Category: Banking Crisis

The ECB is leading Europe to disaster

Colm McCarthy makes some important political points in today’s Sunday Independent. He points out, quite correctly, that the ECB’s policy of favouring an Irish sovereign default later over a private banking default now (and it is important to be clear that this is exactly their position, whether or not they publicly admit it) is going to make it very difficult, if not impossible, to get public buy-in for the further austerity measures coming down the line; and is also virtually certain to lead to increasing anti-EU sentiment here (and in the rest of the periphery as well).

But it’s worse than that. By confusing fiscal and banking crises in the public mind, the ECB is also fuelling anti-EU sentiment in the core, since core taxpayers understandably resent the notion that they should subsidize feckless peripheral taxpayers. By contrast, greater honesty about the fact that we have a Europe-wide banking crisis would make taxpayers everywhere realise that they have common interests, and a common enemy, namely an out-of-control financial sector. In such a scenario, ‘Europe’ might be seen by ordinary voters as having something positive to contribute, since cross-border banking requires cross-border regulation. Right now, however, ‘Europe’ is seen as a big part of the problem, in the case of the ECB correctly so.

Like Colm says, it really is a slow motion train wreck.

Martin Walsh on Residential House Prices

This article by Martin Walsh in the Irish Times has some convincing analysis (unfortunately the graphics are not shown in the on-line version), and some thought-provoking comments on the Irish government policy conundrum regarding residential house prices.  As Martin Walsh notes, to minimize expected future (state-owned) bank losses and Nama losses, policymakers must hope that prices have now fallen to their steady-state equilibrium level.  But for the purposes of restoring competitiveness, continued house price decreases would be better. 

“… it seems that there is a real dilemma at the heart of national policy. Do we prioritise competitiveness by bringing house prices back into line with incomes or keep them inflated in the hope of reducing further losses to the banks and Nama (National Asset Management Agency), as well as containing the extent of negative equity?”

Most importantly, by most long-term metrics, current house prices in Ireland still seem to be above sustainable levels.  

What actions (if any) should Irish policymakers pursue regarding stabilizing the residential housing market, and to what ends?    

Stephen Collins and Groupthink

Writing in today’s Irish Times, Stephen Collins takes the following from the Nyberg report:

It is probably no accident that some of the cheerleaders of the boom have now turned into leading prophets of doom. The same reckless, gambling instinct that fuelled admiration for Seán Fitzpatrick also underpins the “burn the bondholders and damn the consequences” philosophy.

If there is one lesson from Nyberg it is the need for prudent economic management in the years ahead, with careful weight being given to the views of the European Commission and our EU partners.

I think it’s worth echoing Kevin O’Rourke’s previous warning about Mr. Collins and his history lessons. Mr. Collins thinks the lesson we should learn from the crisis is “Don’t be reckless. Be prudent.” However, this isn’t a very useful lesson. I’m sure that Bertie Ahern, Charlie McCreevy and Brian Cowen all believed that their policies were prudent. They were running budget surpluses and their “prudential regulator” told them they had some of the best capitalised banks in the world.

For me, the real message of Nyberg’s report is that Ireland’s economic and political establishment exhibited an extreme form of groupthink during the housing boom. Nyberg’s report brings up groupthink time and again. He describes the phenomenon as follows

Groupthink occurs when people adapt to the beliefs and views of others without real intellectual conviction. A consensus forms without serious consideration of consequences or alternatives, often under overt or imaginary social pressure.

And the report is very clear about the role played by groupthink. For example

The generally held belief in a soft landing outcome, which was quite common even as late as 2008, can also be seen as a consequence of groupthink.

Now let’s take a step back from current economic events and try to ask whether there has been a groupthink element to policy making in the period since the bubble burst. Mr. Collins lashes out at those who wish to “burn the bondholders”. However, these people have had no influence whatsoever on the conduct of economic policy.

Instead, economic policy of recent years has been dictated by the idea that, however difficult things may seem, our situation is “manageable” and that all Irish bank and sovereign debt can and must be paid back.

Those who espouse this vision, including many with weekly opinion columns, backed the September 2008 bank guarantee and also supported whatever incremental measures the government produced as “the final solution” to our banking problems, for example via their backing for the NAMA plan. They have also regularly warned us not to “scare the horses” by suggesting debt burdens might not be manageable.

If anything, it has been this viewpoint, backed by Mr. Collins and many others, that has become the new groupthink. It is not at all impossible to imagine a future Nyberg-style report into the reasons for an Irish sovereign default focusing on the “manageability doctrine” as perhaps the key reason why Ireland failed to avoid default.

What we need now is more respect for dissenting voices, not weekly smackdowns of those who dare to disagree with the prevailing orthodoxy about what constitutes prudent economic management.

Nyberg Report on Banking Sector

The Nyberg Report is available here.

Banks Downgraded to Junk

This seems like bad news and hardly the kind of response the government would have been hoping for after its stress test report and recapitalisation commitments. What I don’t know is whether this makes much difference at this point in relation to corporate deposits. Is it the case that the large deposits that were going to be pulled are already gone or is this downgrade going to trigger further withdrawals?