a diligent observer of this tragedy unfolding in slow motion, that the forces at play in the EU are rather acting like headless chicken running around.
Thanks
Georg
Are not Bank Bonds “risk capital” under the Basel rules ?
Is not Bank Bonds deposits now ?
Where is the rule of law ?
@ Dork,
Karl’s site has a lot of interesting material in deed, highly recommended.
The European Union needs to accept the seriousness of current problems and that dealing successfully with these problems may require writing down existing debt.
http://www.karlwhelan.com/Papers/Whelan_Mar11.pdf
@Michael H
+1
When I was a child, and someone tripped on a footpath, the general admonition was ‘watch your step’ rather than ‘someone else is to blame for that’. Of course, compensatitis changed all that.
I don’t recall the ECB and fellow travelers prodding McCreevy and Cowen, especially the latter, to stoke public expenditure year on year ’til the flames shot through the roof. Neither do I recall the ECB recommending ever greater tax incentives for property investment. Witness the hotel zombies dotting the country. Their existence was all driven by capital expenditure write-off against an existing revenue stream. As for generous tax treatment of rental income. Also the ECB? Many of these incentives predated 2000 – e.g. anyone care to trawl through their BES returns and note how many were property backed? The IMF warned the Regulator in a 2006 report that a property bubble was likely on the horizon. But the Celtic Wise Monkey syndrome prevailed among the elites.
It really is time that the Cluedo solution – it was the ECB that did i!t – was flushed away. Our own gentry did it in Spades, Clubs, Heart and especially Diamonds. Get over it and get on with it.
Karl Dork
Guys one of you think that the whole financial system is a giant Ponzi scheme and the other doesn’t. When it gets to that level it’s not really about facts. You both have a belief system. A bit like Darwinism V Creationism but less scientific evidence is available. Maybe in a few years Ponzi v non ponzi economists will be the new Keynesians V Friedmanites V Austrian School?
@ M hennigan
“For example, it’s common for people who see issues through an ideological prism, whether of Left or Right to have blindspots for inconvenient facts.”
It not just common its basic human nature. I don’t think I have met many people at all who can stop themselves falling into that trap.
But there remain certain things that are hard to escape. The amount of good euro money thrown after bad in this country by European banks is more than the Irish can afford to pay back. That is what we are being expected to do. It wont work. As the man in the Rolo ad says ‘I can not give you what I do not have’.
But they are to blame too! I am not saying that to let Irish people off the hook. I am saying it because it is true. The euro banks were making larger returns than they could by investments in their own countries and they under-priced the risk.
The ECB has refused to allow bond holders or banks be burned. The injections they made in Irish banks were not made for the benifit of the Irish Banks they were made to prevent collapse. The fact that the periphery will have to go through sovereign defaults and that the restructured money will be replaced by ECB QE benifits who most? who are the people who loose least? I would suggest it is bond holders and banking elites.
I find the article very strange and disjointed, and the tendency to blame the EU seems unreasonably strong.
If we reverse the perspective of the article one might say that the problems were these
(i) The Irish banks and many Irish people borrowed money as if there was no tomorrow. Some was greed, some was fear, some was mania, some was plain foolishness, but it was Irish borrowing. The European banks lent to Irish banks (wrongly) assuming that Irish banks were properly run.
(ii) The Irish govt didn’t have an effing clue what was going on and guaranteed all bank debt at a time when that was a hugely bad idea, having missed every opportunity to plan a better solution.
(iii) The ECB has lent huge treasure against collateral that is likely to crumble if you pinch it too hard to banks which are solvent only if you look sideways and squint. This is and was an unstable situation.
In this view the bail out was primarily to avoid a situation where the ECB was acting as lender of last resort to insolvent institutions which (AFAIK) it’s legally not allowed to do, and to provide the Irish government with money to mispend that it can’t borrow from anyone else.
If ECB lending was not allowed the banks would have collapsed in the Autumn and if the Irish govt couldn’t raise money then the Irish state would have collapsed in June. On this view, the Europeans are trying to help us…even if they’re not always doing it perfectly.
The idea that the Europeans shouldn’t get their money back is reasonable when it comes to the bank debts…except that it was our govt that guaranteed most of it, not the Europeans. Our fault, not theirs. The debate over the unguaranteed debt is a smaller issue and there should be a better deal worked on that, for sure, but it’s a smaller issue.
The idea that the Europeans shouldn’t want their sovereign money back but that they should continue to lend to the Irish state to mis-spend is bizarre in the extreme.
Domestically the moves to protect some people and screw others is typical of banana republics at their worst. For instance, Enda’s proclamations that taxes will be raised on people in the private sector in one of the world’s most open economies to continue to pay bubble level welfare and public sector pay is an example of grotesque injustice.
Similarly, the continued insistence that we should borrow even more money on the basis that this would magically stay in Ireland and stimulate our economy in a sustainable way is (IMHO) denying our economic and geographic reality…that our trade exceeds our GDP and that we need to import almost everything we need to live comfortably. Money will flow out as fast as you pour it in unless there’s business bringing it back in.
Ultimately, the Euro may not be an optimal currency area and the ECB/EU may not always have acted perfectly, but it was and is predominantly stupidity and greed in Ireland that caused and are continuing to cause our problems.
@Georg
I have a problem with this concept of “burden sharing”
Correct me if I am wrong but is not bank bonds part of the Basel risk capital structure of banks ?
If the loses are greater then the equity the loses should flow down the capital structure – yes ?
I realise you cannot default on term deposits today given the flawed nature of our monetory architecture but to not default on defined risk capital structure of banks is taking the piss.
@Eamonn
Believe it or not I am not a extreme Austrian
I believe in a national currency and not free banks so that should clear that up.
Lets just follow the logic of the capital structure first before we engage in philosophical discussions.
@Hugh
Lets deal with the basic mechanics of this first.
When a bank creates a loan it does not borrow off anybody – it just creates credit.
This credit flows into the physical economy – the borrower does not create any credit – the seller gets a deposit which he spends into the economy or saves in a bank which adds to the deposit base of a bank.
The Irish banks were conforming to the legal reserve requirements as far as I could tell – therefore there is something wrong with the legal reserve requirements.
What is the function of reserves again Hugh ? – yes to take a loss in the event of default.
Yet no losses amongest the Seniors … Hmmmmm strange isnt it
The problem as far as I can make out is that Irish banks held very little real money – all their reserves were artifacts of credit both inside and outside the state.
And why did France and Germany and other core banks have credit to give out you say ?
Because the Euro limited the production of real money (goverment debt) – this gave a flawed signal via artificial demand withen the euro area.
Kaput
Dork,
where I have a problem to take BIS serious in the whole context is the very structure including the Board of Directors of the organisation itself, IMHO this leads inevitably to results that Martin Wolf from FT described eloquently on Basel III :
Martin Wolf of the Financial Times says that “Basel has laboured mightily and brought forth a mouse. Needless to say, the banking industry will insist the mouse is a tiger.” He adds that trebling of capital reserves “sounds tough”, but “trebling almost nothing does not give one very much.”
All in all, it would appear to me that the sands are shifting quicker under our feet than those responsible for policies would want to admit to the public, they rather be seen to be in control where there is only chaos and war.
The History and results, or better lack of the same, of the G20 meetings is another indicator to me in that respect.
Not only capital has been destroyed and enormous wealth shifted, but trust was even more so destroyed on levels beyond comprehension, and it is here where I see no clear lines of communication by policy makers that would reach the people who are asked to cough up.
I fail to see how the current administrations will succeed to regain this basic level of trust, something which in my opinion is required to go forward.
@Colm
It looks to me the new Rome is entrenched withen the system – you get bad priests and you get good priests but unfortunetly they serve wether they know it or not a dysfunctional system.
If things get really bad they will engage in a second Cather crusade against the non-belivers – we must brace ourselfs for the worst.
@ Dork
Senior Bonds are not reserves, never were…Hmmmmmmmm
@Georg
If the BIS want to remain the one and only church they will have to clear the debts via a physical cash only gold auction with themselves as the dealer.
Nothing else will cut it in my opinion – that is probably their fall back postion anyway.
@The DoC
What you’re in effect suggesting is that the credit created by the banks i.e. loans which ends up as deposits/income/capital gains in the hands of say construction workers, those who disposed of land, building material suppliers etc etc are actually artifical deposits because the bank should not have been creating the credit in the first instance as they didn’t have sufficient Govt Bonds to cover the credit creation?
In other words the Banks’ loans to Govt Bonds ratios were off the scale?
Under the assumption that the above is correct – what deposit exactly buys the Govt Paper in the first instance surely the ‘cash’ artifically created or otherwise, flows from bank ‘deposits’ back to Govt and IOUs in the form of bond notes flow the other way?
Given this flow how is one ever able to determine whether the cash coming from ‘deposits’ flowing back to Govt has not being generated by way of sales of previously issued Govt paper or newly created credit by the bank?
@Brian Woods II
Give me a reference please – as I can’t find it amongst the financial Latin.
@Yields or Bust
What I am suggesting is that banks capital base should only be goverment bonds so therefore they are compelled to buy them and Goverment remains in debt at a high level.
They produce credit off this base only and only that is a reference – nothing else.
This high level of debt needs to be serviced by tax so therefore less money is available for malinvestment.
I am not in favour of this system but without Gold in the mix there is no other way to save and not to spend as my bank deposits are just credit.
As far as I could make out before basel banks were required to keep a large amount of goverment debt on their books – but this got replaced by other forms of capital which gave a false signal of demand in the real economy.
Ps @Brian Woods
Just looked up the definition of reserves and it seems to be checking accounts and the like – fair cop it was a bad choice of words from a layman.
But the substance of my argument remains – the function of risk capital under Basel is as a capital buffer in the event of significant loss i.e insolvency.
Are you suggesting that Irish banks are not insolvent and if so what is the purpose of these bonds ?
@ The Alchemist
Cheap credit and tax breaks helped boost hotel bedroom numbers 150% from 1996 to 2007 while tourist numbers rose just over 70%.
The tax breaks were simply putting oil on the fire and the halving of capital gains tax coupled with 10 year interest only buy-to-let mortgages, made buying additional properties look like a slam dunk.
@ christy/Eamonn Moran
What I’m saying is that the primary responsibility for the carsh is within Ireland.
Whether the blame elsewhere is 20% or 30% – – it is hardly more.
Gary O’Callaghan’s 2010 narrative ignores the fact that ministers decamped in late July as concerns about the banking situation were mounting. We were told that yields were rising because the markets were thin but the key catalyst was that there was no bottom line for Anglo losses.
Before Lenihan scrambled in Sept to get a grip on the situation, the NTMA went apoleptic because S&P downgraded Irish debt.
This was 2 years of slow-motion after the bank guarantee was issued.
Trichet again referred today to the fight with Schroeder and Chirac on weakening the stability pact in 2004.
The guarantee and the rising liquidity from the ECB gave them all the aces on bondholders but remember, it was Ireland that had foreclosed on bond restructuring for 2 years and in Q4 2008, at a time of ferment in international banking, the Eurozone had no fixed policy on the banking crisis.
We did join a currency union and as I said earlier this week, it is not only the ECB that sets the rules of the game.
We have little support from other countries and surely commissioning a report on the ECB would hardly be a recipe for winning friends.
@ The Alchemist
“When I was a child, and someone tripped on a footpath, the general admonition was ‘watch your step’ rather than ’someone else is to blame for that’. Of course, compensatitis changed all that.”
When I was an adult going to collect my daughter from her friend’s house late one evening, I tripped on a footpath and was lucky not to get more than the bruised ribs I suffered from for another six weeks. On daytime inspection, a tree had raised the level of one section of footpath about three inches above another section. The footpath was concealed under shadow tree foliage from a streetlight and so was an accident waiting to happen. I spoke to the householder whose house adjoined the footpath: he said he had been on to the local Council communicating to them by letter and phone numerous times.
Irish citizens should not be liable for the profligacy, incompetence and corruption in the Irish politicised banking system the ECB gave regulatory carte blanche connivance to.
As the ECB hoovers up any remaining credit from our Pension reserve fund, state assets, profits from CT and exports, expect many more damaged roads and footpaths. No doubt Irish citizens, not the politicians, banks, will be blamed for crap infrastructure, declining standards in education, health care, because they didn’t watch their step or because they joined in the party!
Whose party? http://www.youtube.com/watch?v=_TUPUbvO0eU
@ BW and Bazza,
I posted this last weekend to namawinelake forum while this forum was resting:
“If we had not joined the euro then we could wreck our national currency as we pleased and any bondholders would know that the Irish nation was the lender of last resort and the regulator of the value of its currency.
However, we share a common currency and the lender of last resort and the regulator of the value of the currency is the ECB and it does not wish to wreck the Euro as our recent national policy makers might please.
So, given that we joined in the common currency we should exercise a social conscience towards it.”
(I see in the second video of “Video from EUI Conference on Sovereign Default” that Martin Helligm seems to agree with my first paragraph).
I suspect that recent FF governments ‘got FF smart’ with the common currency, in a way that they would not have done with a national currency – note the surge in ratio of borrowings to deposits, subsequently loaned effectively for consumption (and perhaps three in a row). One might say they ran a common car up a tree at 100 m.p.h and some here are saying the group owners should have had more invested in speed traps.
I think it is very much a FF culture based crisis. (Should be interesting to see the report on Anglo, if it ever is completed).
Thank you to Karl for the thread and to all others for comments.
Please understand that I am not trying to absolve Ireland of any blame in this mess. Those of you who live in Ireland know better than I what went on and I defer to you. And Ireland has serious corrections to make.
But we all seem to agree that the ECB also had a role to play. I do not know what percentage that was but I think it important to highlight this while, at the same time, we take our own share of the blame. If nothing else, this could help those EU leaders on a populist thread to explain why some cross-euro-zone burden sharing is required and fair. Also, it might prompt the EU/ECB to deal with the very real banking problem in the euro zone and that would be to everybody’s benefit. People will listen to us.
A bigger problem is that our financing programme will not work. Poul Thomsen of the IMF described at the Portuguese press conference today how a programme should give the economy room to breathe while adjustments are made. (It is not about punishment). But our programme lacks credibility and is suffocating the banks. It will be changed eventually, because it cannot be implemented, but the earlier we can get it changed the better.
We need to get back on the road to recovery … and quickly.
Addendum: I think my current position is that it is a co-responsibility matter.
“The guarantee and the rising liquidity from the ECB gave them all the aces on bondholders but remember, it was Ireland that had foreclosed on bond restructuring for 2 years and in Q4 2008, at a time of ferment in international banking, the Eurozone had no fixed policy on the banking crisis.”
I think its fair to say that the ECB was set against losses on seniors in the wake of Lehmans
By the way – I completely agree that the crisis was and is primarily, perhaps overwhelmingly, an Irish created beast but I don’t think that the actions of the ECB are therefore undeserving of comment.
Just because we implemented bad policies does not imply that we should simply ignore what I would view as, well, potentially illegal, and misguided exercises of power by the ECB that are detrimental to the interests of the State
@ Dork
Karl is one of the good guys and attacking him is most unseemly. If you want to pull someone up with reason there is always Richard Tol on climate change. Apparently he is one of Bjorn Lomborg’s gurus.
@Peter
The credit came before goverment largess.
A typical FF redneck does not make regular trips to Switzerland to finesse commercial banks capital structures.
The central bank war model has been around for 100s of years.
I recommend you read Professor Antal E . Fekete paper on the British / China Opium wars – its quite illuminating.
Tea , Opium and silver have more in common then what you may think.
In modern times the Banks merely flooded their host countries with credit money and got them addicted to the stuff and then took the surplus.
Unfortunetly most of the productive elements of the economy are no more and so our banker friends are struggling to extract a surplus from what remains , poor little dears.
The lesson I guess to learn from this debacle is that you don’t shit in your own nest.
@Gary O’Callaghan
“But our programme lacks credibility and is suffocating the banks. ”
I’m a bit lost as regards this assertion. The banks are only alive courtesy of 180 billion of ECB money. So why keep the patient alive only to suffocate him or her slowly?
“What I am suggesting is that banks capital base should only be goverment bonds so therefore they are compelled to buy them and Goverment remains in debt at a high level.
They produce credit off this base only and only that is a reference – nothing else.”
What do you mean by capital base here – surely a banks capital base is the excess of its assets over its liabilities – it doesn’t really make sense to think of this as a specific type of asset but rather as a proportion of its total assets – what may be getting you is the risk weighting that some assets assets get under Basel agreements when calculating risk adjusted capital ratios
@Seafoid
I think Karl is a nice guy – but I believe his altruism is mistaken – he is serving the wrong church.
Anyway I like forcefull arguments – there is nothing wrong with that in todays age.
Brian Woods II won a round by pointing out my use of financial latin is grossly mistaken – thats how it works baby.
PS Brian woods II – my central point about risk BANK CAPITAL remains – I understand to some extent the time function of money but the banks simply cannot earn their way out of this hole.
@ TDOC,
The largesse came via the borrowing- -credit.
You make an interesting point about the state of the productive economy, here and in the Anglo-Saxon world. Liberal liquidity and low interest rates may be more a recipe for speculation than wealth development. It might be worth a thread of its own
Also, re your exchange with Karl, with whom I have sympathy, about banking: Perhaps a forum such as this should have a thread entitled: “Post your Theory of Economics”.
@ Hugh Sheehy
I agree 100% with your comment.
@ Georg Baumann
There is such a “Fiscal Council” in the making and it is called the European Stability Mechanism. The details can be found at pages 22 to 35 of the link below.
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/120296.pdf#page=22
The page to which you refer covers the activities of the Council (of Finance Ministers) known as ECOFIN and which represents governments on economic and monetary issues in the triangular decision-making process between (i) the member governments of the EU (ii) the European Parliament and (iii) the Commission. In very rough comparative terms with the US federal system, the Senate, House of Representatives and the White House – US Administration.
The comparison cannot be carried too far. The EU is not a federation i.e. it is not a sovereign state in its own right and there is no watertight distinction between federal and state areas of authority. Its unique characteristic is that it is the “states” that largely implement the decisions of the “federation”.
The US does not need a Fiscal Council. It already has one. It is called the US Treasury. However, in the case of the EU, the Treasury’s equivalent responsabilities would be shared between the governments of the member states of the euro area and the ESM. A European solution to a European problem!
One can but hope! If not, the euro will fall apart and the EU with it. A return to national currencies would see the DM return to the status of a refuge currency, it would shoot through the roof, the German economic boom would be ended and Europe would face an indefinite period of economic stgnation. Even with the present collection of senior European leaders of such mind-boggling incompetence (Merkel, Sarkozy and Berlusconi in particular), I do not see this happening.
@Peter
The real disaster in the States came from the Clinton strong dollar , low fiscal debt policey – this forced American consumers into massive debt and malinvestment.
It also exported Americas capital base to Asia – which I believe was a delibrate policy by the CBs to favour their corporate clients via global wage deflation
Similarly the Euro stipulated low fiscal debt ratios with the obvious chronic malinvestment that followed.
Just cast your mind back to EMU entry in the 90s and the change in the feel of everything – I remember it vividly – something was not quite right with the place although I could not put my finger on it at the time.
Now we Know.
The evidence is in and is conclusive – low fiscal debts result in a inefficient allocation of resourses in this monetory system.
Its over because the system cannot give credit anymore – the demand can only be served by wage increases that will uncover the latent inflation in the system or under a freegold / low monetory inflation system in the eurozone a rise of Gold to offset the inability of consumers to pay for their debts.
Its all about the flow………………….
@ George Baumann
P.S. I do actually know how to spell responsibility but I forgot to use the spellchecker.
@All
Lord Goldsmith ” who benefits ? , I tell you who benefits ……”
Listen and learn from a Titan.
http://www.youtube.com/watch?v=SZTzPmn-87w
@ Eureka,
that would be great -but unfortunately, we will still have to live with our european neighbours after all this is over.
@ Al,
the comment he makes about weber resigning because of disagreements with the rest of the board -is this a new rumour? I haven’t seen it anywhere before.
@ dork
The purpose of Senior Bonds is exactly the same as the purpose of Deposits, to give the banks the funds to lend to the economy.
The banks are insolvent, i.e. they have insufficient assets to pay back their creditors who include depositors and bondholders.
A normal company in like position would cease trading and divi out its assets amongst its creditors.
However, it has been decided, righltly IMHO, that to close down the banking system, fire sell off its long term assets and divi them out among bondholders and depositors would not be a very smart idea. Banks are not Waterford Glass.
It is interesting how the populist Joe Costelloe “burn the bondholders” line has taken root amongst the profs in this blog. Of course the correct title for this mantra is “burn the bondholders and depositors and damn the economy”. Not quite so populist, would you agree?
@DOCM
Thanks for the link to EUCO.
I was mistaken to think you refer to the European Chamber Orchestra but while I am at it, they do play in tune very well, and this is a result, besides the fact of the individual excellence and virtuosity, of the many diligent rehearsals they undertake when they meet.
The EUCO you refer to meets four times per annum, and is not necessarily composed of excellence, but current Head of States plus the Foreign Affairs Rep.
If memory serves, they came up with the ESM 2013 deadline.
Still, it is my impression that this might just be another G-20 style debate club keen to pretend and present unity where there is none.
I shall be excused for thinking that this ‘crisis’ highlighted the true inner makings of this Union, based on and never appropriately addressed the inherent economical imbalance of export surplus countries and weak importing countries that were gladly served with debts, as long as one could sell more tanks and submarines, as in the Greek case.
The turf wars inside the Union are immense, the latest amazing ‘E’U-Turn on nuclear power plant stress tests is just one of many examples where Lobby pressure dictates political decisions, or even reverses them entirely.
As for political excellence, you have to raise those leaders, identify and nourish them early, those leaders we are so badly missing, you can not recruit them form conformist civil servant battalions.
Just my impressions.
Best
Georg
@Brian woods II
You never answered by question – whats the point of buffer capital if it is not drawed down during insolvency ?
The losses are embed into the system – the question is who pays.
In a reformed banking system that I would favour all commercial bank deposits would be vulnerable to loss – buyer beware and all that.
But the rules were the rules – bank bonds were defined as buffer capital. under Basel – yes ?
I personally withdrew a portion of my savings from the Post office because I believe paying out this risk capital will risk the sovergin – thats the real result of this crazy policey.
Anyway banks or the state do not need actual deposits to give credit – that is not what happens in a bank lending transaction anyway.
Its just that the real economy cannot take anymore credit – it needs to default on these liabilties or print more goverment money
The leverage between money and credit is just too extreme now and its pretty much as simple as that.
Attempts by banks to earn their way out by not selling houses and the like for cash is creating massive inefficiencies in the real economies.
I keep thinking of a perfectly located apartment complex between UCC and CUH – efforts to not sell this property may save a bank balance sheet for a while but it just transfers bigger losses into the physical economy that even the bank has to operate in eventually.
@ Georg
The orchestra is all that we have got.
They may play out of tune but play they will have to.
P.S. Can you imagine Mitterand and Kohl behaving in the same manner as the current leaders of the EU?
@Ger
Thanks for the comment. European neighbours have put worse than bank default behind them.
@Michael Finnegan
One day you will understand the meaning of “false dichotomy”. Yes, Ireland has its problems. Europe has too. I suspect all countries (even Malaysia) have their problems.
@Karl and Eoin Bond
Thanks for posting this article and providing a forum to discuss it. It has been really interesting.
Very interesting. Meanwhile, back in the wider world, there would appear to be a commodities top with implications for central bank and bond market rates…….just in case anyone missed it.
@ TDOC,
Your second paragraph about trade liberalisation may have much going for it.
However, your monetary theory is another matter.
My first principles:
A society’s money- -currency represents its tradable wealth (and developed as an alternative to barter). (This former is something A. Greenspan did not seem to know in a 1966 paper, where he talked of it as a means of exchange and store of wealth). Changing the quantity of money without changing the amount of wealth only changes the value of the currency and the wealth of those who hold the currency. Vica versa: changing a society’s quantity of wealth changes the value of its units of currency.
Some of this wealth- -currency is deposited in a bank for a rate of interest and the bank loans it to others for a fee, at perhaps, normally, X amount of loan per Y amount of deposit. (Are our banks now allowed only loan 80 of ever 100 euro?). If banks are allowed loan more than their deposits then they borrow the extra.
If wealth grows then the quantity of money may be increased accordingly. (Of course if things go askew, as currently, then that’s another issue).
The quantity of money may be increased also by approx. 3% per annum to encourage keeping it working and also as a means of redistribution of wealth.
Other than that I see little reason for changing the society’s quantity of money, such as your advocating of high fiscal debt *, except perhaps in times of extreme stress such as war – in which case it is directed to survival as distinct from affluent consumption.
* “The real disaster in the States came from the Clinton strong dollar , low fiscal debt policey …”.
Sorry Michael – I meant Hennigan
Apologies
@Peter
Both the strong dollar policey and trade liberalization was linked very closely.
For industrial growth you need demand – that can be created via two mechanisms – you increase wages / benefits or increase credit.
The markets wrongly thought that low fiscal debt was the signal to increase credit as they were working off a obsolete Gold standard model of fiscal prudence – but without Gold you cannot save so you must increase fiscal debt even though eventually that wealth will flow back into the system.
The idea is that with high fiscal debt you reduce malinvestment and thus carry wealth to the next decade and the next…..
But the objective of the CBs was to foster globalisation – their clients got badly burnt during the 60s and 70s inflation so they needed a mechanism to bypass western wage inflation – so they invented derivatives.
This kept sovergin yields low and credit production high – therefore the western peasants could sustain consumption eventhough their wages were stagnant and their capital base was disappearing to the east.
Therefore the western banks could make money via usury and the western industrial corporations could reduce labour costs and increase profits – wining on both ends of the debt and production spectrum.
That was the real reason for the global equity explosion of the 80s and 90s – but there was no real wealth created – it was just transfered.
The problem now is that global trade is unsustainable – hence the collapse of credit and the rise of base money aggregates – it makes no sense to manufacture steel in China when perhaps the Great lakes can do so more effeciently when labour costs are negated and the higher energy costs are factored in.
Even so if the dollar really does die it could create a commodity crash in non reserve currencies in everything but Gold as there would be much less demand for commodities as the dollar enters hyperinflation but those dollar reserves will have to go somewhere………………
@ Peter Kinane
I think this is the nub of DOC’s argument. You say:
“If banks are allowed loan more than their deposits then they borrow the extra.”
No. AFIAK, and I believe what the DOC is arguing, is that under the fractional reserve system, they CREATE this money. It does not have to come from anywhere, as it is created both in postive mode (a cheque is issued to the customer, who does with it as agreed with bank, eg buys car), and negative mode (the customer’s debt is entered into the bank’s books).
If the customer lodges this loan at the same or a different bank, the process starts again, as the deposit counts as part of the banks reserves.
If we ignore interest and inflation – though actually these are crucial – then the positive and negative money are equal, and when the loan is paid off the money vanishes.
Now what I gather is that DOC is now arguing that under Basel III, that even this system has been supplanted (which at least required a factional reserve of the initial government deposit that starts the chain off), and that a reserve is no longer required and pure debt money can be endlessly created. I’m not equipped to judge on that. I may have got him wrong.
By the way, I work across from the Central Bank, and I tend to judge exciting developments in the Irish Economy by the amount of lights there are on at this time of night.
Tonight the lights on the top floor are on, (and only a few lower down which appear to be redecorating). I wonder what’s up?
@ Gavin,
“AFIAK, and I believe what the DOC is arguing, is that under the fractional reserve system, they CREATE this money. “:
Yes indeed. I was somewhat intending to cover that here:
“Some of this wealth- -currency is deposited in a bank for a rate of interest and the bank loans it to others for a fee, at perhaps, normally, X amount of loan per Y amount of deposit.”.
The X amount of loan may be, or perhaps used to be, greater than the Y amount which the bank loans.
In which case if wealth is developed to match that extra money then the value of units of currency per wealth is maintained.
Regardless of TDOC’s point re Basel III, it would seem that the crucial point is the degree to which wealth is developed to match any such new currency.
@ TDOC,
I’ve put foreward my frist principles. You have not directly commented on them nor, in much detail, shown your own.
You say:
“For industrial growth you need demand – that can be created via two mechanisms – you increase wages / benefits or increase credit.”:
It would seem that we subscribe to different models. I find that concepts of models (the concepts which comprise models) do not translate or transfer across models. In which we case we either both put foreward our models and collide them and see which stands and which fades away or we waste go on like this without making a connection.
Directly to the quote: For industrial growth profit or surplus is necessary – indeed growth is profit or surplus.
In contrast your position seems to be that consumption, via higher wages or credit, makes growth. No, it makes consumption. Consumption above production makes decline- -regression.
Re “The real disaster in the States came from the Clinton strong dollar , low fiscal debt policey …”: I should think that a strong currency and low fiscal debt policy is a real sound policy.
@Gavin – yes a reference point.
What I am saying really is that you need a reliable reference point before you can spin credit- in one sense it does not matter what it is although the difference between Goverment money and private money is significant.
Before Goverment money represented the core taxable base of a country as banks held a large amount of domestic sovergin debt on their balance sheets.
This was a accurate reference point which reflected the market they were supplying credit into over a long time period.
Without a solid reference point you cannot determine value so therefore I cannot save, spend or loan with confidence that I know what something is really worth.
Banks are no different – they need a core asset which is a reliable metric.
Here a interesting but frustratingly cryptic Gold Blog that deals with this subject.
fofoa.blogspot.com/2011_03_01_archive.html
@Gary O’
Two of the main issues in developing a better exit from our situation are our relationship with the EU and our willingness to understand the proportion of the causes of the crisis that can be related to Ireland and to non-Ireland.
There’s a rather scary tendency in Ireland now to insist that the whole crisis is Europe’s fault for lending us so much money, that we shouldn’t have to pay it back, but that Europe should continue to lend us money at low interest rates so that we don’t have to experience “austerity”. This line is unlikely to play well with the strangers from whom we need kindness.
Linked with this (as Michael H and Paul H and other point out) is a vast institutional reluctance to accept that Ireland is corruptly run and that it needs to experience huge change. Money is still handed out to those with clout or friends rather than to those who create hard-to-substitute value.
If I was a German or Finn and I saw Ireland wanting to borrow lots of my money to mis-spend while simultaneously threatening not to repay whichever bill suited me, I’d be really reluctant to lend.
We need to be able to show good faith for the future before we are likely to be let off the hook for the past (or at least the banking debts). So far Ireland is (IMHO) showing too little good faith.
@Peter
Oh Peter I did not say that Industrial growth increases wealth – you are jumping the gun there.
For instance if I deplete more resourses then what I create I am net energy negative.
If you could use the example of a primitive peasant – he may live a better life through cutting down a nearby wood and enjoying the comfort of a constant fire but if he does not create a more effecient wood burner he may soon out pace photosynethesis and thus destroy his wealth base.
Your comments on money maybe true for money but we do not hold money in banks – we hold debt – it has a counterparty risk with a exponential function
If on a Island of 100 a group of 3 bankers hold all the hybrid debt / money then pretty soon commerce will break down unless the bankers adopt a plantation system of governance.
Changing the quanity of money changes how much real wealth is owed to each island member.
@TDOC
All money is a bit nonsensical really. Why Gold for example? Why not match wealth to uranium?
Bottom line is money is not equal to wealth. Resources and commodities are the first line. Skills with which you can acquire the commodities of others are the second line. The success of a country depends on these.
@ Eureka
Promise a someone you will give them a uranium ring and you will know why; not to mention specific reactive/non-reactive physical properties of same element of course !
Great thread @ BEB, KW et al.
@Eureka
Yes Money is just a symbolic representation of energy yet to be used.
Its just Gold is somehow recognized as private money , don’t get me wrong I am a big fan of goverment money but it has a counterparty risk if for example debt levels or corruption get out of hand such as now.
Anyhow Gold seems to stimulate our primitive primate brains for some reason – we seem to like trinkets.
But there is a good reason for Gold as a monetory rather then a industrial metal – it unlike Uranium does not get used up for the most part – it just sits there very still like.
That stillness gives it huge monetory potential – for example during periods of high debt stress it can be used to absorb that debt without pushing up the cost of essential items.
If uranium was a monetory metal we could not use it for nuclear reactions .
In essence its where debt goes to die…..
It happened during the 30s and indeed 1980 at least until Volcker decided to take down the usury laws by pushing the dollar interest rates into kamikaze mode.
@Karl
One question if you care to answer it – what does it matter wether the bank bonds are liabilties or assets really ?
Goverment securities are classed as assets but bank bonds are liabilties – ok that makes sense but……
Is not bank bonds pretending to be liabilties when in fact they have some characteristics of assets.
Did they not replace the functions of goverment bonds in many ways but their “taxes” were in form of tribute called the mortgage.
But bank bonds cannot be defaulted on as they are considered systematic.!!!!!
So bank bonds were in effect performing the primary duty of goverment bonds which is the control of inflation but this “Mortgage Tax” was not recycled into anything but outside rewards for the shadow bank sector.
The situation is farcical – huge liabilties are extracting a enormous yield off a tiny real base.
Is that not the definition of extreme risk free leverage ?
Is it possible to sustain such a system in the real physical world ?
@ OM
The reason I chose it was because it is inherently more useful – it can be used for energy. Gold, in this regard, is useless.
The thing about Gold is that it was in effect a global currency. And it had its equivalent FIRE economy in the form of adventurers and conquistadors intent on increasing the supply and their portion of it.
However aside from fulfilling the criteria of a usable currency it had no inherent value in itself.
At the moment there is an increase in the price of Gold.. With actual money having been adulterated so much through credit generation there seems to be a belief that Gold will emerge as the best kind of money again. But in stable democracies wealth resides in the goods and services produced by a nation. A token entitling an end user to some of these services/goods would be more valuable than an over-rated metal only good for making trinkets.
This is an interesting view from the inside of the DoF that may provide some comfort to both sides of the debate here:
http://www.irishtimes.com/newspaper/opinion/2011/0506/1224296265727.html
“bank bonds were in effect performing the primary duty of goverment bonds which is the control of inflation”
Honestly, Dork, give it a break. You obviously have your own theory of the world, or one you’ve borrowed from someone else, but you don’t explain it. For instance, who says the “duty of government bonds” is to control inflation apart from you or some guy you’ve read?
So really you’re wasting your time. And mine, so no more replies.
@Karl
I will finish with this Karl.
Goverment bonds is just money with a time component , ask yourself why is it a asset rather then a liability?
Because a goverment bond prevents another from consuming by taxing consumption – this defers consumption / inflation for another day.
Liabilities however depend on consumption for a yield – its a true private investment.
But what if Bank bonds were chiefly extracting a private consumption tax (mortgage) rather then getting a true yield from a productive underlying asset ?
What if the cost of a house in real terms was much cheaper then the cost of a mortgage ?
Is this not a private consumption tax ?
If defaulted on would not consumption and inflation rise ?
@ Dork
You seem to have a lot of jargon which individually sounds impressive but in aggregate is coming across as a tissue of nonsense. Or maybe its over my head.
But lets take a simple example: you say “banks don’t need funding they simply create credit”. To me this is non sequitur from a simplistic half truth.
So let us take an example. I go to my Irish bank and ask for a loan to buy an apartment in Bulgaria. You are correct at this point, the bank simply issues me with a loan document and credits my current account – instant creation of credit out of nothing. I then write my check to Bugaria Investments. The Irish bank has a problem. That credit it created out of nothing has come back to bite, it needs to transfer funds to Bulgaria. And so it needs to get foreign funding. Ergo banks need funding to create credit.
The ECB has been far too generous to Ireland in that it has allowed the Gov’t of the day the luxury of conducting business as usual. Blame applies to the ECB in the sense that one one could lay blame on donors to a Mother Teresa charity for prolonging misery and not letting the beneficiaries die an early death without prolonged suffering. In Ireland things get curiouser and curiouser as we cast around looking for a foreign Patsy to lay blame on.
The Gov’t continues to dither pointing to Portugal and the ECB and claiming that the Portuguese got a better bail out deal. It would never occur to anyone in Irish Gov’t that Portugal has taken a more prudent and responsible tack than Ireland has. Our Gov’t is still deep in denial as it puts more energy into trying to scapegoat the ECB than it is putting into remedial actions. The Irish Gov’t in a sense is in jail having been convicted of irresponsible behaviour and instead of expressing remorse and promising to behave it is denying everything and blaming the judge and jury. To a fair minded foreigner we look like common criminals.
As for the ladies and gentlemen of the mass media, every country has its gutter outlets as there is money to be made catering to the baser instincts of society. As we all know profits are not what they used to be as the media cash cows are drying up and since they are infertile taking them to the bull will not restart the cycle.
Could we pretend that we are fine upstanding and decent people and we will come out of this with our heads held high. Or as the saying goes we could fake it ’til we make it.
@ Paul Hunt
re the Pye piece in the Irish Times. Unfortunately that piece comes without citations or reference to other papers or resources. Its also unfortunate this Whistle Blower because of fear of his job, didn’t go public at the time.
A far more interesting and remarkable story from within DOF, is the following cited on the internet recently by George Baumann, I think from a link provided him by Dr Constantin Gurdgiev of TCD
http://www.scribd.com/doc/50015511/The-Destruction-of-the-Irish-Economy-by-Jeremy-James
In the case of Jeremy James, he did plead for permission to publish in the IT, but it was refused.
Both instances above clearly evidence the need for strong whistle blower protection in our society, both alert to the danger of stakeholder elites setting an agenda in snuffing out debate, criticism, questioning; both show how hidden agendas can negatively target true analysis based on empirical analysis and rigorous scientific method; both show how so-called elites set out to destroy their critics in a Big Brother environment that is designed to hide and bury the truth.
Unfortunately, our society is not run on talent which typically is often regarded as a threat; unlike, as in the US, where talent is a merit that is cultivated. Though many exceptions exist to that pattern in the US, eg the case of Brooksley Borne. The Frontline documentary, The Warning, well worth a look….
http://en.wikipedia.org/wiki/Brooksley_Born
This shift in values against freedom of debate, criticism and stakeholder elitism in Ireland is evidenced in recent years in the stance taken by government against large numbers of academics petitioning against government policy on the banks and NAMA; greater secrecy laws regarding the banks and NAMA; and further erosion of freedoms evidenced in today’s IT report on Croke Park,
http://www.irishtimes.com/newspaper/ireland/2011/0120/1224287942598.html
Socialism for the banks has come at a great cost to democracy and the cost continues to be extracted!
@Dork
If there is great insight in your remarks, it seems that you may have to express yourself in a different way so that people on here can understand what you’re talking about – or that they can believe you have any idea what you’re talking about.
Right now, at least, I haven’t a clue what any of your posts mean. Others too, apparently. Sorry about that.
@ Paul Hunt,
These comments have a ring of substance to them:
““The government had no incentive whatever to take corrective action. It was reaping a colossal revenue windfall, most of which it then channelled into current expenditure. As an egregious violation of the most basic principles of economics, this is probably impossible to beat. Many commentators bleat about the need for greater specialist skills in economics and financial management in the department, but this is nonsense. The mistakes that were made had nothing to do with skills. They were due rather to the appalling inability of the department to impress upon the government the sheer recklessness of its policies [emphasis in the original].””
“Given that the financial sector accounted for 35 per cent of corporate profits (up from 15 per cent in 1975) and the irresponsible removal of important legal restrictions on the kinds of activity that financial institutions could engage in, the opportunities for trading recklessly in a rapidly expanding money supply would prove irresistible. This in essence was the main thrust of my argument.”.
“In the course of the 1990s, however, as the public coffers expanded, a polar shift occurred and the department began to see itself merely as a provider of “advice” to the government. Its defensive role was forgotten.”.
He does not offer much in support of this categorising:
“… the sharks and jackals who control the international banking system.”.
@ Eureka
I don’t wish to ‘nit pick’ on the industrial usefulness of gold (or the difficulties in promoting nuclear power) because I cannot disagree with your broad point ( the post was actually my poor attempt at humour 🙂 ).
But the fact is that the base acceptability of the material, globally transferrable as it is into almost any local ‘currency’ is my real point – there is broad human demand for it’s ‘percieved value’ derived from actual demand.
I think I said that right !
@ Dork
Even i’m starting to bite at this nonsense.
“Goverment bonds is just money with a time component , ask yourself why is it an asset rather then a liability?”
Huh?
@Brian Woods II
You are trying to make the transaction more complex by involving foregin transactions.
Where does it need to get funding withen a independent legal juristiction ? – it has created the funding itself and has been given a legal entitlement by the state to do so.
(this would at least be the case for the Libyan central bank but perhaps the ICB is junior to the SNB or the FED-Why is this ? Are we not sovergin ?)
Anyway the commercial bank has been trusted by the parent central bank that its credit investments are wise and if not the central bank can create money to bail out the commercial bank.
Given the nature of globalisation there has probably already been agreements to recognize this credit abroad.
Perhaps what you are driving at is that a foregin central bank may not accept the full credit and faith of another CB and its sister commercial banks.
But that equation revolves around the nature of sovergin currency and its role has a backstop to commercial banks lending operations.
You may remember that I stated that if the physical economy cannot take anymore credit it will not take anymore credit period.
The nature of the physical economy and the mechanics of funding are very different – hence the crisis in the real economy.
Dork: Goverment bonds is just money with a time component ….
Try buying a carpet with government bonds. Describing something which is clearly not a medium of exchange as money is just abusing language. You might as well say that land is just money with earthworms in it.
In fairness though, the Dork is shaping up to be one of the great trolls. Not up there with the legendary Troll of Sorrow, but one sees the potential.
I’m not often tempted to abandon the only good rule for such cases: DNFTT. But the really good trolls can always suck you in.
@Peter Kinnane,
Thank you. That’s why I thought it useful to bring this op-ed to the attention of readers here. I think he sums up the situation and the problem more succinctly than Regling, Honohan, Nyberg and Wright have done. And, implicitly, he has generated the seeds of a solution. We can no longer rely on the good offices of the DoF to restrain venal and imbecilic governments ‘behind the scenes’ as it were. We need appropriately resourced and empowered Oireachtas Cttees with permanent staff of the calibre of the author of this op-ed piece and the ability to commission research and analysis to scrutinise government proposals and to hold government to account.
But I’ve been round the block on this many times previously and there are few, if any, takers.
Re the ‘sharks and jackals’ I suspect a limitation on the number of words has restricted explanation. And there seems to be some conflation of the situation in Ireland and that in the global financial arena. Ireland’s was an excessive, lunatic, but BOG standard set of bubbles in property and banking facilitated by fiscal imbecility. The layer of excessive financialisation is global financial markets was and us much more malign, is insufficiently understood by policy-makers and regulators (and economists!) – and is certainly not under sufficient oversight or control – and frightens the bejaysus out of politicians everywhere.
Our friend ‘grumpy’ has mentioned the end of the bull run in the commodity markets. But this looks like look a temporary correction as the ‘paper’ commodity markets had run way ahead of the underlying physical markets – and disbelief may be suspended for only so long. The frightening thing is that this enormous layer of paper trading based on all and every underlying asset or commodity has a life of its own; lack of transparency, thin trading and absymal price reporting mean that future/paper prices are often pasted back on to the underlying physical markets.
I suspect the author of the op-ed piece had the shadow banking and investment banking community (who can play profitable games on both sides of the deal in these financial markets) in mind when he referred to ‘sharks and jackals’.
@Bond Eoin Bond
So you are saying that when more goverment bonds are present on a commercial banks balance sheet there is not a drop in consumption to service the interest off this money ?
When I pay tax it goes to service this interest yes ? – a tax on labour , petrol etc = a drop in consumption on my part – yes.
You must agree with the above as it is patently obvious.
But when I service a liability such as a Mortgage I first have to consume – yes.
I actually buy a good such as a House with all its raw materials.
This is a huge difference
The point I am trying to get across is that finance has been corrupted.
Finance now does not create a real yield as its investments do not increase productivity.
It is acting more like a tax or a rent – hence my questioning of karl and the role of bank bonds in the global depletion journey.
Look at it like this – if a house does not improve the productivity of a nation the only mechanism to extract a yield is to engage in rent seeking.
Collectively there is a negative real yield to society.
Banks no longer invest in windmills to create more land – they chiefly invest in consumption sinks.
@ Kevin Donoghue
🙂
What does DNFTT actually mean?
Sorry to go off thread.
I observe a fascinating Babylonian aspect in the exchange with the Dork of Cork here.
To the Dork:
I do think that society at large certainly would benefit from demystifying the financial language, and in that respect, I would like to challenge the Dork to try to avoid using the ‘Insiders language’, in an attempt to clarify his point, which might be very valid after all, but currently, I don’t know this.
To the Insiders:
I remember Frederique Soddy in this context. 1921 Nobel Price in Chemistry, he even predicted atomic fission as early as 1909, and turned economist.
As an outsider to economics from an academic perspective, I would always try to translate stuff that I think I understood correctly, into a language that is able to be understood by anyone.
This is not easy for an Outsider, and open to all kind errors of course, but we live in times where we, as in we the people, are literally forced to look down the throat of the this monster, or in other words, one can only fight an enemy that he understands.
For example, and please, of course I stand to be corrected:
In my view debt should be a claim on the economy’s ability to generate wealth in the future.
The lack of restructuring solutions, mainly ideologically driven imho, and the decisions to bring together sovereign and private banking debts in this crisis has severely distorted the relation of debt and future wealth.
Hence I would assume that the equations used in modeling for future wealth prediction, the ‘positive economic output’ changed equally, but did they?
The relationship between the prospective future wealth of a nation and the currently ‘imposed on’ debt level, is one aspect of this distortion.
The other important aspect is the relationship of social stability within Europe and ROW at large.
Personally, I find the exclusion of the public opinion on the matter of banking debts wrong. I do believe that we need to have a referendum like Iceland did.
Best
Georg
@Kevin Donogue
Remember those Japs a few years ago crossing the Swiss / Italian border with US treasury bills .
Goverment Bonds can be used as a medium of exchange if there is no title to them.
They just may not be respected as a medium of exchange as the other party may expect higher inflation then the interest.
There is really very little difference other then time and its variables.
@Ordinary
DNFTT = Do Not Feed The Trolls
@ Hugh
Ah. Thought it meant Do Not F…… Touch That! Same basic meaning! 😀
@ Dork
a government bond is sold to a commercial bank. The funds are used to build a road, or an airport. This is unproductive rent seeking? Or investment, as George Bauman says, in the future economy’s ability to generate wealth? Consumption may reduce now, but it is for the aim of increasing consumption later due to higher productivity via use of these new assets. It’s patently obvious that you are talking nonsense.
@ Dork
I used the foreign example as it makes things more clear, but it applies to an internal economy as well.
Look, I could swop IOUs with you. Instant creation of credit. However, next week when the Mercedes dealer presents me with your IOU, I have a problem. I need real funds.
I think you are arguing that this was never an issue for the banking system. They could get the funds from fellow banks or as a last resort from the CB. Okay, some truth in that.
But back to topic. Senior Bonds are Funding not Equity. Do you understand that point but disagree or do you not understand the point, coz I can’t tell whether you are simply a Troll or a misunderstood Genius.
Come on folks. The Austrian school did once provide some valuable insights. Those that had some empirical validity have been absorbed; those that didn’t have been abandoned or have migrated to the wilder shores of libertarianism. Time to move on.
The Economist has highlighted some research that suggests there is a huge wall of ‘good money’ looking for a safe home:
http://www.economist.com/node/18650928?story_id=18650928
Wouldn’t it be better to focus on what we need to do get in shape to access this – rather than finger-pointing at EU institutions or losing ourselves in Austrian praxology?
@eoin
Consumption may reduce now, but it is for the aim of increasing consumption later due to higher productivity via use of these new assets.
I intend to think, It is not only reduction in consumption, but the opposite of wealth, poverty that is the result of late to the game, or failed policies to tackle this crisis.
Increase of poverty needs to be measured, but it is evident, and I would include the thousands of people forced to leave the country into that equation of a national poverty level, as they more then likely will not return to contribute to the wealth creation.
Somehow it all comes back to the same term over and over again, sustainability, and the opinions here are multifold, and often mixed with ideology.
May be we should start asking the question how we can avoid further increases in poverty before we claim to have a plan that increases future wealth, which is dependent on more than our national decisions alone, or is the poverty emerging all around us collateral damage accepted in academic economy circles?
It’s amazing how the narrative has changed. Remember how many on this site were mocking various Fianna Fail TDs who were going around parroting how the ECB was going to pay for NAMA…oh, how we laughed at their misdirection, their naivete and their duplicity. Turns out, though, that the joke wasn’t funny…that was indeed their strategy. At a time when the ECB were looking to wind back their ELAs, the Irish were grabbing more and more liquidity and treating it as a medium to long-term funding source.
This strategy, such as it was, allowed uis the the ‘luxury’ of the world’s slowest bank bailout. Contrast with other countries who found their banking systems in extremis: over a weekend, you…you…merge…boom…done. Entities infinitely more complex than any Irish bank restructured overnight.
By the end of his tenure, most here wouldn’t have believed Lenihan if he told you the time of day; now, while spinning for his legacy, we suddenly become receptive to his narratives?! Why?
Trichet’s response to the Irish Indo lady yesterday was telling: “the level of commitment of the Eurosystem to Ireland has absolutely no precedent.” And then, for emphasis, he repeated it word for word. And looking at the numbers, the case seems irrefutable.
And yet, on this site, we read repeatedly that the ECB is the cause of Ireland’s malaise. I even read that the ECB is responsible for the deposit flight from the banks! Now in fairness to the author of this particular piece, he seems to concede in his comments that while the bulk of the responsibility lies at home, it is important to highlight the (negative) role of European institutions to redress the balance, and hence, I would imagine, provide a more balanced understanding in order to allow future discussions to progress in a spirit of mutual contrition, rather than a spirit of beating the red-headed stepchild of Europe.
That’s all well and good, but when ‘ECB sux’ already outnumbers the contrary position by about 9-1 on this site, it seems that any redressing of the balance should occur on the other end of the scale, before everyone here manages to convince themselves that it’s all the fault of the perfidious Hun, and the time has come to round up the posse with the burning hurleys and give old Fritz a good working over, lest he forget the day he ever tangled with the sons of Cuchulain.
By failing to redress this balance, the promoters of this site also provide a space for nationalistic wingnuts and economic illiterates to flourish and degrade the comments; witness the proliferation and increasing assertiveness of crass ignorance since this topic took wing.
@ Paul Hunt
@ Paul Hunt
re “We can no longer rely on the good offices of the DoF to restrain venal and imbecilic governments ‘behind the scenes’ as it were. We need appropriately resourced and empowered Oireachtas Cttees with permanent staff of the calibre of the author of this op-ed piece and the ability to commission research and analysis to scrutinise government proposals and to hold government to account.”
The problem with that is Oireachtas committees can be controlled to sing to the tune of whichever party is in power. They’re pretty toothless in Ireland. They’ve had bankers in already who ran rings around them. Often, just like our banking reports from Honahan, Nyberg, they end up being coverup political and banking charades controlled by insiders.
Instead, we need committees with far more wide ranging powers, similar to the US senate committee system that investigated McCarthyism. OR the committee below that in the ’50’s in the US investigated organised crime across the US calling 600 witnesses in public hearings that were televised. This also holds the methods, procedures and expertise of committee members up to public scrutiny.
http://en.wikipedia.org/wiki/United_States_Senate_Special_Committee_to_Investigate_Crime_in_Interstate_Commerce
I’ve said before the money trail through the banking sector in Ireland should be investigated by CAP, better still above. Call 20 people including fingers, Seanie, Drumm, directors of banks, upper management, developers and lenders and we would have a much better picture of what happened than the nonsense coverups we’ve been given.
None of the above should become an excuse for not putting in place world class management teams in the DOF with the expertise and professional systems required to withstand contamination from the infection that led the DoF and Minister for Finance to be the worst performing disastrous financial team in EU financial history:)
http://www.irishtimes.com/newspaper/opinion/2011/0506/1224296265727.html
Where the heck did this guy spring from? Well its about time!
What do the “dont blame the ECB camp” have to say about this man?
@ Michael Hennigan
Given you think that those outside Ireland are 20-30% to blame do you think they should pay that portion?
@ Hugh & BEB
🙂 Thanks lads.
@ Eamonn
he seems to apportion the blame evenly as follows:
– the global financial system (not just the ECB) for creating the crisis
– the Irish political system for ignoring its likelihood
@ Eamonn Moran
‘Where the heck….?’
Ex. DoF I believe.
Check out Colm Brazel and his links above for the full history (Thanks by the way Colm)
@ The Other Andrew
Re “the Irish were grabbing more and more liquidity and treating it as a medium to long-term funding source.”
Either you erroneously misread the comments above, or you choose to ignore the acceptance on behalf of the majority of contributors, that there is not the either/or scenario you depict.
Most contributors are as vehement against the mistakes made on the Irish side by Lenihan et al as they are against the disaster brought by the ECB.
As regards the laughable liquidity support you mention, all it props up at present is the IMF, lack of economic sovereignty, future austerity and eventual default.
@Eoin Bond
I did not disagree that goverment bonds can be held by commercial banks – where have I not said this ?
The funds can then be used for goverment expenditure etc.
But I engage in austerity through forgone consumption to pay for the interest but if I pay for the principle the money supply shrinks.
I have not got a serious problem with this if you read my above on the role of goverment bonds in a economy.
It essentially represents the wealth of a country expressed in paper form.
However where I do have a problem is the nature of liabilties such as bank bonds – as I said above the consumption comes first with these vehicles not after.
The owners of these liabilties can both improve a business or not – if the business goes under the rules state that they take the loss first or at least I hope they do.
@Brian Woods II
We Are going around in circles again – this is buffer capital under Basel wether it is equity or bank bonds – it means you should follow the rules baby.
and follow the capital structure.
What is the point of Basel if the sovergin takes the loss before all risk capital ?
Yee “Capitalist” queens baffle me.
If you continue with this nonsense capital will continue to be wasted in unproductive capital consumption sinks.
There should be a knew world created for yee lot – maybe subsidists my be appropriate.
@Colm Brazel,
I think we’re on the same page here. The inability of the Oireachtas and its Cttees to scrutinise government proposals and to hold it to account effectively is the single most important deficiency in democratic governance in the modern era (and, to varying extents, it is the case throughout the EU – and in the EU itself).
This is not something for government – governments everywhere will avoid scrutiny, transparency and restraint like the plague. It is for all backbench members of the Dail to take the lead – and for citizens to compel them to do this. TDs are fully empowered to do this if they were so minded.
That’s where the pressure needs to be focused, but there seems little interest. And I’m a little bemused that it attracts little interest from the principal contributors on this board as it would allow them to showcase their analytic capability and influence public policy-making – and be adequately remunerated for the effort!
..and here we go: ECB liquidity support is ‘laughable’….sure dude, BostonorBerlin has always been at war with Eurasia…
I suppose this is all consistent with the Kubler-Ross model…we’ve done denial, now for the anger phase, next comes bargaining…but this is not a psychological counselling blog; I believe that function is provided by politics.ie…we should be attempting to cast a cold eye over the economic issues of the day…heated rhetoric (a) won’t progress the debate, and (b) attracts the wrong kind of posters.
@The Other Andrew
Get off the stage mate – the last time the private banking cartel was given such free reign was the run up to the Great War
The ECB is merely trying to peserve the value of its assets which have only a cash price in many cases given that they are non productive consumer goods in the main (yes houses are consumer goods)
This overvaluation of unproductive assets is robbing the real economy of investment.
They are killing us with debt kindness.
Ireland is a total lost cause.
@ The Other Andrew
re “ECB liquidity support is ‘laughable’” I meant in the sense that rather than increasing our economic independence it has made us further dependent on the ECB. The ECB is using it as a backstop to shore up the falsehood that we can repay such lending or fulfill the terms of the bailout. In effect its a form of quantitive easing. Its also laughable to the extent that it has failed to bring growth back to our economy. As DOC says above in one of his infrequent moments of lucidity:) “They are killing us with debt kindness” At the EU level they are quickly pulling the plug on this as it increasingly exposes the ECB to our own contagion.
http://www.ft.com/cms/s/0/580109dc-bf43-11df-a789-00144feab49a.html#axzz1LZSLoAz5
@ DOC
Its just more evidence of ECB crack house magic that that has failed and done irreparable damage to Ireland’s economy.
Ladies and Gents,
Allow me a pledge, by just offering a thought…. and then I leave you to it, as I do not wish to dilute the excellence of the fora contributions by my own economic illiteracy as ‘The other Andrew’ above put it. – Pffff-
Allow me to make my point by starting with something different than economy.
It is 30 years ago that we sent two probes into space.
Voyager 1 and 2 are now in the Heliosheath, the point where the solar wind is slowed by the pressure of interstellar gas, and they are now at the edge of the solar system. This means, that for the first time, we send a craft that was constructed on earth 30 years ago into Interstellar Space, this will probably take place in 2015.
If anyone around here is not humbled by this accomplishment and it’s significance, well, you need not to read any further.
What an outstanding accomplishment this is, and it is certainly not the only, but unique in it’s way. The challenge to achieve this was enormous, and what brings me to this example is simple.
Current policy makers often are to be found out of their comfort zone, overwhelmed and incapacitated to deal with the complexity at hand.
Perhaps, this global crisis needs to be understood as a conglomerate of five major crises to peak at the same time.
1. Economic – System breakdown –
2. Environmental – Climate change, Peak oil –
3. Cultural – Clash of belief systems, Western Cultural dominance –
4. Political – democratic deficits –
5. Security – Increasing military expenditure
Interdisciplinary efforts are required to stand a fighting chance to tackle the problems, and it is clear to me that time is of the essence, it is very pressuring.
The council questions I raised earlier was asked on purpose, as the current status quo does not leave me with a great deal of hope in the quality of the council available to date. There are many examples of such extract groups such as the G-20 et al. and their lack of results and execution.
If I rewind back to 2007 and fast forward to date, the results presented, policies implemented and progress achieved are rather embarrassing, are they not?
It is clear to me that the economic part is only one aspect, and that lines of communication are getting worse, hence the quality of decisions is not of a standard that is convincing for the public, or even would regain hope and trust.
I think, it is fair to describe the public feelings, opinions and reactions as somewhat hopeless and and in paralysis. They shall be excused, and that includes myself, to think of those in charge as headless chicken.
Those in charge are responsible for the wellbeing of Nations and future generations, and fours years later, the situation has not improved, on the contrary, it would appear that there is only a forced upon delay of the inevitable, the re thinking of our ways and our future actions.
Power dynamics are changing, and although it should not be this way, change is always a scary event to most of us.
Looking at the five aspects involved, I come to think, there is no Plan B, or if there is, you tell me about it, I certainly do not think that there is one.
We can not continue to act the way we acted in the past, if we continue this way, and just apply bandaids to inner bleedings, the possible results are very predictable.
This is one of many reasons why I say that we need to involve the public, especially on the banking matter in form of a referendum. The process of consultation with the public is missing, or in some parts can even be described as misleading, and as an example I would point out the second Lisbon referendum and the PR surrounding it as misleading.
Politics has changed in the past 20 years, and where we had charismatic leaders once, regardless the political fraction, we now have mediocracy, at the very best, administrative career civil servants have replaced charismatic and competent political personalities, to the benefit of a structure that can be described as democratically dysfunctional because it is based on overwhelming Lobby pressure that dictates policy decisions.
We are endangered to slip back into a somewhat feudalistic scenario, where key positions in politics are held by conformist Yes-Sayers with mediocre competence, an sorry excuse to hold up the democratic Flag, but in reality it is just a logical progression of this new reality. Dr. Jens Weidmann’s appointment to Germany’s CB comes to mind as one example, and there are many others.
Some of you here are in positions that have access to the halls of power, and have a little influence on the developments, it is to those that I would say, we need your council and your words of truth, your courage not to be politically correct, your wisdom to accept that we badly need better council on the pressuring issues at hand, and your courage to enable the public to have a voice on these matters.
On the economic front alone, to refuse this referendum on banking matters to the public is morally wrong, and we should stop the separation of the moral aspect from the daily decisions by statements like…. Yes, to burden the taxpayer with the the entire private banking debts might be morally wrong but…. There is no but possible!
We are at a cross roads, and it is morally wrong that an unelected and unaccountable for Institution that changed the goal posts by loosing their independence and neutrality forces policy decisions for all of us.
Thanks for your patience.
Best
Georg
@Colm
Again the mechanism to finish this is simple
Separate the “risk liabilties” from the term accounts – let the term accounts become goverment money.
This goverment money can seek the true cash price of these “assets”
These assets may get 5 -10 cent on the Euro.
The money saved by not serving debt interest to failed institutions can be used for either consumption or investment.
What the hell is complex about this ?
If we don’t do this soon we will not have any money for consumption or investment.
Whats happening now is madness squared or even cubed
Is there a feature on this site to ignore users or minimize the comments, the likes of Dork are adding way too much noise to an otherwise great debate.
Do we really need constant posts on the evils of fractional reserve banking or various conspiracy theories.
Once its entertaining, twice its ok, but hundred times it gets rather annoying
Dork please start your own blog and let the big boys do some debating while the rest of us mere non economist mortals read and learn and maybe provide occasional input.
Oh I thought it was the 30years of tax breaks for property schemes
Dammit the ECB is sly
@Pongo
Yee guys have won , but what spoils will remain after you let the big guys do the talking I have no idea, but I can make a reasonable guess.
It seems to me the situation will have to get even worse before most of you will come to your senses.
Good luck for now lads.
@ Georg Baumann
On referenda, check out the experience in California, the biggest state in the American union and send your best wishes to Sacramento, where the once youngest governor and now the oldest governor, is struggling to get out of a fiscal mess that had a long gestation.
A referendum in Ireland where Europe was the scapegoat, would give a platform to the ignorant and could brand the country ovrseas as a failed state — it is that but it would hardly help the unemployed if we broadcast it to the world.
@Eamonn
I also reject utterly the despicable arrogance with which this country is being treated, and the servile ineptitude of those who pose as our leaders.
Unless we take a stand and defend our sovereignty, our integrity and our children, we will be destroyed as a nation.
A clarity of speech that is long overdue and it is only such clarity that has a chance to break the apathy of this Nation!
It is difficult to see what will spark people in developed economies to free themselves from the comfortable captivity and the increasing constraints on liberty they experience – even if it is becoming much less comfortable for many people in Ireland. It took constant harassment by authority figures in Tunisia that drove a casual vegetable seller to ignite the flame (literally and tragically for him) that initiated the Arab Spring.
Unfortunately, in the rest of the EU we are seeing the rise of populist, nationalistic, xenophobic parties. It is, perhaps, to Ireland’s credit that there is little evidence of that here. But is it really, if it is the result of an overwhelming, de-energising and stultifying apathy?
@all
Conservative German Die Welt writes:
“There are good reasons for bailing out Portugal…. But there is a fundamental problem in the European Union. Despite months of discussions, EU political leaders have still not reached a consensus as to the path out of the crisis…. Indeed, top politicians still haven’t even been able to answer the vital question as to whether investors should bear the risks of their ill-advised investments in bonds from Greece and Portugal or whether banks should be granted a free lunch.”
“The fact that there is no clear position on the issue is shocking. Many would like to see the banks get away scot-free. And that may be advantageous when it comes to the stability of the financial system. But that would mean that euro-zone taxpayers would once again have to assume the costs of a crisis which began with bank stockholders making good money. That’s not how the free market economy works. It would be nice if the EU were to realize that fact.”
http://www.spiegel.de/international/europe/0,1518,760872,00.html#ref=nlint
Irish Political & Governance System failed abysmally ……… little sign of real change or any radical restructuring or real burden-sharing from the gouging upper-echelons around here …….. let alone a whiff of responsibility or accountability …….
Nor – as Die Welt notes above – have the EU UpperEchelons in its Governance System got any substantive handle on its BankingCrisis …. this is not an either/or – it is a Both/And problem and entire European Project remains in some jeopardy ……. we are well beyond ideology here ….
@ Paul Hunt
Don’t bother about the article, but does this picture assist you at all? It sums up the Government and DoF strategy since Autumn 2008.
http://www.zerohedge.com/article/what-make-todays-market-move
For what it’s worth, I blame the ECB for giving our government an alternative to repudiating the bank guarantee and putting the banks through a resolution process. I blame it for its contribution to demonstrating to investors in sovereign debt that their interests will always come last while Ireland continues to use the euro.
The ECB deserves to lose every cent it has put into achieving this.
@DO’D
Sounds about right.
A interesting (You may be aware of it) interview with Former German Finance Minister Peer Steinbrück 09/14/2010 in Spiegel Online
http://www.spiegel.de/international/germany/0,1518,717248,00.html
a salient quote from the above link
SPIEGEL: It’s been almost two years since the financial crisis reached its climax. Has the worst been overcome?
Steinbrück: No one knows. There are still deep-seated structural problems that threaten the economic balance in the world: Between the United States and China, for example, but also within Europe. We have taken a few steps toward taming the financial markets, but we haven’t come nearly far enough to rule out a repetition of the crisis. The most important question hasn’t been answered yet: Who’s in charge, politicians or the financial industry?
@Paul Hunt
Why do think apathy prevails?
My view for what its worth is that those with the economic wherewithal to keep their heads above water (i.e. the employed) just continue on that vein and hope the problems dissolve away. The I’m not too bothered community as long as the monthly cheque rolls in.
Those who are economically drowning are otherwise too occupied in restoring their economic well being. They don’t see formal or informal protest as a mechanism at improving their economic lot in any material fashion any time soon keep their head down and slog and hope but rarely engage in anything other than very formal change processes such as General Elections etc.
Those who are economically drowned are too fatigued by polictical failure upon polictical failure to muster enough energy to believe their is potentially a better way – and harsh as it may seem the Social State has done an extremely good job at cushioning their economic blows.
Others at either end of the extremes of society are or were never engaged in good or bad times so probably not likely to adjust their stance.
So it turns out the ‘silent majority’ are very much inclined to live by their name and economic circumstance dictates everything. I really mean everything.
I see todays voter turnout in the NI Elections will be about 50%. It must really make a lot of folk on the island wonder what the hell was all the fighting really about when you see such miserable numbers bothering to participate in the ongoing rehab of NI. Maybe I’m just getting old.
@grumpy,
Oh no! Not Bambi. Please say it isn’t true.
@Ordinary Man
Sanity, increasingly from within the Financial System, appears to be emerging in Germany …. and without German Political input – EU ain’t goin anywhere …. this sanity transcends political ideology so pragmatism and realism may be on the up …….. but elections not to 2013 …..
As for France – not so good – all Sarky is doing is bombing North Africa, hammering North African immigrants, playing the local family affairs card, insulting French citizens of Islamic origin, deporting Roma, bullying Ireland, facilitating far-right – all in a VAIN attempt to keep DSK at bay ……… to elections in 2012. How far the Great French have fallen …. embarassing really ……..
@DO’D
You may be right but the fundemental problem is as Steinbruick asks above ‘Who’s in control?’
Maybe below from the Economist yesterday is what they really fear in the Banks of Europe and is a driver in bringing some sainity to the situation.
‘America’s Justice Department filed a lawsuit against Deutsche Bank and one of its subsidiaries for allegedly hiding the poor quality of some of the mortgages it submitted to be covered by a federal mortgage-insurance scheme. The government claims it has paid $386m in insurance claims on 3,100 mortgages because of the German bank’s actions, but is seeking damages of more than $1 billion in its suit.’
Sounds like a start.
@Yields or Bust,
Apologies for multiple posts. Maybe wisdom accumulates with age 🙂
I find it hard to disagree with your assessment. There are numerous ginger groups seeking to encourage the engagement of ordinary citizens in reform of the process of democratic governance, but they seem to be getting little traction. The one making most noise – the ‘We the Citizens’ iniative funded (allegedly >€600K) by Chuck Feeney’s Atlantic Philanthropies – has attracted an interesting collection of national and international polsci academics and elements of official and non-official civil society. The effort is focused on demonstrating the ability of a Citizens’ Assembly to frame and advance constitutional, institutional and procedural reforms of democratic governance that government and the Oireachtas are either unwilling or unable to contemplate.
In all likelihood it will generate a bit of a buzz, produce some interesting output, get a pat on the head from the government – and then…nothing. Alternatively, should it really seek to force the pace and try to get citizens to engage with backbench TDs/Senators en masse (and get the latter to do the jobs they’re supposed to do in terms of scrutinising and holding government to account) it’ll probably be crushed as, reportedly, was the previous foray in to the public sphere funded by the same source.
But disbelief can be suspended for only so long and a tipping point always arrives. Think Ceaucescu on his balcony blinking in disbelief as the crowd below him started to chant against him..ordinary Berliners taking hammers and sledgehammers to the wall..Mubarak on television wagging his finger at his people….
Very enjoyable thread, apart from the mumbo jumbo TDFC is coming out with. A deathmatch between himself and JTO would draw quite an audience.
Dont think I’ve ever agreed with apportioning blame to outside parties, the overwhelming responsibility for it all rests on the shoulders of our own delinquent leaders. IMO. But then others have their own view, which is fair enough. Having said that, i do think its time to wrap this particualr discussion up, as it has been in the public forum for quite a few months, and no doubt is permeating abroad to those same outside parties.
I believe our best approach to getting the most help and most favourable terms is to admit unreservedly how badly we got it wrong, stress how intent we are to put things right, and then look for as much help as we can, with as much humility as we can muster. I would leave it to other, uninvolved outside parties to highlight the failures of the ECB, EU etc.
Whining about how badly we’re treated and how its not really our fault is a sure fire way to turn even more people against us…..those who have’nt already turned that is.
@ Paul Hunt,
I should think that if the wrong people, or people without much higher intellectual faculty, come to power then they get to express themselves throughout the life of the society and have a mandate to do so. Perhaps it is very difficult to do much against a strong manifestation of such a scenario; it may just have to run its course to collapse- -implosion. At least the electorate, when they waken up, can rather easily but the phenomenon out of its misery – perhaps the major advantage of democracy, the major disadvantage being that people have an input to issues of which they know, and want to know, nothing and vote for those with whom they identify.
We’ve had comparatively independent academia – for what good it was. So, I should be reluctant to form a new group to do this DoF work – presumably society as a whole is well alert to that rather narrow matter now.
(In 2007 I started to have an interest in theory of economics. That same year I decided to run for election to a board of management of a company whose management I was becoming concerned about. Twice in my canvassing letter I urged, due to concerns about the USA economy, that “we drag our feet” on a new investment project. I got one vote, though it was one more than I directly asked for – I did not even vote for myself, anticipating that the competition who were stating that all was well with the world would have a sweeping victory, as they did, but at least they could see that I anticipated it. Of course we now know what became of many such investment projects).
Here, through my name in this forum, is a link to the introduction to what I state is a radically original, coherent philosophy system. I’ve had no expressions of interest in it.
Philosophy is a bit like economics and perhaps everything else in that one is rather wasting one’s time in talking to someone about it if they know nothing of it. They need some cultivation in the subject, though this is not something I feel should be my role.
I’ve brought my system to specialists in the field, since the system came together in 1997. They, or at least many of them, could see its worth instantly. Yet, it immediately became trendy not to openly comment on it – probably for one hundred and one reasons, one of which may have been that they did not like to recognise that they had a circular posture and were looking our at the world through their navels for millennia, until an outsider, albeit a comparatively sub-literate one, came along and made them aware of their condition. They probably needed to be propped up to acknowledge it, not having the necessary spine and grace to do so of their own accord – again, not something I would be inclined to do.
Philosophy has a bearing on economics, as on all issues. I should think, indeed A. Greenspan acknowledged when being questioned about the meltdown, that his policy that the markets would self regulate in the interest of self interest was based on Randist theory – Randist rubbish.
Indeed, since A. Einstein took the world by storm at the age of 26 (in 1905, his “annus mirabilis”) with so much (non)sense then and in 1916, academia does not know its head from its posterior – but I’ll pass on trying to support that claim now.
Another issue is that the modern world seems to involve much specialisation. I find that no issue is an island.
And a post such as this risks being regarded as in bad taste.
for whats its worth my view is that after one month in office the FG/LAB
goverment has been seduced by the Dept of Finance and forced by the ECB and EU that for Ireland it would be fool hardy to try to impose loses on the senior bank bond holders or we will lose the cheap liquidity to the irish banks
we are heading for sustainable debt levels ? of total 2015 soverigne dept of 118 % GDP which is where we were in the late 80s going to be tough but managable in to the future,
can any body really beleive that
Ireland is being squeezed dry and there no plan B
CAN THE PEOPLE OF IRELAND HAVE A REFERENDUM PLEASE
Has the MoF set the cat among the pigeons? And which ones?
http://ftalphaville.ft.com/blog/2011/04/26/553721/allied-irish-and-a-collapsing-capital-hierarchy/
Pathetic is the mildest term I can come up with, for delusionists who want a referendum to effectively highlight our demands/divine right to have international funding to pay Europe’s most expensive lawyers, medical consultants and many more of the Irish chapter of the Golden Fleece.
@micheal hennigan
what is pathetic is that irish people have been rail roaded in to this mess
by our political leaders ,dept of finance ,irish central bank ,regulaters ,banks ,ECB and yes our EU partners
imho if we were dealing with IMF on its own we would be looking at way forward and yes there would be a lot of pain and adjustments but we would most proberly have a future to look forward to as a citizen in a republic i beleive decisions that were made can only validated by the consent of the people
Story going around about Greece leaving the Euro!
I’m not sure whether I want a referendum. The part of me that does want one wants it mainly in order to force the government into a position where it will have no choice but to move quickly to a positive primary balance, steamrollering the Golden Fleece folks along the way. And disappointing the referendum proponents who think there’s a free lunch at the end of the rainbow.
148 comments on “ECB must share the blame”. It does not seem like a very productive activity. Granted, designing a scapegoat is a way to relieve frustration but, long-term, it will not improve the situation one bit .ECB’s board must be scared stiff of its present exposure to Irish risk .Fortunately it is too late now for them to disengage themselves ,but it is not very helpful to remind them how gullible they were.
@Eamonn Moran
Der Speigel
EU Commission holding crisis meeting tonight on Greece leaving euro
We live in a parliamentary democracy. The people delegated their ultimate authority to 166 TDs on 25 Feb and that delegation of authority holds until the next time of asking within the next 5 years. Probably more than most, Ireland’s voting system reflects the intent of the people reasonably faithfully. The direct consent of the people is required when a change to the Constitution is advanced or there is a contest for the Presidency.
This process of democratic governance (which should be perfectly adequate and sufficient) isn’t working very well – and is obviously not functioning to the satisfaction of many people. But rather than put the effort in to make it work better they seem to want to over-ride it via a populist referendum – the tool of demagogues and would be dictators always and everywhere.
From Wikipedia:
“In Europe, where the popular referendum (commonly known as abrogative referendum) was first introduced (in Switzerland in St. Gallen canton in 1831)[9] it now exists in Albania, Denmark (since 1953), Italy (since 1970), Malta, Russia and Switzerland (since 1874).
In Latin America, the popular referendum exists in Colombia, Uruguay and Venezuela.
In the United States, such a process exists, as of May 2009, in 23 states and one territory: Alaska, Arizona, Arkansas, California, Colorado, Idaho, Maine, Maryland, Massachusetts, Michigan, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Utah, Washington, Wyoming and the U.S. Virgin Islands.”
Every single one of them a hotbed of demagogues and would be dictators …
@paul hunt
the people have been pushed aside the EU have more control in this country
than ever before thanks to the bailout that our leaders did not even feel the need to put through the dail at the time if you remember they reluctantly agreed to some FF back benchers ,
the decisions are of huge scale importance to every citizen yes we should have our say warts and all
Greece may be showing the way in focusing the EU attention to the Euro crisis and hopefully outlining the resolution
@ Jarlath
Spoken like a true Irish government minister. Gary O’Callaghan’s article asks for the ECB to share ‘some’ of the blame, not all, most or even much of it. As such, this could be entirely consistent with your opinion that the “overwhelming responsibility rests on the shoulders of our own delinquent leaders”.
I don’t blame the ECB for Ireland’s inept banking system, for the ghost estates or for the grossly out-of-whack public spending – nor can I recall a post here blaming them for such things. I do blame them for adding pressure to a weary government to get them to use tax payer money to bail out the Irish banks and, by implication, their European bondholders.
The ECB broke its own rules by loaning money to bankrupt Irish banks in an attempt to keep the European banking system afloat. Once it realized it was going to get caught doing this it ‘bounced’ Ireland into a bailout, forbid it from haircutting bond holders and began to transfer its potential losses on the banks to the Irish taxpayer. This may be in the past, but now that we are on the hook for the banking liabilities, there is a fair chance that we will be sitting down with our sovereign creditors in the not-too-distant future. If that conversation happens, I’d prefer it were framed around the idea that when the ECB/EU/IMF bailed out Ireland, Ireland bailed out the ECB and the European financial system.
While there has been the odd flutter out of Germany echoing this narrative, I do not believe it’s one that’s been widely heard outside of Ireland. In my opinion, leaving the dispersal of this view to some deus ex machina in the form of “other, uninvolved parties” is a continuation of the ongoing causes of this crisis – the idea that we taxpayers/politicians should all sit quietly like good girls and boys and not bother the grown-ups in Dublin/Frankfurt. As far as I’m concerned, the more publicity this view gets in Europe the better.
Once again, I have no interest in blaming outsiders for the bursting of the Irish bubble or the dire state of the economy – Ireland needs to match its income with its outgoings and drastically reform itself – but based on the reported commentary of those involved in the bailout discussions, I most certainly blame the ECB for their part in transferring 100% of the losses of the banks onto the Irish taxpayer. The shortfall in the banks should had been paid for by bondholders (after the expiry of the 2008 guarantee or the government could just take the guarantee away with the same of the same pen that granted it) rather than taxpayers and why some might call that view cribbing and moaning, I call it capitalism, and I believe that view may resonate with the average German or Finish voter even if it offends their unelected technocrats.
@ Paul Hunt
What this thread shows to me is the absence of grip on the notion of class politics.
To be clear, the rich and profit taking end of European societies have taken their pleasures, blown their wad, and now expect – and are succeeding in getting – the working people to clean up their mess. So they can do it again.
This is class war.
Ideas based movements around citizens campaigns generally run into the ground as they don’t know which side they are on. They just want things to be better.
Where working class movements are strong politicians pay attention.
In Ireland, the legendary lack of an industrial revolution, combined with a union movement which is strong on rhetoric, but historically unwilling to stop the state in its tracks, means that the actual vehicle for popular opposition to the direction the state is taking, is not going four to the floor with the government/ECB/IMF.
Thus Marx is on the blogs, not on the streets.
We live in a state formed by DeValera and McQuaid, not Connolly and Larkin.
@Gavin,
I agree. Ireland suffers from the failure to present two power blocs competing for power with each defined by differing views on where the boundaries of the state should be drawn. Good governance requires that these blocs successively persuade voters to rotate their periods in power. This ensures that the excesses and imbecilities of one may be reversed and remedied by its successor, while those policies that have lasting value and benefit are embedded – and so on over time.
But again, it’s for the people to decide to move on from the anachronistic configuration of factions – and they made some progress on 25 Feb.
Union leaders on €150k+ per annum?
Kind of sums that one up for me Gavin – don’t start me!
🙂
Some of us are concerned that the banks are getting away scot free. It could could be said that in most countries banks do get away scot free but with limitations. A deposit insurance scheme funded by the banks and administered by an arms length trust is the norm in most countries. The amounts covered are usually Euro 50,000 to Euro 100,000 per depositor (not per account). Stockholders are usually left with nothing, with bondholders in the higher tranches getting no more than 1/3 of face value in a lot of cases. The regulatory arm of Gov’t usually take over the bank within 72 hours of a collapse and fire the top three layers of management as well as the board of directors. There is no automatic pension or severance unless it is in an arms length trust. The bank continues to do business now managed by the regulatory agency with a majority of its work force still employed but under conditions of employment that begin on the day the regulatory took over. In other words they were unemployed for 72 hours and now have a take it or leave it job offer. If it is deemed that the bank had any net positive value on dissolution the bondholders, management and employees get paid accordingly. The bank continues to do business and in that sense it does get off scot free.
In Ireland we march to the beat of different drummers so disregard all of the above. We have a new commandment number eleven- The taxpayers shall prop up the banks. That includes the bondholders, directors, management, unlimited depositor insurance.
greece leaving euro area der speigel playing games?
I would like to recommend to you this Greek film (english subtitles:
http://www.dailymotion.com/video/xik4kh_debtocracy-international-version_shortfilms#from=embediframe
Some interesting statements by Prof. Lapavitsas, and there is also role in the film for Mr. Lenihan.
As for the Greece story, here:
http://www.spiegel.de/international/europe/0,1518,761201,00.html
@ edward v2.0
I was referring to the desire out there for people to blame the ECB and EU for our banking crisis….the aftermath and the steps taken to deal with it are a different conversation. The ECB has been very poor in that regard, my initial point was that we are responsible for the mess we created, regardless of how cheap credit was or who was giving it out, we had choices, we chose poorly, we’re responsible…the responsibilities for dealing with the whole mess and putting things right can be spread across a very wide field, that most certainly would include europe.
Oh and by the way…dont ever call me a government minister again, thats probably the worst slur i’ve ever seen on this site. shame on you.
@ Jarlath
My apologies for the minister comment.
@Edward v 2.0
I see some report today that Trichet accepts that propping up the banks was (is) legally dubious. Now that gets us into interesting territory.
the only problem is we still owe him 180billion .
@Georg Baumann
Short Film – 1hr.14min long ! 🙂
Thanks for that I will give it a go after Ulster slay the Dragons.
Some great posts today by the way.
@ Jarlath & Edward v2.0
Smiley faces guys (colon then back bracket) – keeps it fun.
Ooopsa second half.
@ George Baumann
Quote from Brian Lenihan “Lets be blunt about it, we all partied”.
Really? The Germans didn’t. cf.
http://www.ft.com/cms/s/0/c21fb0d2-551f-11de-b5d4-00144feabdc0.html#axzz1LTQa48c6
@ edward v2
apology accepted.
@ ordinary man
u wouldnt be as quick to smile if u were called a government minister!!!!
@OM and DOCM,
why to date no one from the ‘new’ political leadership in Ireland has claimed large portion of the debts to be ODIOUS is astonishing.
Well, to be honest, it does not surprise me when I look at the ingredients of this ‘new’ political leadership.
@ Jarlath
If I was implementing their cowardly policy, maybe not. 🙂
@ Georg
Because they were pushing the ‘Spend, spend, spend’ policy at the same time as Bertie et. al.
@All
Let me clarify something that people may not be aware of .
When I pay my tax none of it goes to the exchequer – I repeat none of this money goes to services – you see the money is already there.
The tax stubs is just a accounting entry in the tax office..
All I repeat All of my tax goes to pay interest off the goverment debt through my efforts to be austere via the tax system but not directly – but that money flows back into the economy – the problem with Ireland is that maybe people do not have much of these and therefore have to export the kitchen sink to pay for these coupons
I realise people get upset when they are told this but that is a integral part of the monetory system now – unfortunetly the Euro is restrained from engaging this system to the full extent with predictable consequences.
The ECB /ICB are making monkeys of us as we do not understand the monetory system.
Anyway this can be very hard to explain using plain English as it is very counterintuitive – I would recommend this guys analysis as he is very down to earth in his explanations.
http://www.youtube.com/watch?v=EB55ER44JMQ
Anyway I personally am not a fan of this system but we do have that system now – although we have a strange hybrid MMT / gold system / limited fiscal debt system under the euro and it is perhaps even more flawed.
This is a weird system but it is manifestly the monetory system so I would recommend all economists try to get your head around this system as it is very hard to explain sometimes
Sorry for the abuse fellows but thats what Dorks do……….
Anyway this guy explains the process in a elegant fashion.
Please check out the “hidden in open sight Video ” he made a few days earlier – its the simplest explanation of MMT using the 3 Buildings analogy.
@ ordinary man
admitting we f**ked ourselves up would not be cowardly. thats the only point im making
@ ordinary man
i dont know if they are even being cowardly. I think its a case of not knowing what else to do at this stage. Maybe if Greece head off into the sunset, we can watch them and take notes
the Greeks have upped the stacks and Germans are responding by gathering
like minded countries together and planing their responce
right now there is a war of wills where brinkmanship will determine what percentage rate structuring will take place
Why would Greece be coming to head today ? It isn’t even 2012 yet.
or even a head
@Dork,
I would recommend this guys analysis as he is very down to earth in his explanations.
When I was young, I remember one of those parties where some people popped some LSD and this chap might just have been on the same party, only, he never left it.
Sorry, but this reference just does it for me, total Lunacy.
@Georg
Because the financial system is so divorced from reality – people are repelled or bamboozled – this is understandable.
The Physical economy is still physical but its productivity is being ripped apart by false price signals.
If you want to get your head around MMT I would also recommend the Pragmatic captilism blog -believe it or not this crazy system IS THE MONETORY SYSTEM – theres really nothing there – its just accounting baby and the accounting is seriously flawed.
@Dork
I also do think that the financial systems are inherently flawed, forces at play stretched laws or even created laws, and used opportunities to create ever so more financial instruments that can be understood as outright fraud.
I do have some understanding on the history of money and the events that took place in markets around the world, the impotence of political representatives, whether deliberately because of vested interests, or just because they were out of their wits.
However, as I indicated earlier, we need better council, much better council and in all honestly, I do not think that your ‘modern mystik’ has any capacity to offer serious council on the matters that concern us all.
Yes, people are overwhelmed, scared, utterly disappointed in their representatives, fearful for the future and changes that will come, but honesty, clarity and integrity is required and not the mambo jambo of a late to the 60s LSD left over.
Sorry to be that blunt, but the situation is so bloody serious, and unfortunately most people do not understand the seriousness at all, there is no time to waste with false prophets, whether they come from central banks or from the woods.
Thats all I have to say to your reference.
Best
Georg
@Georg
What happens when the goverment subtracts tax from you ?
The money in your bank account is less all of a sudden
The money is transfered to the tax office and recorded – therefore no net money was created – yes ?- the quanity of money remains – its just that you don’t spend it
How does a goverment raise extra money ? – it does not go into the tax office and take it believe it or not.
The goverment / treasury states that it will spend a certain amount in the budget – it gets a bank wether a central or commercial to give it a piece of paper with interest and thats it!!!!!!!!!! – all of the principal and the interest
( Unfortunetly the situation in Europe is unique – the central bank dictates how much a country can spend – in America the Fed merely monetizes the congressional debt if there are no commercial bank customers)
You do not pay directly for this new Bond – the money is already there – you pay indirectly for the interest via austerity.
The holder of the bond spends the physical surplus you created. ( for example the non bond holder burns less oil and in the future the bond holder burns more)
What happens when the ECB decides not to create money – a larger ratio of your physical wealth goes to pay the interest……….. – your buying power is effectively subtracted by another with more buying power
Now can people understand the vice that the ECB holds over sovergin states.
The function of tax in a MMT world is to control demand only – not to service debt – Public debt is only money.
The situation is appalling –
Simplified example >
The ECB tells the Irish Goverment it can spend 30 billion a year for the next 10 years
The Irish goverment says yes masser.
Lets assume that there was no goverment debt before this and we are starting afresh with this new system.
The Irish goverment gets 20 billion off the commercial banks and the ECB gives us 10 billion every year through monetization.
We need to pay 6% interest for 10 year money.
Remember the amount of money is static in the system.
Who gets the money after many years of this policey ?
Yes the holders of the bonds.
The Irish citizen gets less and less of this money.
The Irish commercial banks have less and less deposits for reseves and capital and therefore cannot legally lend out any credit money – causing a bigger contraction again
Thats why the goverment is finding it harder and harder to tax (although tax is just a accounting entry – the money is simply not there in the economic system to tax – more and more money is held by the bond holders.
If you follow this to the logical conclusion there would be famine in Ireland as people will not have any money for food eventhough the money is still there.
Remember the amount of money is static in this example but because of the function of exponential interest most of the money is owned by the bond holders eventually.
Thats why in a system without commercial credit production the Irish citizens should convert their term deposits to post office goverment accounts.
Some of the money will flow back into the domestic system then – the commercial bank money has no velocity now – its just sitting in term accounts with a ficticious asset on the other side of its balance sheet.