Dijsselbloem on bail-ins (or not)

Some comments made today by Eurogroup President Jeroen Dijsselbloem reported here are worth reading.

We should aim at a situation where we will never need to even consider direct recapitalisation…If we have even more instruments in terms of bail-in and how far we can go on bail-in, the need for direct recap will become smaller and smaller

Now we’re going down the bail-in track and I’m pretty confident that the markets will see this as a sensible, very concentrated and direct approach instead of a more general approach…It will force all financial institutions, as well as investors, to think about the risks they are taking on because they will now have to realise that it may also hurt them. The risks might come towards them.

A subsequently released statement suggested some draw back from his earlier comments.

Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday.

Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.

153 replies on “Dijsselbloem on bail-ins (or not)”

In the long run he is right. There has to be an orderly and coherent way of winding up a failing institution without beggaring the taxpayer. There are several problems. This is not what they are doing it at the moment. Think of a chimp with a wrench looking at a Ferrari and you get the picture.

In addition, if you are the owner of any thing on the right had side of a bank balance sheet, you should get out now because THEY do not know what they are doing.

Granny is now an investor in the new EZ banking world. There will be granny classes all over Europe studying bank balance sheets etc.

This from yanis Varaoufakis

“Mr Dijsselbloem, the new Eurogroup said in no uncertain terms when rejoicing that the Cyprus deal paves the ground for new bailout arrangements such that the European Union “…will never need to even consider direct recapitalisation” of failing banks. This constitutes the death knell of both the direct recapitalisation agreement reached last in the EU’s June 2012 summit and, naturally, of any meaningful banking union. The message is thus clear: Each to his or her own! All plans to use the ESM in order to de-couple the banking from the public debt crisis are off the table.”

To think that Noonan thinks that the Cyprus deal is good for Ireland just shows how bad we are at picking finance ministers.

Jeroen Dijsselbloem’s clearly an idiot. His PR Guys have been backtracking like fury all afternoon/evening.

I moved all my money to the UK and Switzerland a little while ago. I’m past caring about the Euro and the unelected f**kwits who are really running the show there now.

I don’t normally agree with Fintan but he’s on the money here:

http://www.irishtimes.com/business/economy/europe/cypriot-bailout-shows-troika-to-be-hapless-incompetents-1.1337996/cypriot-bailout-shows-troika-to-be-hapless-incompetents-1.1337996

But lets not get histrionic about all this. We have all been had by Germany (and the Finns and Dutch really)- essentially now that the risk has been transferred to the periphery banks can go bust. How do we get them back??

I would really like to start a pan-European political party that’s based on Locke’s stuff with free education and free healthcare thrown in (5 principles in total). How do I get it started? Will anybody join me?

@Robert Browne at 8:00 pm

re: Yanis Varoufakis hears his 125th death knell (though I think he’s right this time)

Thanks for reminding us of the delightful Yanis — that highly intelligent and mildly bats Greek economics professor whose blog is a fun read even when he has a bad hair day, that is 7 days a week — the guy who is not only opposed to such policies as the reform of labour protection law but considers anybody who argues in its favour to be obtuse, or evil, or both.

Like all too many fervent anti-austerity partisans he diabolises his opponents ad infinitum. He lowers the quality of every debate he participates in because he does not even try to engage with ‘the other side’.

The article you quote from is relatively mild-mannered by Varoufakis’s phoque-you standards yet it deserves a thorough fisking* — but time’s a thief so I’ll just select a couple of extracts.

Marfin-Laiki Bank’s bond and shareholders will be wiped out – as they ought to.

The bank’s bondholders and shareholders include a substantial percentage of the pension and life assurance funds of the citizens of Cyprus. Ought they to be wiped out as well?

At least now uninsured deposits will be haircut in proportion to the size of the bank’s black hole, thus restoring a degree of private responsibility on the part of depositors viz. their choice of banker.

True, but again no mention of the fact that the depositors and bondholders also include the pension and life assurance funds of the cypriot taxpayers who would otherwise be footing the bill. To some extent at least the bonderholders
are us.

Why does nobody seem to cotton on this? This eternal bullshit that bankers = banks = bondholders = evil besterds just goes, and on, and on.

The effect of the complete wipe out of the foreign depositors will have a devastating effect not just on the banking sector but also on the hotel and tourist industry.

Ten out of ten for that.

Cypriot euros that are no longer exportable (nb. Imagine Vermont dollars that cannot be taken out of Vermont: a logical travesty within a currency union)

Eleven out of ten.

[T]he powers that be in Berlin and Frankfurt are shifting away from unifying moves, adopting increasingly authoritarian, divisive policies that are pushing the Eurozone in precisely the opposite direction to that dictated by political and economic sustainability.

Malevolent Germans just love socking it to the EU. They WANT to sink the dreamboat. They’re LOOKING FORWARD to chaos and

The message is thus clear: Each to his or her own!

It was always thusly clear, if not quite so clearly.

*Fisking
http://en.wikipedia.org/wiki/Fisking

PS Actually I am a fan of Robert Fisk, even if he deserves an occasional fisking.

As for Fisk himself, in a 2005 interview he stated that he was unaware of the term. “I have to be honest: I don’t use the Internet. I’ve never seen a blog in my life. I don’t even use email, I don’t waste my time with this. I am not interested. I couldn’t care less. I think the Internet has become a hate machine for a lot of people and I want nothing to do with it.”

Fair play to him.

@Eureka at 8:55 pm

I would really like to start a pan-European political party that’s based on Locke’s stuff with free education and free healthcare thrown in (5 principles in total). How do I get it started? Will anybody join me?

Plus
… free icecream and hamburgers for the kiddies
… free Russian beauties for all males between the age of 14 and 100
… FREE ULTRALIGHT PURE-TITANIUM ROADBIKES FOR ALL MAMILS* AND OAMILS**

Count me in.

*MAMILS = middle-aged men in Lycras
**OAMILS = old-aged men in Lycras

@ Carolus
I’m not sure about the Russians – Germans would go mental over the deposits

Everything else all good

Draw back? More accurate to say he threw the Italian tank in the fourth gear of reverse. Cyprus has gone from a special case one week ago to a template this morning and back again. Mad stuff.

@francis
He forgot the prayer for world peace too…

Honestly, never mind lavender hill mob, anthill mob would be more like it. Where will the hooded claw strike next?

“First, there will be no more bailouts without bail-ins, meaning investors and even some depositors in banks that get in trouble may have to pay at least part of the price of rescuing them”

Pity they didn’t think of this before the Irish taxpayers payed off all the senior bond holders in Anglo Irish Bank but maybe they were all owned by Irish pension funds or could they have been German, British or French?

@ Carolus

‘Why does nobody seem to cotton on this? This eternal bullshit that bankers = banks = bondholders = evil besterds just goes, and on, and on.’

The bankers drove a coach and four through their prudential obligations, and are justly derided. Pensions and insurance fund managers caught the bonus fever too, and put the future of many persons at needless risk. Finance may have power, but it is no longer respectable.

Prime Minister Rutte of the Nederlands is supposed to have announced today that Cyprus is the new model. Markets moved negatively in response to his comments. The Dutch are now out Germaning the Germans.

@Paul Quigley at 11:51 pm
Pensions and insurance fund managers caught the bonus fever too, and put the future of many persons at needless risk.
Fund magagers caught the bonus fever because their clients lacked foresight. Indeed, no manager ever got rich by selling ‘moderation’, e.g. a 2% return on investments as opposed to 5% or 8%. The clients wanted hugh returns, and they wanted to make their money ‘work’ for them so that they wouldn’t have to dig in to their capital.
Understandable but unrealistic — after all the STIMULUS came from the clients, the RESPONSE from the managers. The clients got what they wanted, with the managers acting as their agents — until it turned out that what they wanted wasn’t there any more. And anyway, the bondholders are us.

‘’If anything the process works in reverse, with loans driving deposits’’. Distayat, (2010)

Hence I have an issue with calling account holders depositors. This description supports the misleading idea that these customers deposited money in the banks which the banks then put at risk by lending to borrowers.

If this were the case how could the cash in the economy which forms 3% of the money supply possibly lead to deposits which form the other 97% in an era when banks don’t process loans in cash form?

The answer is that banks create the ‘deposits’ they lend and this is fundamentally different from the impression that the media and this forum is giving.

Indeed if anything the analysis here is in reverse. Banks aren’t risky because they lend out depositors’s money at risk. They are risky because they create the money they lend and it’s systemically impossible for all loans to be repaid. If they lent existing money it would be possible for all loans to be repaid.

When a bank fails they are now expected to reduce their liabilities in one way or another but there seems to be no acknowledgment here that this destroys money. We use the bank’s liabilities as money for 99.9% of transactions by value.

When an economy is short of money how could destroying the money on its banks’ balance sheet help?

rf at 12:24 am

I’m not sure what it is you disagreed with in Yannis’s aticle

Rf, what I chiefly disagreed with was Yannis’s refusal even to consider a reevaluation of labour law’s impact on employment, his assumption that Greek law is more or less acceptable as it stands, and that the existing evils are in no way associated with Greece’s home-grown policy of expanding, rather than contracting, government’s share in the economy. His fundamental assumption is that the more government involvement in the economy, the better, Basicallty, he is opposed to austerity policy and all its work and pomps but fails to provide any practicable alternative. He is clueless as to the role of the Greek state in inadvertently destroying his country’s competitiveness.

Before everyone thinks they understand the “new” rules, you need to look a bit more carefully at the deal. It is fair to say that the deal goes in two opposite directions at the same time, which is par for the course.

Based on all the reports I’ve seen, no BoC or Laiki depositor is going to take a hit if they did their banking with them in Greece (where they had over 300 branches). Greece has been “ringfenced” and the EU is lending money to both Cyrpus and Greece in order to recap those banks in Greece (shortly to be sold to Piraeus). The amount is about 1.5bn. Of the 10bn being lent to Cyprus, only about 7bn is needed for government deficits/rollover. The rest was referred to as a “buffer”, and it appears that one of the uses to which this buffer has been put is to ensure that bank creditors do not take any losses in the Greek branches of the failed banks.

So we’ve got
– Mechanism A: 0% haircuts in some countries (with losses covered via EU lending to sovereigns)
– Mechanism B: up to 100% haircuts in other countries (via bank resolution)

You’ll see that both A and B are applied at the *same time* and for the *same bank* with BoC and Laiki.

So whether, as a depositor, you’ll see A or B appears to be a function of
– how close or how far away the sovereign is from the “magic” 100%/2020 or whatever the IMF’s DSA metric du jour is
– what country you, as a creditor, are in, not the domicile of the bank.

Part of the flowchart seems to be

– If the sovereign can borrow further based on the DSA, and the creditors are the right sort of creditor, or have otherwise done a deal somehow, then A is mandatory (perhaps even in the future too).

– If the sovereign can’t borrow further based on the DSA, and the creditors are merely the locals or dodgy mobster types then B is mandatory.

The ELA part of the deal was another example of strong-arm tactics by the ECB. By rights the Laiki ELA should have stayed in the failed bank, and be run off over time, or else the collateral should have reverted to the Cyprus CB (in the same way IBRC’s collateral ended up with the CBI)

Did the ECB think, that even with a 100% haircut of Laiki depositors, that there still wasn’t enough to pay off the ELA? What’s the value of the assets going over with the 9bn ELA liability, and who decides the value of those assets and the methodology used (e.g. market value, long-term economic value etc.).

They appeared to be stuck for hours arguing over whether BoC should be restructured (without the ELA moving over) and the approach taken in the final deal, however the issues involved between the two approaches are not at all clear at this stage.

@Paul Ferguson

Do you think that having a “full-reserve” type of bank account would be a good idea, and that it would solve the problem of deposit insurance? I think there should be two types of current account – one that earns no interest (other than perhaps that paid by the CB itself on reserves) with the money stored as central bank money/reserves, and another that is the current account of today (where you end up with a bank claim, but no “money”).

I agree that a lot of re-education is needed. People need to understand what “money in the bank” actually means.

Having a large amount of money over 100K in a peripheral bank could now easily break one of the basic laws of investing – the need to diversify. It isn’t really that different from buying equity in the bank. A better solution is a money-market fund that diversifies over multiple banks in multiple countries. One of the problems with depositors “holding banks to account” is the lack of transparency into bank operations. Ideally there should be the equivalent of SEC 10-Q filings every quarter to start with. Given the apparent ease with which Boucher et al. can hide behind “confidentiality” and “commercial sensitivity” for even basic questions at Oireachtas hearings, I’m not that hopeful on that front in the Irish case.

Bail-ins are a positive development but to avoid including uninsured deposits, there would have to be some restriction on banks like Anglo and the Cypriot ones who used market leading interest rates to attract a lot of deposits.

Bungling Europeans make an easy target and in this particular case a justifiable one and today, the Financial Times while referring to “dreadful unforced errors,” adds “Few in Cyprus may agree, but the island state has got the best deal it was entitled to expect. This was not the morality play rolling across media bulletins that paint the country as an innocent victim of European highhandedness. It chose a high-risk strategy of living off a banking system far bigger than the state could support…But the choice to hitch the economy to offshore banking was made with the complicity of leaders and the acquiescence of a population content to live beyond its means.”

Seems familiar?

Off Topic: John Corcoran’s persistence as a leading activist against upwards-only commercial rent reviews merits congratulations, following Mr. Justice Charleton’s landmark ruling in the High Court on Monday that said the rent payable by Bewley’s Grafton Street to the Johnny Ronan controlled Ickendel Ltd must be allowed to fall to market reflective rates under the provisions of the lease.

Bewley’s rent doubled to €1.5m at the last rent review date 1 January 2007, the peak of the property bubble, and is up for review again to apply as and from 1 January 2012. The market rent will now be established by an arbitrator who is already appointed.

Maybe the justice encountered many of John’s off-topic insertions on this blog??

Jan 2013: Shoe shop Korky’s loses eight-year battle against rising rents

http://www.independent.ie/irish-news/shoe-shop-korkys-loses-eightyear-battle-against-rising-rents-28956042.html

yoganmahew,

talking with somebody in Cyprus:

“the new restructuring plan does not tax deposits held at the government-owned Russian Commercial Bank”

together with

“In the last week, the international money transactions of Cyprus were about twice as high as normal, but were not allowed into certain directions.

One Russian bank survives untouched.

Putin is extremely quick to nod his approval, ….., to signal that some Russian banking stays in Cyprus, or how else should I see this?”

leads to that Euro and Putin had an agreement before.

I begin to doubt that Dijsselbloem’s “template” was a gaffe.

Greece is up this April. They have to deliver lists with names of layoffs.
Since they need the worker ants to keep the shop running, they have to deliver some of their cronies.

How fast can those people make a public makeover from ND to Syriza?

@ Michael,

The FT is hardly the gospel – not that the ‘real’ gospel would be of much use to us in these days either. It’s judgement of Cyrus, conveniently made in hindsight of course, is arguably the product of the opinions of its primary sources, mostly located amongst the elites of Brussels and the markets who use the FT as a means of conveniently and anonymously relaying messages to one another.

I don’t pretend to understand all that much about how money flows throughout the world financial system. But from what I can grasp, the problem, which has become particularly manifest in the smaller eurozone countries like Cyprus and Ireland before it, is about trying to fit an oversized square peg of a globalized financial system into the round hole of a nation-state, the design and organisation of which cannot accommodate it. The traditional liberal democratic nation state system is completely out of synch with the globalization of finance as it has developed over recent decades.

Most of us, citizens of such nation-states, of which we have legitimate expectations that our welfare and interests (including bank deposits) will be protected by those whom we elect locally to do that job, have had no hand, act or part in any choice of ” a high risk strategy of living off a banking system far bigger than the state could support.”

The charge of acquiescence is unfounded: most ordinary citizens awareness of their local banking system is that the notion of personal customer service went out the window a long time ago. Our only relationship with the bank is through depersonalised ATM and credit card transactions. Even salaries are paid ‘directly’ into bank accounts and the notion of going to the bank to cash a pay cheque belongs to another, almost long-forgotten, era.

If, as citizens, we are guilty of complicity in this debacle, it is more in the sense of assuming that our political leadership were properly regulating and monitoring what the financial system was up to, as we went about our daily lives. Or, to paraphrase Colm McCarthy, that there was some little man whose job was looking after the money on our behalf. That such little men (or women), both at administrative and political level, hadn’t a clue what was really going on is now apparent to us all, though it shouldn’t surprise us.

The end result is not just as Kevin O’Rourke describes it: ‘The mother of all financial crises’. It is the mother of all political crises too. The majority of citizens in our mostly pleasant liberal democratic nation states did not live beyond their personal means. Moreover, they were constantly being assured by political leaders that the financial sector was doing a good job for us all in protecting our meagre savings and stimulating the creation of wealth in the economy. Now it turns out that our political leaders, creatures of the nation state, didn’t know what they were talking about and worse, that the only way they can fit the square peg of a bust global financial system into the round peg of our lives is by destroying the social contract between citizen and state.

@Michael,

‘Round peg’ above should be ’round hole’. And yes, John Corcoran is to be congratulated.

@Bryan G

The ELA part of the deal was another example of strong-arm tactics by the ECB. By rights the Laiki ELA should have stayed in the failed bank, and be run off over time, or else the collateral should have reverted to the Cyprus CB (in the same way IBRC’s collateral ended up with the CBI)

Not so.

ELA is secured credit and, as such, senior to unsecured credit such as deposits or bonds. Bank resolution is obliged to respect the seniority structure established in the bankruptcy code.

A practical way to understand why Popular Bank’s (Laiki’s) ELA debt cannot be defaulted on is that the performing assets to be transferred in the good bank (and what would make it a “good” bank in the first place) are largely pledged as ELA collateral. If ELA is defaulted on, the collateral will be seized, and there are no assets left from which to build the good bank.

@Bryan G

“The ELA part of the deal was another example of strong-arm tactics by the ECB. By rights the Laiki ELA should have stayed in the failed bank, and be run off over time,”

So, it was an a la carte liquidation of Laiki /Cyprus, the carte being chosen by the preferred creditors and euro enforcers.
The principles evolve and change to suit the changing needs of the creditors.

Now that the bondholder money and the core deposits are safely back home, hit whoever is left. A few token tears for small depositors helps the image.

Dijsselbloem was just acting as policy spokesman for Schaeuble. That is why he got the job.

@Eureka
“I would really like to start a pan-European political party that’s based on Locke’s stuff..

Your suggestion is being hit hard, but you have a real point.
Democracy both within countries and at EU level has utterly failed to protect citizens since this crisis began, other than those citizens in creditor countries.
Perhaps that is the new democracy!

The subsequent statement makes the claim “no models or templates are used” which actually seems to me a bad approach. It would be better to have a model at least and maybe a template rather than just make up procedures and principles on an ad hoc basis.

@Gregory Connor

Agreed. Also it does not say a word about the depositors first approach. It is basically a non-denial. Just some random, not very well thought out statement by Dijsselbloem’s office.

@Joseph Ryan

With reference to the point I made in the previous post, the traditional nation state democratic model does not sit easily with the globalisation of finance model and when the latter develops a major problem, the tools and processes available within the nation state model, and by extension the EU, are incapable of coping with it without tearing up the social contract between citizen and state on which their political legitimacy depends. I don’t have a problem with the citizens of Germany and Holland or Finland, who question why they should be asked to pay for the bailouts of Cyprus, Greece or Ireland, or with their political leadership who respond to the public mood of their own electorates. If the boot was on the other foot, would the citizens of Ireland behave any differently? There’s nothing ‘new’ about this; it’s the traditional model of democracy at work.

@ Joseph Ryan
Thanks for the support
I don’t mind them to be honest – they enjoy feeling clever.
It’s their thing.

@ veronica 

It’s true the FT isn’t the gospel while democracy is often intermediated through powerful collective groups.

The individual citizen in that situation has little influence and the individual without the benefit of collective power usually bears an unfair burden during recessions.

In Ireland, a decade after the long recession of the 1980s, FF regained power.

While the Germans can be too risk averse, the Irish appear to be at the opposite end of the spectrum as regards public spending. Has anyone ever been elected in Ireland for advocating prudence? The multi-seat system of course encourages auction politics.

When Charlie McCreevy stood up to the toothless European Commission and ECB in 2001 about growth in spending, the popularity of the coalition jumped.

People of course blame the politicians for failures but what sense of responsibility should voters have?

Dijsselbloem is way out of his depth. Bank of Mattress is safer than any bank that overstretched itself with loans during “the great moderation” if deposits are targeted.

If depositors are to be on the hook for failed lending there are huge questions about the future of bank lending, especially for generic jerry built property that is beyond the reach of the average punter.

@ All

It seems unlikely that Dijsselbloem could have made such a series of possibly incendiary remarks without the full knowledge and backing of Berlin, The Hague and Helsinki. This is being borne out by the reported subsequent remarks of ministers from these countries.

The coverage by the media of events as chaos rather misses the point. “Knock ’em down drag ’em out” conflicts seldom look tidy. Apart from the scuffle regarding Cyprus, the main battle between Italy and Spain, on the one hand, and Germany on the other has finally been decided with the intervention of France on the side of the latter. Quelle surprise!

To quote Schaeuble in a recent documentary; “If everyone cleaned up before their own door, the whole neighbourhood would be clean”. It remains to be seen whether this formula will work. But there has been no effort on the part of its proponents to disguise the objective they have in mind i.e. banks and their investors, which include depositors (why else are they being paid interest on their deposits?) must eventually fund the insurance arrangements for their overall activity themselves. Indeed, Schaeuble spelt out some time ago the order in which calls would be made with the ESM at the end of a long list and for use only in extremis.

The logic of this position is not dictated by Germany but by the political reality that the EA is made up of nation states and they have collectively neither the political willingness nor the capacity to convince their electorates to change this situation in a manner which would allow a sharing of financial responsibility between governments. Breaking the “vicious link” between banks and sovereigns clearly meansi different things to different people.

@ MH

Re the FT the masthead says “without fear or favour” but that can morph into plámás as circumstances demand. The Editor is known for his arslikhan feature interviews with the great and good.

“While the Germans can be too risk averse, the Irish appear to be at the opposite end of the spectrum as regards public spending.”

There was a certain amount of infrastructural catch up in the early years of the Tiger. And then FF tore the arse out of it.

As part of the sphere of London and with a PS inherited from London (what was it John Kelly said about the engine inherited from England with local service teams keeping it working?) I think Ireland has a similarly cavalier attitude to the value of money as England.

So you have most insurance money invested in unit linked policies with high equity exposure or else with profits where equities gave fabulous returns as long as the bull market roared.

Now that growth is dead the pensions funding model of the Brits is in serious trouble

http://www.bbc.co.uk/news/business-21756785

I presume it’s the same in Ireland

Similarly Ireland has the English house ownership fetish. Less than 20% of Germans own their own home.

Inflation is grand in Ireland but under a currency like the Euro the whole economic mentality will have to change. There won’t be any more house price bubbles, most likely. Or if there are they’ll be subdued. And 7% investment growth into infinity also looks ropey.

@ Carolus

‘Understandable but unrealistic — after all the STIMULUS came from the clients, the RESPONSE from the managers. The clients got what they wanted, with the managers acting as their agents — until it turned out that what they wanted wasn’t there any more. And anyway, the bondholders are us.’

Please. So accountants, banks and other entitites didn’t promote, represent or otherwise endorse savings ‘products’. The regulation of the sell end was blind to systemic risks, which is where all the big risks were. Terrfiic money was made though.
As for bondholders, they include a diverse range of entities, including sovereign wealth funds and private businesses. To suggest that that Aviva or Axa funds, for example, are somehow ‘us’ is stretching it pretty thin.

@ All

Just to hand KW in the IT.

http://www.irishtimes.com/business/economy/europe/cypriot-bailout-terms-welcome-but-further-crises-loom-unless-systemic-action-taken-1.1338355?page=1

The systemic action that he refers to is what is in the works and, while the technical framework is under discussion, the definite deal will not emerge until after the German elections; assuming that the economic and political situation across the EA does not tank completely which might force Merkel to put Europe ahead of her electoral ambtions!

@ MH

“But the choice to hitch the economy to offshore banking was made with the complicity of leaders and the acquiescence of a population content to live beyond its means”

I think that is dreadful waffle.
How does the average punter know the country’s economic model is banjaxed ?

http://www.politics.ie/forum/elections/202869-meath-east-election-419.html

Tommy Keating, an unemployed roofer, is also voting Fianna Fáil.
“I said to Micheál Martin: as soon as the other shower got in, there was nothing. There were always jobs in the building trade with Fianna Fáil.”

@Michael,

Granted our electoral system would benefit from reform. The selection of PR-STV as a voting system was more accidental than anything else in the first instance. But generally I think the focus in much of our political commentary on the iniquities of PR-STV distracts from where the real rot lies: in the failure of the Dail to hold the government of the day to account; the way in which the political parties have ‘rigged’ the parliamentary system to ensure a system of executive hegemony continues in perpetuity; and, in consequence, the hollowness and hyprocrisy of any party political promises of reform since all parties, with any hope or ambition of attaining office, have a vested interest in maintaining a lack of ‘checks and balances’ on government action once they get there.

Besides, the electorate only gets to vote once or twice in every decade. Elections are but one cog in the wheel of democracy and voters, understandably, cast their ballots in relation to their perceived immediate needs.

As for the voters’ ‘sense of responsibility’, the late Peter Mair and other scholars point the finger at ‘amoral localism’ as a lamentable feature of Irish political culture – suggesting that the electorate has ‘copped out’ on holding governments to account for their actions and instead merely holds local TDs and especially local TDs who make it to Cabinet, to personal account for success/failure in delivering benefits at local constituency level. I think these scholars have a point.

But I would argue that it’s not quite so simple, in that such localism becomes inevitable in the context of the way the larger apparatus of our democracy works, and is intended to work, in practice. Small wonder that the electorate is suspicious of reform of teh multi-seat constituency system and PR STV, since they perceive (rightly) the predominance of party political vested interest in most such suggestions. Nor are they blind to the inertia of proposals to reform the functioning of the parliamentary system given the advantage such failure confers on the incumbent government. PR-STV has the advantage of being highly democratic. What voter in his right mind would opt to change that system when it’s abundantly clear that they will be the only losers and that there is never any genuine intention by any incoming government to engage in any meaningful reform of the rest of the system?

So as voters we tend, within the limited choice presented to us by the established political parties, to select those public representatives who proclaim the greatest allegiance to our local, or sectoral, interests. If those people whom we elect as our representatives display a modicum of intelligence or competence to manage broader affairs of state, that’s all to the good too; but it’s hardly essential to getting elected in the first place.

There’s a real appetite for political reform amongst the electorate generally, which may explain the current trends in ‘tracking polls’ that show a rise and rise in support for ‘independents’ plus a consistently high proportion of ‘undecideds’. Tinkering with PR-STV, without an overhaul of the rest of the system, is not ‘reform’ and will neither improve democracy nor bring about desirable changes in our political culture.

@ Bryan G,

Primarily I’m trying to educate about banking ultimately as a means of resolving the debt crisis. I would envision updating the system to recognise digital money as money, as opposed to a bank’s liability. Digital money should be an asset of the central bank the same way as freshly minted coins are.

I would like to see us go towards a version of full reserve banking. This would involve separating account into ‘Only you can use it’ and ‘Only the bank can use it’. If a bank failed the money in your first account would be 100% safe and there would never be a bank run again. Hence there would be no need for deposit insurance, a banking union or a bank bailout. We’d pay less taxes, the money supply would be kept adequate for trading and full employment. It would be possible for all loans to be repaid and so on.

First things first though. Let’s correct the notion that banks take money from depositors and lend it out to borrowers.

Thanks for comments and links above: interesting reading and analysis. This is where I’m at with regard to the thread.

Template or tailor-made?

Poor old SAAB went bust in 2011/12. It didn’t cause a euro-wide panic. I suspect that other car manufacturers saw this as an opportunity rather than a situation of fear, horror and contagion in the car industry: let alone bringing down sovereigns with it.

All along the argument has been that banks are different because the collapse of one can bring down others and sovereigns with it – in some cases not necessarily the sovereign of the nation of the bank.

I’m in favour of unguaranteed depositors over 100k taking a hit in a wind-up as part of the order of bail-in previously established. I think the very fact that the guarantee is set at this level is a clear indicator that the money is not safe above that.

I’ve always been uneasy with the ESM as the tool for funding this though, as it borrows from the backing of taxpayers (right?), which does tend to push them up the queue above bank creditors.

So the argument is that as the banks are (a) systemically necessary for the economy unless we go back to barter or Paul Ferguson comes up with a better system, and (b) banks tend to be co-dependent, and (c) banks can bring down sovereigns, then the banking industry itself needs to take responsibility where there are insufficient funds to wind up a bank properly.

I see the 11 country euro wide FTT as a step in the right direction here: but rather than get too caught up in it, just to say an ESM backed by the banking system rather than the taxpayer.

Colm McCarthy recently pointed out the huge size of the banking sector in Europe, the huge size of the banks (TBTF) and the problems associated. I don’t know how we get there, but the Danish system of large amounts of small banks which can be closed down without a country/continent wide panic seems preferable.

The other problem with the ‘tailor-made’ approach is that it breeds uncertainty and encourages powerplays.

So, I’m in favour of a template, but I don’t think the right template is there yet.

http://www.irisheconomy.ie/index.php/2013/01/31/crisis-conference-liveblog/

http://en.wikipedia.org/wiki/List_of_banks_in_Denmark

@ Paul
That’s a very interesting idea but the “only you can use it account” would not have any interest and would have bank charges instead. I think that that’s fair – and would kickstart the economy. The idea of earning money for doing nothing with it is a bit daft.

@ Veronica
There’s always a catch up between democratic systems and economic ones. The political creation of nation states was painful but only happened because of better transport etc. It’s not that hard really. People are the same everywhere with the same hopes and dreams. Ultimately they divide politically into give me all the money and ah it’s alright somebody else can have a bit. And that varies according to how much money you have in the first place – that’s just a long way of saying – it’s labour and tories and republicans and democrats.
So it will take a bit of work. Either you let the current system break down and build it again or you try and change the current system. I think it’s always worth trying option 2 first as it is least destructive.

As for the chap who mentioned the pony – no accident you thought of an ass….

@veronica

But generally I think the focus in much of our political commentary on the iniquities of PR-STV distracts from where the real rot lies: in the failure of the Dail to hold the government of the day to account

I always associate a hostility towards PR/STV with anti-democratic impulses, particularly a contempt for the concerns of working people. The advocates of single seat constituencies tend to be from a cohort more comfortable with the executive being made up of “bold leaders ” (read centre-right supply side reform favouring technocrats) rather than principled representatives. It is a classic reactionary tell – very European Commission.

Your persistence with Mr Hennigan is to be commended but after several years of being subjected to the spray of his fact cannon I think it is safe to say that the many useful statistics are hard to separate from the torrent of rage against the old country.

@Eureka,

“There’s always a catch-up between democratic systems and economic ones”.
I’m afraid I don’t agree – I would argue that, historically, it’s the other way round! Political systems, and culture, determine economic systems and their rules of operation. The specific problem with which we are faced is that politics remains national whilst finance is global. To arrive at a workable model that will ‘fix’ the mismatch at the least cost to the political system, and the protection of citizen welfare on which it relies for its legitimacy, is a very complex undertaking. Especially so, if the problem is not clearly defined in the minds of those whose job it is to come up with workable solutions. From the shenanigans in the EU over the past three years, it’s obvious that the problem is not clearly defined. I would agree with you, though, that Option 2, if possible, is always preferable.

@Gregory no one reads it,best ignore it.No one in states reads Forbes,no one,there are no readers,none.When is last time anyone on here linked a piece,it’s a joke of a publication ludicrous.Its eh like NOT trending anywhere.Crap mag….is it closed yet.Weird creepy place to be published.

@ veronica

Less Cabinet control of the Oireachtas maybe be a good thing long term — but I wouldn’t be optimistic in the short-term.

TDs in recent times have got a parliamentary gofor in additional to secretarial assistance and a research service, but after years of recession, how many have inspired the public with challenging new ideas. Even these national ideas competitions failed to make any headway.

Most of TDS simply have no interest in policy detail and a science budget of €23bn in a decade has yet to elicit any interest.

Parties produce brochures not serious policy documents and there are no political think-tanks to help them.

As for reform, Irish people find process boring and on this blog single digit numbers would be doing well.

@ seafóid

The best of luck to Tommy Keating and Micheál Martin may still be holding down his old job in Presentation College.

Maybe the buck stops nowhere is fine and more than four decades after the launch of ‘free’ education, the easiest option is to have some foreign foe to blame for our woes.

@Gavin Kostick

“Colm McCarthy recently pointed out the huge size of the banking sector in Europe, the huge size of the banks (TBTF) and the problems associated. I don’t know how we get there, but the Danish system of large amounts of small banks which can be closed down without a country/continent wide panic seems preferable.”

How we got there is very simple – banks continued and were allowed to breach well understood Loans to Deposit ratios. (BTW banking has very little got to do with capital levels at the basic level) Its no more complicated than that.

Northern Rock failed depsite it having a core Tier 1 ratio north of 10% at its last report prior to queues forming, Amagerbanken in Denmark equally reported a core Tier ratio in Oct 2010 at close to 14% and within 6 months the depositors were taking a 40% haricut etc etc. The bottom line is that the clamour for higher cpaital ratios is simply a by prodcut of a system which has been allowed to get out of control and the basic control of a bank is its Loan to Deposit ratio. End of.

If banks want to lend north of 100% of their deposit base then the capital required to do so should be increased at an ever rising rate above pre determined levels i.e. the leverage required should based on lending over and above deposit levels so for every 5% lending say above the 100% deposit level an additional 10% capital is required and above the 105% level an additional 20% capital is required so on so forth.

This basic rule would have seen the world avoid the financial crisis because those banks that thought they could make a go of it above 100% of their deposits would suffer punitive capital requirements the result being that lending rates would as a consequence have to go ever higher and borrowers appetitite would fall and the bank would go quietly into the night back below the 100% level again. Basic stuff – but allowing Irish Permanent for instance lend up to c400% of their deposit base whilst maintaining a 4% Core Tier 1 ratio was an accident waiting to happen. This was a classic case of both Directors, lending officers and Regulators simply not understanding the basics of the banking model(flawed and all as it is as Paul Ferguson is at pains to point out).

@Shay

The world would be a very dull place if we all shared the same opinions and prescriptions as to how it actually works and might be made a better place. For one thing, we would miss out on the opportunity of argument and the prospect of enlightenment. Worse, we might fall into the trap of believing in the monopoly of our own wisdom to the exclusion of alternatives. Might as well be a hill of ants in that case.

@veronica

Worse, we might fall into the trap of believing in the monopoly of our own wisdom to the exclusion of alternatives.

I have personally set my bar lower than “wisdom” to “not being horribly mistaken” but it is good to know there are people with higher ambitions.

The only time Forbes gets a mention is it annual d**k measuring competition,this year a chap who likes wear a dress is arguing over his size…why is KW Ireland’s ahem leading economist associated with such a sh**e magazine?

@ John Gallaher

Forbes would probably disagree with your analysis given that their magazine is the #1 business publication by readership and decision-maker reach (http://www.forbesmedia.com/files/F-Print-Accordion_Singles.pdf).

Given that Forbes.com is also the most visited business website with 16m unique readers (having recently surpassed WSJ.com), I think it’s unlikely it will be closing anytime soon (http://www.forbes.com/sites/lewisdvorkin/2013/02/11/inside-forbes-as-our-audience-surges-were-even-more-excited-by-what-comes-next/).

@ Veronica
Interesting point.
I wonder if the words we use complicate things. Ill try this but it’s only thinking out loud:
The drive to dominate and exploit is much more energised and efficient than the drive to cooperate

It’s much harder to make friends than to kill them

It’s a w**k mag.
“In another kerfuffle, Jamestown’s deal to buy 90 Fifth Ave. on the northwest corner of W. 14th Street from Aby Rosen’s RFR for $115 million completely unwound as Forbes stopped paying rent on the office property that it essentially net leases.
Sources tell us that Jamestown and RFR have amicably parted but that RFR still has a big beef with Forbes over its “tortious interference” in the transaction — let alone the non-payment of rent.”
http://m.nypost.com/p/news/business/realestate/commercial/sitt_coops_th_st_bldg_TzqI6d7H0jX9aZiPm121sN

I find myself unusually agreeing 99% with Karl Whelan’s opinion piece in today’s IT, though I still dislike his “I know it all, them EU/ECB guys are fools” motif.

But I in particular agree with the following conclusion “I think the chances of such a deal [to retro recap AIB/BoI from ESM funds] have been downgraded from slim to none.”

Well, many wanted this to happen in Ireland on the basis that we had an outsize banking sector relative to our economy. It is hardly a template for all economies and Jeroen Dijsselbloem is clearly a muppet. With that said, I guess we just have to sit back with a six pack of beer and a six-pack of andrex kitten-soft and hope that the former will prove more useful than the latter.

@Veronica

” I don’t have a problem with the citizens of Germany and Holland or Finland, who question why they should be asked to pay for the bailouts of Cyprus, Greece or Ireland..”

I have a real problem with that issue, because I know full well, that from the outset of this crisis the settling of the massive losses, that already existed on bank balance sheets, was managed with precision and purpose, to ensure that those losses were not borne by the large investors from core countries.

One has only to look at the post from Bryan G above, that the allocation of losses, even at this stage, is a power process, arbitrated only by the ‘great powers’ within Europe. There is little logic and no equity involved.

Following on from the Cyprus deal, all peripheral banks should now simply freeze unsecured bond liabilities, if any are remaining. They should be converted to equity forthwith.
A similar process should apply to ‘covered’ bonds, with any final shortfall in the workout of collateralized assets, netted off the bond principal.

Otherwise, the person at the end of the queue, is the small depositor or the State.

@Zhou,

With a name like ‘This ‘ill bloom’ he’s more likely a tulip?

If Karl Whelan’s analysis is correct, then the government debt relief strategy is gone up in smoke?

@ Paul Ferguson

“They are risky because they create the money they lend and it’s systemically impossible for all loans to be repaid.”

There is no problem at all in a banking system repaying all their loans. They simply repay them with other loans to the system. If you have a deposit on call in a bank, all that is promised to you is that if you ask for it back you will get a cheque i.e. a loan to your bank in another form which will be transferable throughout your banking system. A banking system as an aggregate has no problem whatsoever in meeting these demands no matter how widespread. Of course there can be wild distortions within the system – see Target2, but no problem in aggregate.

Okay, you may demand coin and be entitled to it. A bit messy if everybody demanded coin but subject to the capacity of the mints everyone can be accommodated.

You are not entitled to demand from your bank another currency or gold or baked beans for that matter. How much you can get of these in exchange for your loan to your banking system is decided in the marketplace. It is of course possible that calls on your own banking system are internationally of little worth in which case you will be disappointed, but there is no question of the bankiing system not being abe to accommodate you.

Of course, this analysis fails when the banking system promises something which it hasn’t the capacity to deliver e.g. under a gold standard or under an exchange rate peg, but these days modern banking/currency systems have moved off these unsustainable promises.

“though I still dislike his “I know it all, them EU/ECB guys are fools” motif.”

KW does know it all. There’s noone that still disputes that, is there?

ah I see Carolus Galviensis at 12.55..but do you think reforming Greece’s labour laws is going to have any medium(or even long term) positive impact on the Greek economy?

@ YoB

I understand the Cypriot banks LDR was ludicrously small. Its assets were mainly Greek bonds, which do not contribute to Loans and its liabilities were dominated by Deposits.

Cypriot banks had too many deposits and nowhere to lend them. Irish banks had too many lending opportunities and not enough deposits to finance them.

@ rf

I think that KW still believes that ELA is a free lunch. He lectured our own legislators on how Central Banks going bust was not the disaster their little naive minds might perceive, that it was really quite harmless and would solve the Anglo problem wtith no pain to anyone.

He may be right, but other than Peter Matthews and a few others, the lack of widespread support for this seemingly painless solution has not been taken up. My simplistic inference is that there is a flaw there somewhere, suggesting that his level of infallibility may be of only the Pope Emeritus standard.

@ Veronica

The economic crisis has been a very insightful introduction into how Ireland is actually run. Political reform would help but there is more damage that needs to be rectified.

I get the feeling that the education system was overhauled in the 60s and 70s and that the people coming out of that system now are far better educated than their parents were but that the institutions of state are still set to 1950s.

Some of the stuff that pops up in the IT or Indo occasionally is embarrassing

http://www.irishtimes.com/news/politics/public-policy-must-be-based-on-evidence-and-not-on-ideology-or-anecdotes-1.1324140

http://www.irishtimes.com/debate/whip-system-has-stripped-d%C3%A1il-of-its-independence-1.1254433

http://www.independent.ie/irish-news/14m-office-faces-demolition-as-department-not-good-at-buildings-29146921.html

The PS has a massive execution problem. Nobody seems to care. It’s someone else’s money.

Benefits like unemployment are not managed properly. Look at all of the people stuck on the dole with no hope of best in practice or even second or third quartile retraining.

The list is very long.

There is far too much waste.

The best time to improve the system was 20 years ago. The next best time is now.

@ MH and Veronica

The Irish State is still pretty mediocre when it comes to performance. There are lot of aspects that could be improved. Many processes are far from best practice. It’s a disgrace that Frances Ruane has to write an op ed asking for policy decisions to be based on analysis and data in 2013, for example.

The political system also has room for improvement. The whip system, for starters. Why is everything still so tightly centralised ?

It seems as though the education system produces many people who are far better than the system in which many of them will live.

That sort of sloppiness was maybe yokay in an era of easy economic growth but waste is a big drag on performance now that resources are not so flúirseach.

@BWII

“Cypriot banks had too many deposits and nowhere to lend them. Irish banks had too many lending opportunities and not enough deposits to finance them.”

Eh I see a problem with that model – with too much in the way of liabilities why were Cypriot banks continually paying rates above Eurozone averages to secure deposits, with no lending home to supply ? – that model simply doesn’t make economic sense. And since proven.

Whilst you somewhat correct I’d suggest its a Cypriot specific banking model problem rather than an overall critism of prudent Loans to Deposits ratios.

And BTW Irish banks believed they had too many lending opportunities. So when is a ‘lending opportunity’ not a lending opportunity? When lending into property deals at less than 2 % net rental yield – that’s not an opportunity, that’s a disaster. And since proven.

We now know that most of the lending which took place from about 2002 to 2010 in the property space in Ireland was lending errors rather than opportunism. Rethink the argument.

@ YOB

“When lending into property deals at less than 2 % net rental yield – that’s not an opportunity, that’s a disaster. And since proven. ”

Not in all cases. You can borrow money today in Switzerland over ten years for 1.5%. Rental yields on property are very low- not far off 2%.

An acquaintance related a story last year about Martin Cullen the PD minister who told him in 2006 “this is going to go on forever”.
Say you thought Ireland was going to be like Switzerland.

It depends on how “serious” you are , it seems. Or maybe CH is due a crash.

@seafoid

Unfortunatley one needs to compare apples to apples, you haven’t done so.

The 10 year Swiss Sovereign Bond is today yielding 0.73% i.e. Swiss property yields are almost 3 times that yield.

In 2006/7 with Irish 10 Year Govt Bond Yields at c3.5% to 4% on that same basis Irish property should have been yielding closer to 11% and yet it was BELOW the so called equivalent risk free rate. This was stupid squared.

So I’m sorry lending into the property yields as witnessed in Ireland was a banking error. There is no getting away from that sad reality and allowing Ritchie Boucher remain as CEO of BOI is enough to make me extremely ill given that he signed off on billions of euros of these deals.

@ YoB

Ireland was in the grip of a sort of a cargo cult pre Lehman.
I agree the yields were nuts. But some people really thought it was new Switzerland.

That NCB 2020 report. 6% growth for the next 15 years. If we build it they will come. They said it was just a supply shortage that drove the yields so low.
http://www.rte.ie/news/2006/0322/74353-economy/

And the market can be stupid for a very long time.

Did you ever watch that 2006 era RTE programme “I want a garden” . Where have all those people gone?
And the decks in the Midlands. What happened to them?

I used to drive past a roundabout in Oranmore in the County Galway in the 90s. One day as I was passing they were putting up a shopping centre. I thought it was a stupid place for a shopping centre. It was a great idea for about a decade. And now it is a stupid idea again.

@ YoB

I wasn’t proposing any models. I was simply observing that the LDR gives polar opposite answers for the two failed systems of Cypriot banking and Irish banking respectively. It is not therefore an entirely reliabe test of banking probity.

@ Gavin Kostick

There is a better system which is very well presented in Positive Money’s book . More detail at http://www.positivemoney.org/shop/modernising-money/

For a look at how we could transition to this system in the EZ we have a publication at; http://sensiblemoney.ie/data/documents/A-Guide-To-Full-Reserve-Banking-In-The-Eurozone.pdf

@ Eureka

Under the proposal all the electronic money in the economy would be ‘held’ at the central bank. If you have a current account with a bank the would provide an efficient means of money transfer and they would store your money completely safe. In return they would charge a service fee or a transaction levy and so on. I think this would be a small price to pay for resolving the debt crisis and having a more stable monetary system.

@ Yields or Bust

It is painful but we are making enough progress to keep us interested.

One thing regarding your comment. You said that ‘If banks want to lend north of 100% of their deposit base …’. However a bank loan creates its own ‘deposit’ so I don’t see any ratio of loans to ‘deposits’ can restrict the creation of money by banks. Unless I’m missing something?

@ Brian Woods

It is impossible for all loans to be repaid to banks.

When banks process loans they credit their ‘Depositors’ account by P and debit their ‘Debtors’ account by P.

When banks process loan repayments that debit their ‘Depositors’ account by P + I, credit their ‘Debtors’ account by P and credit ‘Shareholder’s Equity’ by I. As a result money to the value of P no longer exists.

As we repay loans to banks everyone’s bank balance tends towards zero and people have to default because the last interest repayment cannot be made.

If we borrow higher and higher Ps we can repay old loans. I agree that if we managed to do this forever then the system could run without the complication of loan defaults. However we live on a finite planet and mortgages have reached their natural limit of duration so I don’t think the ‘perpetual expansion’ tactic can work this time.

I’m not sure if you meant to say it but you phrases it the other way around. As in the banks can always pay their debts to everyone/each other. Again this is not possible.

When you get a loan from a bank you leave with a higher bank balance and technically the bank owes you that amount of cash. However only 3% of euros exist as cash while the other 97% exist as claims to this cash so from that point of view it’s not possible for the banks to honour all their debts. I think you’re suggesting a bank that can’t meet it’s liabilities can create another liability on itself with which to honour the first but of course the bank is not in any better of a position in this scenario.

The other debts that banks have to worry about are debts to each other which they settle with a different type of money, central bank money. However central bank money only has to be around 1% of the sum total of a bank’s customers’ accounts and so they cannot honour 100% with 1%. Again, perhaps I’m missing something?

@ Paul Ferguson

I have read your Guide to the Eurozone Monetary System. I found it very useful for confirming and adding to my understanding of a modern monetary system. However, I do feel you have overplayed the implications of the mechanics, but I might pick that up with you by e-mail.

I think you are missing my point. That is my fault for my very poor explanatory skills. I agree absolutely that all Money held by individual agents is a Call on our banking system, whether it be a Call on the CBI through Note and Coin or a Call on the Retail Banks through a checking account (technically I prefer to leave out term accounts, but they can be included withut changing the argument).

Here, is the beauty. All that Call entites you too is a Call on the banking system. By definition it can always be met, even if the assets backing the Call are worthless. There is an entitlement to change the nature of the Call as to whether it is in Note & Coin or an entry in a bank account and you are also entited to switch which entity of the banking system upon which you have the Call.

But all other “entitlements” of your Call rely entirely on the market which decides the Price that others will demand to accept your Call in exchange for other currencies, precious metals or, indeed, goods and services.

A banking system which does not have the equivalent of a gold standard or a foreign currency exchange peg simply can’t go bust for all it has given is a promise that you will have a promise. Beautiful! Of course, the Central Bank may permit individual participants in its system to go bust, but that would be a deliberate choice with a view to maintaining the credibility of the price level.

@ Paul Ferguson

I believe it is theoretically possible for the last interest payment in your model to be met. Let’s say the banker begins with $10 of equity and lends a business person $100, to be repaid in ten installments of $11 each (inc interest). In the first repayment period, the business person opens up shop, sells services to the banker for a price of $1, and repays $11. Continue in the same way to the 10th period. At the end the banker still has $10 of equity and the business person has fully repaid $110.

Admittedly of theoretical interest only.

HEY!! SENIOR IRISH ECONOMISTS WHO ARE MEMBERS OF THIS SITE

Hey! Yes you!

Have you gotten together and presented a proposal to the Government for leaving the euro? Have you outlined what needs to be done, what resources are required, and a timeline for proceeding with an exit?

If not, then would you please get together and make one! Because the likelihood is, one or more of you is going to get a phone call in the next week or two. For the sake of the nation, try not to be caught unprepared.

Back in the real world…the EU Commission proposal
…….from the Guardian
“12.03pm GMT EC: Large depositors could be bailed in next time…..
The plot thickens…The European Commission has told reporters in Brussels that large uninsured depositors could to be “bailed-in” to help rescue a bank, under a new draft EU law on bank resolutions.

The comments came as the EC fielded questions on Jeroen Dijsselbloem’s comments yesterday that Cyprus showing the way ahead for handling financial crisis.

Spokeswoman Chantal Hughes said:

In the Commission’s proposal, which is under discussion, it is not excluded that deposits over 100,000 euros could be instruments eligible for bail-in.

It is a possibility.

Hughes insisted though that smaller savers were protected and (wait for it, folks) always would be:

At no point is it possible to bail in depositors under 100,000 euros, either now nor in the future

Are we supposed to forget about the first bailout plan for Cyprus, and its plan for a 6.75% haircut on all deposits under €100k?”

Worthy of a dedicated thread?

“In the Commission’s proposal, which is under discussion, it is not excluded that deposits over 100,000 euros could be instruments eligible for bail-in.”

Why would anyone keep more than 100k in a bank ?

The banking crisis with all these rotten unpayable debts is like a bad dose of food poisoning sloshing around the stomach. The stuff has to come out.

All this procrastinating is so expensive. Why not recap/wind down the banks as necessary and start from scratch? It’s passover. The bank angel of death could help bring new life .

@ skeptic01

Theoretical maybe, but it does dismiss the Ferguson paradox.

What Paul is proposing is to let us imagine that the banks decide to get out of business altogether. They call in in all their loans plus interest and pay out all their depositors with interest as well as paying off their staff and shareholders. How do they enable all this disintermediation without Money which relied on their intermediation?

Clearly it would have to take the form of a mass of distermediated loans and bits of paper between agents. So maybe a mortgagee is divied out between 20 depositors. These depositors can carry their bits of paper to the shop and have a way of splitting it up into two bits of paper, both calls on the mortgagee, one of which he gives to the shopowner and one of which they keep for themselves. Meanwhile the mortgagee is out earning her crust and getting bits of IOU paper of her own etc. etc. get the picture?

It is perfectly possible to construct a stable model where the interest goes round and round and the calls on the banking system (Money) go round and round. Money is an IOU drawn on our society which is accepted as a medium of exchange.

Our modern monetary system is really very clever. It is the miracle of maturity transformation. Long term economic calls on our society are repackaged into liquid short term calls. This little beauty does of course need careful management and that’s where things can go wrong!

@ Brian Woods II

I’d be happy to correct anything in ‘The Guide’ if you spot anything inaccurate. Although we have been very careful with our research!

(The guide’s available at http://sensiblemoney.ie/data/documents/How-Money-Is-Created-And-Destroyed.pdf if anyone else in interested in how the modern banking system runs.)

I think I know where you’re coming from regarding the ‘promise to a promise’ system although I think it’s difficult to conclude that the banking system cannot go bust. It can turn around and say we’re not honouring our promises as we’ve seen. Perhaps you’re looking at it from a different level to me. I’m all about the accountancy procedures!

@ skeptic01

If we’re to go into detail then for the following reasons it is mathematically and theoretically possible for all loans to be repaid even though banks create more debt through loans than they do money.

1. There is some cash in the economy which is created without a corresponding debt and if all loans were paid slowly enough this cash could facilitate the repayments.

2. Banks only delete the principal of a loan repayment and record the interest received as profit. As you’ve demonstrated above if the rate at which the banks spend this money back into the economy before the next loan repayment is due it is possible for all loans to go according to plan.

3. If banks purchase an asset of a non-bank they create the money for the purchase and this money isn’t always created with a matching debt.

4. If a debtor defaults on a loan they leave debt-free money somewhere in the economy and so the remaining debtors can find it easier to repay their loans. (When too many people defaulted the Government collected money through taxes and put this into the banks’ reserve accounts and this had the opposite effect)

Hence it is theoretically possible. Of course what matters is that in practice given the perpetuating compound interest on loans it’s not possible. i.e. The mortgage arrears problem, which leads to banks not recording the equity that’s need to be spent back into circulation before the next repayment etc.

This looks like a good read

http://www.oup.com/us/catalog/general/subject/Economics/Political/?view=usa&ci=9780823249619

The Intellectual Origins of the Global Financial Crisis

Edited by Roger Berkowitz and Taun N. Toay

“Commentary on the financial crisis has offered technical analysis, political finger pointing, and myriad economic and political solutions. But rarely do these investigations reach beyond the economic and political causes of the crisis to
explore their underlying intellectual grounds. The essays in this volume delve deeper into the cultural and intellectual foundations, philosophical ideas, political traditions, and economic movements that underlie the greatest financial crisis in nearly a century. Moving beyond traditional economic and political science approaches, these essays engage thinkers from Hannah Arendt to Max Weber and Adam Smith to Michel Foucault.

With Arendt as a catalyst, the authors probe the philosophical as well as the cultural origins of the great recession. Orienting the volume is Arendt’s argument that past financial crises and also totalitarianism are rooted, at least in part, in the tendency for capital to expand its reach globally without regard to political and moral borders or limits. That politics is made subservient to economics names a cultural transformation that, in the spirit of Arendt, guides these essays in making sense of our present world.

Including articles, interviews, and commentary from leading scholars and business executives, this volume offers views that are as diverse as they are timely. By reaching beyond “how” the crisis happened to “why” the crisis happened, the authors re-imagine the recent financial crisis and thus provide fresh thinking about how to respond.”

@ Paul Ferguson

I saw nothing at all wrong with the guide, quite confirmative and educational in fact, as I have already acknowledged. I recommend it to any on this blog who want to understand the mechanics. And I do think an understanding of the mechanics is important.

However, I retained a suspicion that in your highlighting the apparent contradictions between the reality of modern technological monetary management and the traditional money multiplier school, that perhaps you were reading too much into these contradictions.

My read of some of your posts in this blog rather sterngthens that suspicion as you appear to be suggesting strokes which would blow all our current problems away. My instinct tells me that can’t be the case.

As I say, it is perfectly credible and heuristic to construct a model where every year the same aggregate income is earned, the same expenditure is incurred, the same shareholder profits are earned, the same interest is paid and collected, that the compounding is happening but self cancelling so that the debt stock remains the same, the same level of default occurs, the money supply remains the same etc. etc. Your view seems to be that this is impossible and that debt must balloon out of control to keep the wheels turning, but possibilly I got that wrong.

Martin Wolf had a sobering point in the FT last week. “Banks have so little loss absorbing capacity that they stand permanently on the edge of disaster”

@ Brian Woods II

Thanks for the feedback. I think there are many consequences to the debt-based system which wouldn’t be as severe if we had a more permanent money supply which didn’t have a matching debt at source. I don’t think moving towards a full reserve system would be the answer to all our problems but I think it would certainly help.

Regarding the need to perpetually grow the economy to remain stable you haven’t got it wrong. While it is possible to have a model which runs as you’ve described the model runs much better when the money supply is expanding and indeed this seems to be the mindset of most economists.

The system certainly doesn’t run well if we’re deleveraging and this brings me to the other part of our analysis. That is why we feel this recession is so unique.

Prior to the 1970s around a fifth of the money supply existed as cash and this acted a ‘buffer’ to other 80% which was bank-created money.

When we developed computers almost overnight the cash money supply dwindled to 3%.

From there the money supply has doubled about every ten years and it seems that this rate of expansion of the money supply is what’s needed to keep this system running smoothly. However it’s not feasible for us to double the money supply every decade for the foreseeable future when not many people are willing or able to loan money into existence. We feel this is a unique recession as a result.

As well as this mortgages have always been able to increase in duration but are at or near their natural limit.

How ever well you feel it has served us in the past I think we’ve reached the end of the useful lifespan of the system. Time to discuss other ways in which we could better create money I would say.

Joseph Ryan wrote:

Your suggestion is being hit hard, but you have a real point.
Democracy both within countries and at EU level has utterly failed to protect citizens since this crisis began, other than those citizens in creditor countries.
Perhaps that is the new democracy!”

However when 17 elected eurosystem finance ministers meet at key times, such as last sunday, they are at all times 17 elected representatives,

http://www.irishtimes.com/business/economy/europe/global-capitalism-on-track-to-become-substantially-less-global-1.1338401

@ Flj and seafóid

Back in the real world indeed!

The job of the Commission is to “promote the general interest of the Union” and to “take appropriate initiatives to that end”. (Article 17 Treaty on European Union).

The “general interest” is, of course, difficult to define but a rough rule of thumb is that any proposals should have some chance of achieving a qualiied majority in the Council (it being left unstated that this QMV should include either Germany or France and preferably both).

In this instance, since Moscovici qualified Cyprus as a “casino”, it may be fairly safely be assumed that the QMV includes both.

@ Flj

Luckily, the Irish “business model” has little in common with those of Cyprus and Luxembourg. It would be wise, nevertheless, to start the process of a dispassionate assessment of the merits and demerits of US dominated FDI in the country. Such wisdom is unlikely to be displayed.

@ An Duanaire
Oddly enough Michael Noonan is only elected by the people of Limerick to represent the interests of Limerick. There’s a mismatch

@Francis probably not the forum for this,but agreed Forbes is for rich right wing republicans,its creepy and weird.
Can not remember last time ANYONE mentioned a piece in it,nor have I ever seen anyone in NY reading it…
Forbes is for the proctologist office,out of date old yesterday’s news.

John,

well, then suggest a different forum, without a censor.

FT(alpha), …

The KW-Forbes piece on Target 2 /Cyprus is actually something, I did mention in some other place, because it has interesting psychological dynamics with it.

And as this edwards pointed out, they have paying readers.
Some 47% voted for some creepy in in the US, and 29% for Berlusconi in Italy.

I recently tried to actually watch a little more TV, trying to keep an understanding what “normals” consume.

@An Dunaire

re: The 16 castrati.
It’s had to argue that democracy prevails, when governments are being changed and ousted at will and the acceptance of arguments is urged at pistol point.

Cyprus has changed everything, both the economics and particularly the politics.

Even the Luxembourg Prime Minister has just reacquainted himself with his country’s geography, and is starting to grow a pair.
[Ref link from@Fiatlux]
http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_26/03/2013_490035.

The flight of capital to Germany/Netherlands/France should be making it way to the top of the agenda any day now.
Germany has overplayed its political hand. It was a Pyrrhic victory. Even pet poodle La France is likely to start pulling at the leash.

@rf at 2:02 pm
ah I see Carolus Galviensis at 12.55..but do you think reforming Greece’s labour laws is going to have any medium (or even long term) positive impact on the Greek economy?

According to the textbooks, yes. But from living in Greece (for one year — Oct 2011 thru Sep 2012) and from what I’ve learnt from Greek acquaintances and read in the media, Greek labour law is honoured more in the breach than in the observance. For example, one restaurant I visited employed a ten-year old girl as waitress, and virtually ALL service staff in the catering industry are illegally employed. I mean all, like 90 percent. Ditto for most other services except for supermarket chains etc

So in the real existing world it is quite possible that the reform won’t have much effect. I really don’t know.

@DOCM
Indeed. Perhaps we can be a bit more secure in the knowledge or probability that our United States friends would yield a lot more clout in the IMF and indeed the Commission.
Nonetheless, when we are included with Malta and Luxembourg by the SDP it is time to take note.
Interestingly, these are the only countries whose representatives took issue with the treatment meted out to Cyprus. Stunning silence from MN.

@Carolus Galviensis

“For example, one restaurant I visited employed a ten-year old girl as waitress, and virtually ALL service staff in the catering industry are illegally employed. I mean all, like 90 percent. Ditto for most other services”

Compare and contrast….. I was issued with an order from HR at my new Swiss client in the UK today (I’m recruiting some new internal PR Guys/Gals for them)…. they have to prove eligibility to work in the EU at the point of interview now (not post offer).

I love how HR add so much value to any process. Half of their intranet is full of HR diktats.

I think Cyprus was just a test – to push the envelope… see what they could and couldn’t perhaps get away with. OK 75k?

@PR Guy at 9:46 pm
I think Cyprus was just a test…

I doubt whether it was planned as such. More like a ‘natural experiment’ perhaps, like ‘shit happens’.

One can certainly use the outcome for testing purposes, though.

@PR Guy at 9:46 pm
I think Cyprus was just a test…

I doubt whether it was planned as such. More like a ‘natural experiment’ perhaps, like ‘shit happens’.

One can certainly use the outcome for testing purposes, though.

@ All

FYI the FT Brussels Blog transcript of what Dijsselbloem actually said.

http://blogs.ft.com/brusselsblog/2013/03/the-ftreuters-dijsselbloem-interview-transcript/

Whatever about the associated controversy of the interpretation put on the remarks by both the FT and Reuters (Dijsselbloem has maintained on Dutch TV that he never even heard of the word ‘template’; which is believable even for someone whose English is near word perfect but not the native tongue), the direction that the heavy-hitters in the EA have decide to go is clear.

Time to dust off this – somewhat dated but prescient – paper by Professor Winkler of the Frankfurt School of Finance and Management!

http://www.voxeu.org/article/19th-century-lessons-ez-crisis-management

If the creditor countries wish to indulge in the idea that European banks can individually provide against risk, it is a victory of hope over reality. They can only do so collectively and there is no realistic basis on which this could be achieved. The market reaction in respect of certain bank shares would suggest that the banks are well aware of this. Near total retreat of banking behind national borders in the EU – already well on the way – seems inevitable.

@docm

“If the creditor countries wish to indulge in the idea that European banks can individually provide against risk, it is a victory of hope over reality.”

Don’t follow. Can you expand what you mean by “provide against risk”?

@Seafoid

“Why would anyone keep more than 100k in a bank ? ”

You and John McHale too, eh?

I don’t understand this point. Why would you not keep more than 100k in a bank that you didn’t think was likely to become widely thought to be insolvent before you could withdraw the funds?

Deposits – even large ones – are senior creditors. If your argument were correct, who would own bank equity?

Or, put another way, how could a fund that owned bank a shares logically hold cash balances at a bank?

Is all bank equity in the EZ worthless?

Grumpy,
Leaving aside DBK which has the backing of the Teutonic empire but skinny capital ratios nontheless.
1. All EZ banks are significantly more levered than their global counterparts
2. Arguably the EZ is in a depression and the ECB is oblivious to it so the capital is under a bit more pressure
3. Last week implies that the normal rules over the ranking of liabilities in a failing bank are open to interpretation in the EZ.
So why would you risk owning anything on the left hand side of an EZ balance sheet unless it is really really cheap….which it ain’t.

@Grumpy
Your question as regards the worth of bank equity reminds me of the story attributed to Warren Buffett.
When asked about investing in airlines he is reputed to have said that whenever he had the urge to invest in airlines he felt the need to go to AA.

@Grumpy
Your question as regards the worth of bank equity reminds me of the story attributed to Warren Buffett.
When asked about investing in airlines he is reputed to have said that whenever he had the urge to invest in airlines he felt the need to go to AA.

A random thought –

Irish bank investors may have taken comfort 3 months ago from the fact that the banks are backstopped by the state and the state is backstopped by the ECB (assuming that we can comply with a programme and the evidence is that we can).

If the new EC “template” is a real idea, then this changes since the programme that we need to be compliant with to get backstopped by the ECB, may require that bank investors take a hit first.

So a little bit of comfort may have been removed. How important this was to Irish bank investors is open to question, as is the reality of the new EC “template”. (Never heard of the word). For the ECB backstop to become critical, the solvency of the Irish banks themselves would first have to be exhausted, then the indigeneous solvency of the Irish state would also have to be exhausted, and finally we would have to lose our international friends all over again to the point where we once again can’t negotiate a favorable deal.

@Anonymous Economist

Not so.

ELA is secured credit and, as such, senior to unsecured credit such as deposits or bonds. Bank resolution is obliged to respect the seniority structure established in the bankruptcy code.

I take your point that the ELA would need to go where the insured deposits go, as it is senior to them, however it could have gone to a Good Laiki bank separate from Bank of Cyprus. BoC pushed very hard not to end up with the Laiki ELA, so there was another scheme on the table, but obviously it lost out. To me it makes no long-term sense to have one giant bank and a few small ones – it’s like merging AIB into BOI and having a “one pillar” strategy.

The lesson is that ELA is best viewed not a *bank* liability, but as a *banking system* liability. It will hop around and attach itself to whatever bank is alive, or the sovereign, as needed. The ECB have improved the collateral held for the Cyprus ELA, as the pool of assets used to support it is now the aggregate of BoC and Good Laiki. I suspect that it was considerations like that, rather than what made business sense, that drove the shape of the deal.

I trust that anyone here with money in Slovenian banks has pulled it by now. They’re next up.

Following up on my last post, one of the rules to be added to the rulebook is that a bank may be forced to pay for the mistakes of its out-of-control competitor.

It seems that of Laiki’s 9bn ELA, 4 bn was incurred in Greece due to bad lending there. However *all* of the losses in Greece were funnelled back to Cyprus – no Greek depositor was touched.

I presume that Laiki’s assets remaining after the Greek branch losses had been taken were not enough to cover the liabilities of 9bn ELA and 5bn insured deposits. At this point you might have expected a liquidation and then the Deposit Guarantee Scheme to kick in and make insured depositors whole after losses had been assigned, but this didn’t happen. Maybe there was no money in the fund, or maybe the ECB prevented it as it would have meant losses on the ELA (e.g. run-off value of the collateral worth less than the ELA granted). For whatever reason it didn’t happen.

So the losses were then assigned to BoC. It wasn’t in great shape to say the least, but wasn’t the total basket case that was Laiki. The Laiki losses seem to have raised the haircut on uninsured depositors there from the 20% to the 40% range. The transmission channel was from Laiki’s bad Greek lending back to BoC’s home market.

Not an example of anything you’d want to classify as a template for future use; it explains the resignation of the BoC CEO:

Artemis said in his letter that he dissented with the forced takeover of Cyprus Popular (Laiki) Bank by Bank of Cyprus along with a 9.2 billion debt in emergency liquidity assistance without prior consultation with the bank’s Board.

Central Bank governor Panicos Demetriades sent a letter to the Bank of Cyprus Board on Monday cancelling all its powers and also the powers of shareholders.

“Cyprus bailout: eurozone policymakers at loggerheads over implications”

There’s a hole in the system, dear Draghi, dear Draghi,
There’s a hole in the system, dear Draghi: a hole.

Then fill it dear Olli, dear Olli, dear Olli,
Then fill it dear Olli, dear Olli: fix it.

With what shall I fill it, dear Draghi, dear Draghi,
With what shall I fill it, dear Draghi: with what?

With taxes dear Olli, dear Olli, dear Olli,
With taxes dear Olli, dear Olli: try tax!

But the tax take is falling, dear Draghi, dear Draghi,
But the tax take is falling, dear Draghi: it falls!

Increase them dear Olli, dear Olli, dear Olli,
Increase them dear Olli, dear Olli: whack’em on!

But tax take falls more now, dear Draghi, dear Draghi,
But the tax falls more now, dear Draghi: it fell!

Squeeze the sovereigns, dear Olli, dear Olli, dear Olli,
Squeeze the sovereigns dear Olli, dear Olli: squeeze them!

But the sovereigns are bursting, they’re bursting, they’re bursting,
But the sovereigns are bursting, they’re bursting: some burst!

Try the savers, dear Olli, dear Olli, dear Olli,
Try the savers dear Olli, dear Olli: try them!

The hole just got bigger, got bigger, got bigger,
The hole just got bigger, got bigger: it grew!

Then the bondies, dear Olli, dear Olli, dear Olli,
If you must it’s the bondies, it’s the bondies: burn them!

Now the system is creaking, is creaking, is creaking,
Now the whole system is dear, dear Draghi: it creaks!

[female voice]

Inflate it dear Draghi, dear Draghi, dear Draghi,
Inflate the system it dear Draghi, dear Draghi: inflate!

But I don’t have a mandate dear Christine, dear Christine,
But I don’t have a mandate dear Christine: don’t ask!

Well then print it, dear Draghi, dear Draghi, dear Draghi,
Well then print it dear Draghi, dear Draghi: please print.

But we don’t have a printer, dear Christine, dear Christine,
We don’t have a printer, dear Christine: there’s no ink!

Well who make money, dear Draghi, dear Draghi?
Well who can make money, dear Draghi: who can?!

Well the banks are supposed to, dear Christine, dear Christine,
Well the banks are that system, the banks: that’s who!

[All together now]

But there’s a hole in the system, dear Draghi, dear Draghi,
There’s a hole in the system, dear Draghi – a hole!

http://www.guardian.co.uk/business/2013/mar/26/cyprus-bailout-eurozone-clash-savers

@Grumpy
““Why would anyone keep more than 100k in a bank ? ””
Your answer to the question would be a little too cryptic for the many businesses with in excess of 100,000. [I know of no individuals with that kind of money].
At present in Ireland, and I am certain in other EZ countries, are asking te question. Are we as depositors in the firing line, if we deposit in the wrong country?
Answer, After Cyprus, Yes.
Clarification: Cyprus 1, would give it to them in the neck, while repaying bondholders in full.
Message Received: Try not to deposit large sums in the wrong country.

Correction:
Message Received: Try not to deposit large sums in the wrong country. Or in the wrong country with the wrong ‘business model’

Odd quote from Juncker according to Ekathimerini

‘Luxembourg Prime Minister and former Eurogroup Chairman Jean-Claude Juncker struck a very different tone, saying, “We treated all Cypriots like bandits and gangsters.”’

If true, funny how they always seem to change heart after they finish being in a position to do something about it. Fear for Luxembourg?

Anyone have a source for that one?

http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_26/03/2013_490047

@ grumpy

The best way to answer your question is probably this Deutsche Bank commentary on the SPD’s election programme.

http://tinyurl.com/cv8vlmq

Notably;

“The SPD favours a restructuring along the lines of the original Liikanen proposals as the party states that the Germans want a clear separation between investment and retail banking. Proposals here include a pan-European restructuring fund funded by (large) banks according to their risk profile, their debt ratios and their relevance for the system’s stability.”

Neither proposal is going anywhere because of entrenched – and almost certainly majority – opinion in Germany. Things are fine, just as they are; thank you very much!

By the way, even allowing that the commentary is by Deutsche Bank, Germany’s only international player in the banking sector, this comment really takes the biscuit!

“partial re-regulation of the labour market, e.g. introduction of a general minimum wage of EUR 8.50 per hour”. Re-regulation?

As matters stand, the central question is which will make it to the pass first, the next euro crisis or the parties scrambling for power in the September election? I would bet on the former. Moscovici appears to have changed direction but the French economy has certainly not done so.

@ Grumpy

The average non expert punter used to think bank equity was blue chip. Lots of them had their fingers burnt in 2008 and not just in Ireland. I know three auld fellas late 60s-mid 70s who got hosed in BoI, RBS and UBS respectively, in 3 separate jurisdictions.

Now Leopold Dijesselbloom comes along and says deposits are fair game.
Fine. Then advertise them as such. See how many people take up the offer when interest rates are on the floor and will be for the foreseeable. “Your deposits are at risk if the bank ar*es it up on the other side of the balance sheet . Regulated by the Financial Regulator”.

Martin Wolf last week

“Banks are not vaults. They are thinly capitalised asset managers that make a promise – to return depositors’ money on demand and at par – that cannot always be kept without the assistance of a solvent state. Anybody who lends to banks has to understand that.”

So let’s change the education system. What do you think?

@ grumpy

Les Echos excoriates the French government’s failure to address France’s economic decline.

http://www.lesechos.fr/opinions/edito/0202666347199-la-bataille-du-chomage-un-travail-trop-partiel-552896.php

I liked this bit in particular;

“Aucun salut n’est à attendre des incantations répétées de Jean-Marc Ayrault, qui appelle à la « mobilisation générale » comme un général sans armée. Car, en guise de munitions neuves, le chef du gouvernement n’a à offrir que 2.000 postes supplémentaires à Pôle emploi. Or, dans la bataille contre ce chômage qui gagne du terrain depuis cinquante-sept mois, minant le moral d’une nation et laissant des millions de blessés économiques, ce n’est pas l’infirmerie qu’il faut renforcer, mais les premières lignes.”

The contrast drawn with Germany may also be noted;

“Or, dans ce pays, où les syndicats surprotègent les salariés en place, avec le soutien d’un Etat qui fait du pouvoir d’achat un objectif permanent, les salaires continuent, par une singulière exception, de ne jamais baisser quand le chômage augmente.”

@seafóid

Hmm maybe thats the master plan?!

Scare people from keeping money in banks so they go and spend it on houses, cars (German preferably :D), goods/services etc

Tho of course this can backfire badly

““Why would anyone keep more than 100k in a bank ? ””
You could have just sold a house for example…

@DOCM
re: Coeure remarks:

Hot air. Who funds the losses that already existed or the liabilities being imposed on banks via take up of another bank’s ELA. The ECB?
Draghi has gone to ground. Lying doogo. Maybe he doesn’t know where he is and is starting to speak German, like Tappatoni.

The June accord has been torn up. The ESM is dead. A nice quango for bankers and economists to retire to and write papers, and scour Europe to find a bank sound enough to lend to. Those kind of banks don’t need the money.

The ECB (and the 16 castrati) lost in Cyrpus. Schaeuble won.
Depositors are now on the line, unless they are under 100,000 and ‘guaranteed’!

You guys all seem to be saying that because senior creditors of a bank could lose some money if that bank were found to be insolvent, that:

(i) any money manager who allocates funds to an uninsured deposit at any bank, no matter how solvent, is crazy

(ii) by logical extension, since bank deposits are way up the seniority scale, all Euro Zone bank shares must be presumed worthless, and junior debt must be worth cents in the dollar.

Even to someone who has been generally bearish for several years vs consensus on EZ econ and banking, this seems unrealistically extreme.

@Seafoid

It is absolutely ridiculous that school leavers, not to mention some economics grads, are essentially ignorant of the basics of the financial system. Perhaps a little time could be shaved off the celtic linguistics fetish…

Paul Fergusons idea is correct:
If you want to keep money safe you put it into a safe in a bank and pay the bank to stop people robbing it – end of.
If you want to not use money spend it. Spending by putting it into an account to earn interest is no more virtuous than spending it on a meal out with da boird (much less enjoyable)

Simples. We’ve been here before – presuming interest on money that’s doing nothing is illigic

Thanks Eureka,

Martin Wolf noted today that the vast majority of euros exists as the banks’ liabilities. I’d welcome more recognition on this.

”Nearly all euros are, in fact, the liabilities of banks.”

Eureka say:

“If you want to keep money safe you put it into a safe in a bank and pay the bank to stop people robbing it – end of.”

And what exactly do you mean by money in this statement? Gold is not money. Cans of baked beanz are not money. No one is questioning that Money is merely the nominal liability of the banking system whether that is expressed in Note & Coin bearer form or as an electronic entry in a current account.

Nobody is denying that this is what money is, so what point is being made here? If by keping money “safe” you mean preserving its exchange value either for other financial assets and or goods and services, locking it (whatever “it” looks like) in a vault does not help at all.

Grumpy

Re i) in a core country and for a systemically important entity it is probbly ok
Re ii) since the periphery is in a depression and since there is no clarity on the rules, the tail risk around bank equity is rising. With EZ peripherals trading above Tangible Equity and earning sub COE returns this tail risk is not priced in.
You probably also have to have your ears tuned in to re-denomination risk.

@ BW 2
That’s a diversion. If govt collected property tax in baked beans then yes – they would be stored. If I thought there was going to be a famine – then baked beans.
Money is based on belief in its value.

@ Eureka

And there you have it. The Government will accept a transfer of your entry in a bank account to them to discharge your property tax. There is no need or point in keeping that entry in a vault.

@Grumpy

I think O Rathaille hit the nail on the head back in the 1600s

Tír gan eaglais chneasta ná cléirigh!
Tír le mioscais, noch d’itheadar faolchoin!
Tír do cuireadh go tubaisteach, traochta
Fá smacht namhad is amhas is méirleach!

Depositing money in banks.
We should be mindful of the law on deposits before risking our money…
Per Lord Chancellor Cottenham..

“Money, when paid into a bank, ceases altogether to be the money of the principal; it is by then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. The money paid into a banker’s is money known by the principal to be placed there for the purpose of being under the control of the banker; it is then the banker’s money; he is known to deal with it as his own; he makes what profit of it he can, which profit he retains to himself, paying back only the principal, according to the custom of bankers in some places, or the principal and a small rate of interest, according to the custom of bankers in other places. The money placed in custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal; but he is, of course, answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands.

That has been the subject of discussion in various cases, and that has been established to be the relative situation of banker and customer. That being established to be the relative situations of banker and customer, the banker is not an agent or factor, but he is a debtor.”

He is not answerable to the principal if he puts it in jeopardy…
Hard to believe that this is still valid in English law. Needs to be changed.

@ seafoid

re your quote from the FT

‘Martin Wolf last week

“Banks are not vaults. They are thinly capitalised asset managers that make a promise – to return depositors’ money on demand and at par – that cannot always be kept without the assistance of a solvent state. Anybody who lends to banks has to understand that.”

I noticed Wolf’s use of words there. He has grasped, and would appear to support, the incremental reframing of reality which is going on.

A:Bank deposits can arise when the bank makes a loan to a customer, but a counterbalancing asset goes on the banks BS. The deposit presumably exit the balance sheet as the funds are drawn down for whatever purpose the customer had in mind.
B: Deposits are also created when a customer moves in funds from elsewhere in the system. No reasonable customer would consider that such an action could ever be construed as making a loan to a bank. Such a notion is an absurdity to Joe and Jane Public.

Yet this is precisely the logic which is being used to raid bank deposits, and which receives the sanction of a respected FT economist. It follows that Minster Noonan’s recent reassurances on that score have a purely contingent, and typically political, value.

Deposits will not be touched unless the PTB deem that step to be expedient, in the interests of the ‘financial system or spome part thereof’. As so often in history, there is only one truly fixed principle, namely the principle of expediency, which is, of course, shorthand for the right of the powerful to make rules which serve their interests, and to be seen to be morally irreproachable in doing so.

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