Resolution of the Irish banking crisis: Hard-earned lessons for Europe’ Post author By Philip Lane Post date May 19, 2015 Speech by Lars Frisell here. Categories In Uncategorized 14 Comments on Resolution of the Irish banking crisis: Hard-earned lessons for Europe’ ← QUB public policy blog → A Finance Minister Fit for a Greek Tragedy? 14 replies on “Resolution of the Irish banking crisis: Hard-earned lessons for Europe’” “In retrospect, [ed – not everybody has to invoke ‘retrospect’ here] the optimal solution was an insolvency law to put Anglo into State conservatorship, followed by some degree of depositor preference to facilitate a balance sheet division into an entity for wind-down and a viable bank. “Except for the covered deposits most of the liabilities would have stayed with the old bank, alongside a large chunk of the real estate portfolio. Then a wide-ranging guarantee would have been issued for the remaining banks, thus drawing a clear line between the bygone entity and going-concern banks.” http://www.irishtimes.com/business/economy/bank-guarantee-a-very-costly-mistake-central-bank-adviser-1.2218510 “Suppose half of the bailout money can be recouped. That would still imply a cost of some 7,500 euro per Irish man, woman and child.” We should consider it a penalty on stupidity. And to remember that this penalty was also collected by some Irish-based citizens and firms and not just by foreign financial institutions, private equity ghouls, vultures and other bottom-feeders. In most aspects of economic and financial affairs Ireland is governed not by the rule of law, but by rule by law – with much of the law enacted being directed and influenced by powerful special interest groups capturing unjustified and excessive rewards and returns at the expense of the vast majority of Irish citizens. The policy and regulatory arrangements that led to the triple fiscal, banking and property blow-out are still allowing the powerful special interest groups to wreak economic damage in all other sectors – and they’re beginning to play their old games again in these three sectors. Despite all of the pain and grief nothing really has been learned by the vast majority of citizens. If people keep electing either clowns or the deluded or populists, on one side, or those who are part of and pander to these powerful special interest groups, on the other side, then they shouldn’t expect anything other than being fleeced continuously by these special interest groups with the risk of occasionally being taken totally to the cleaners when some of these special interest groups lose the run of themselves. @ PH To use one of my favourite quotations from Abraham Lincoln; “Elections belong to the people. It’s their decision. If they decide to turn their back on the fire and burn their behinds, then they will just have to sit on their blisters”. The one conclusion on the saga of the famous guarantee that is generally agreed is that it was the culmination of series of policy failures largely made by politicians that inveigled a majority to turn their back on the fire. I agree that we are at risk of repeating the exercise. However, the overhang of debt and the new stricter EU budgetary rules should prevent us from doing so. I did see much point to the speech by Forsell, to be honest. It was maybe news to his audience but not in Ireland. Postmortems are only useful if the cause of death is established and the necessary lessons drawn. The Swedes managed to do this. http://www.finanspolitiskaradet.com/download/18.11165b2c13cf48416debd6d/1420730553813/Underlagsrapport+2013-1+Holmquist+%26+Molander.pdf Irish Financial System Corporate Governance ‘The first line of defence against bank failures is the board of each bank and the senior management to whom the board’s policy is delegated. There would have been no risk of regulatory failure, or of poor decisions at political level, if the first line of defence had held. In no other eurozone country did that first line fail so catastrophically as in Ireland.’ http://www.independent.ie/opinion/columnists/colm-mccarthy/banks-probe-still-needs-to-shine-light-into-the-darkest-corners-31209795.html … and … and … the humble citizenry, forced to pick up the odious tab, have not received any explanation whatsoever of how … how … these board directors and senior bank management created the greatest financial system fu*k up in history. Essentially, these board directors and senior bank management treat the humble citizenry with total contempt … while pocketing their bonuses and overly generous pensions (topped up by the said humble citizenry) as they continue to swan around with no fear whatsoever of ever being called to account as the function of the Irish legal system is to protect such echelons from the lumpen plebs. @all financial system spinners Resolved! Resolved how are ya! “For the Irish it is ironic that it was the infamous Deauville statement in October 2010, where Angela Merkel and Nicolas Sarkozy announced that private investors should be prepared to take losses in future bailouts, that removed any hope for Ireland of staying out of a Programme of Assistance. Yet in the Programme negotiations a month later, the Europeans insisted that creditors to the banks should not be bailed-in. It is very difficult to understand. […] [A] lasting legacy of the Irish crisis is the vast number of mortgage and SME arrears. Seven years after the property bust there are still more than 100,000 people in arrears on their primary dwellings, which means one out of every seven mortgages. A lot of people genuinely cannot afford their mortgages any longer, as they have lost their job or suffered other financial losses. But others might ask what moral right the rescued banks have to require full payment since their creditors, among them foreign banks and professional investors, were compensated in full.” Lars Frisell Financial system heist of the century. … By the financial system on the humble Irish Citizenry. Good prescription as to what should have been done at the time of the “costly mistake”, and it is good to see the Central Bank being much blunter about the fact that it was a mistake than it has been in the past. The notion that no one could have anticipated losses close to what actually occurred seems to me to be off the wall. It was obvious at the time that there was a significant risk of very large losses. The fact that the markets had identified Anglo and Irish Nationwide as being insolvent, the fact that Morgan Kelly had publicly identified a risk of major property-related banking losses, and the size of the amounts guaranteed should, taken together, have been enough to scare anyone approaching the issue with an open mind stiff. What we actually saw was that senior FF politicians insisted on an strategy that amounted to playing Russian Roulette, and that the leaderships of the Greens, Fine Gael and Sinn Fein closed ranks to push it through the Dail and shut down debate. None of these parties lacked at least some people in senior positions bright enough to understand that they were spinning the cylinder on the revolver, and pulling the trigger. Resolution may be premature and will not in any case be least cost. @DOCM, Eoin O’Leary, in his recently published monograph: http://www.irisheconomy.ie/index.php/2015/03/10/new-book-on-irish-economic-development/ sets out the choice: a high-performing EU state or a serial under-performer. Perhaps a majority of Irish citizens think life is too short to have to bother continuously imposing some measure of scrutiny, restraint and accountability on those they elect to govern, on those whom the elected appoint to implement governance and, more importantly, on those who seek to influence and direct those who govern and implement governance to advance their interests at the expense of the vast majority of citizens. Tóg bog é an saol agus tógfaidh an saol bog duit. The willingness of a majority of citizens to bide their time quietly between elections and then to exercise their ultimate authority in the polling booths is much to their credit. That is why last autumn’s water charge protests which so frightened the Government were so remarkable and unusual. But it is not just liberty that requires the exercise of continuous vigilance; the delivery of sensible and efficient governance also requires the continuous imposition of scrutiny, restraint and accountability – either directly by citizens or indirectly via the Fourth Estate. Another factor appears to be widespread distaste at the conflicts between various interest groups that a functioning process of democratic governance would air and seek to resolve. The small size of the polity and the literally incestuous nature of the exercise of political and economic power all contribute to this. When the backs of those who exercise political and economic power are so close together, it is difficult to avoid mutual scratching. One only has to observe the widespread and continuing failure of the practice of economic regulation to glimpse the underlying malaise of the lack of a functioning system of democratic governance in the economic sphere, but there are innumerable examples across all sectors. However, this lack of a functioning system of democratic governance in the economic sphere does not prevent bursts of over-performance. Beneficial policy initiatives are continuously implemented; committed front-line public sector staff frequently go beyond the call of duty; the resilience of the private exposed sectors is remarkable; and all despite rather than because of the system of governance. But the absence of a functioning system ensures that some combination of powerful special interest groups will always exploit the conditions that fostered the high performance to advance their own narrow economic interests at the expense of the vast majority of citizens. A period of underperformance is the inevitable result and the severity of the underperformance is determined by the malign or benign impact of external factors. And so the cycle continues. More excellent news from the QNHS for Q1 2015 today: http://www.cso.ie/en/releasesandpublications/er/qnhs/quarterlynationalhouseholdsurveyquarter12015/#.VV4pTTl0XVo Unemployment rate down to 9.8% in April from 11.6% in April 2014. My prediction that full employment (which I define as an unemployment rate of 5% or less) would be reached by September 2017 may have to be brought forward a couple of months. Number in employment up 2.2% y-o-y (from 1,888.2 to 1,929.5). But, Number in full-time employment up 3.6% y-o-y (from 1,437.5 to 1,489.6). If we equate each part-time job to 1/2 x a full-time job, the number in full-time equivalent employment was up 2.8% (from 1,662.8 to 1,709.5). It looks as though the y-o-y increase in employment could hit 50k by the next quarter. It was 41,300 in this quarter. In addition, Number of employees in the public sector was virtually unchanged Number of employees in the private sector was up 4.3%. And, as Seamus Coffey points out in his blog, the percentage employment increase outside Dublin was higher than in Dublin. A little publicised part of the QNHS is the early indication it gives on migration trends. The QNHS doesn’t give full population figures, but gives figures for the population aged 15 plus.There are now clear signs that net emigration is falling rapidly and population growth is accelerating. These are the figures for the y-o-y change in the population aged 15 plus each quarter since Q1 2012: Q1 2012: -5,300 Q2 2012: -8,100 Q3 2012: -2,600 Q4 2012: +1,800 Q1 2013: +700 Q2 2013: -4,700 Q3 2013: -2,700 Q4 2013 +900 Q1 2014: +2,000 Q2 2014: +7,600 Q3 2014: +2,800 Q4 2014: +4,500 Q1 2015: +10,800 So, clearly population growth is accelerating sharply. I think this partly explains the resurgence in house prices in the past year. New house building needs to be increased sharply to match the accelerating population growth. @Paul Hunt Eoin O’Leary, in his recently published monograph: http://www.irisheconomy.ie/index.php/2015/03/10/new-book-on-irish-economic-development/ sets out the choice: a high-performing EU state or a serial under-performer. Actually Ireland has been a serial over-performer for the past 50 years. And looks set to continue that trend for the rest of this decade at least. Further to my previous post, based on the age 15 plus population figures in the QNHS, it looks as though net emigration in the year to Q1 was down to near 10k, compared with 20k last year and a peak of 33k the year before. I can’t see any way this trend will not continue. Net immigration should resume in 2015/2016 or 2016/2017. This will obviously have profound implications for the housing market. Of course, it should be remembered that prior to Census 2011 the QNHS was overestimating net emigration (or underestimating net immigration, if you prefer) by 20k a year. I wouldn’t be at all surprised if Census 2016 shows something similar, although probably not to the same extent. @JtO, Thank you, John. You’re very adept at selecting economic statistics that allow you to gloss over the combined impact of inept policy responses to the effects of external factors and of deviant (but special interest group-favouring) policy-making and the resulting inevitably damaging economic behaviour that underlies and generates the long (1975-2001) lap and the start of the second lap described here: http://www.irisheconomy.ie/index.php/2009/07/16/another-lap-for-hare/ Thankfully, it looks like the current lap will be shorter than the previous one. It could, of course, have been much shorter (in that economic recovery was retarded) and need not have followed a course that generated so much economic hardship for those least able to bear it. The recovery was retarded because the Government had to manage the fiscal adjustments and the economic changes required by the Troika (some of which continue in a much weaker form under the almost laughable European ‘Semester’ surveillance) to minimise the impact on the powerful and influential special interest groups who continue to extract excessive and unjustified rewards and returns at the expense of the vast majority of citizens. The resilience and performance of most of the private sectors of the economy, in particular the tradable sectors, are truly remarkable when one considers the burdens imposed on them by the profit-gouging, inefficiencies and rent-capturing that characterise the sheltered private, public and semi-state sectors. @Paul Hunt “You’re very adept at selecting economic statistics…” Its nothing to do with being selective. The QNHS was published yesterday and I commented on it. If it had been some other set of statistics, I’d have commented on that. So far I’m the only one to do so. But, then its easier for me to do so since I accurately predicted its contents a year ago. There does not seem to be much interest in the banking inquiry but some of the testimony is revealing. For example, John Hurley stated that the CB were ready to provide €3bn to Anglo via ELA ,although it was not clear whether that was evident to the senior people in Anglo. Previous testimony had indicated that the two main banks had agreed to provide short term liquidity to Anglo, presumably on the view that in its absence Anglo would default. In other words Anglo would not have been allowed to default by the CB but Hurley argued that knowledge of the ELA support would have raised a significant contagion risk . It was also clear that Hurley viewed the decision to split the regulator and the central bank in 2003 as a huge error, and he disputed Honohan’s view as to the powers the central bank actually had to influence credit conditions. Comments are closed.