You know it’s getting bad when one of the leading bank economists goes on the national airwaves and suggests that the nation pray. On Morning Ireland we had a number of informed commentators giving us their perspectives on the Government’s proposals to recapitalise the banks – in effect, a second bail-out. After going through all the varying worst-case scenarios (the suggestion that the recession could turn into a depression unless this bank thing is solved quickly was treated quite seriously) it was left to Professor Ray Kinsella to sour our morning cornflakes:
‘The bottom line is that we’re going to need a lot of prayers to see us through next year.’
Of course, it’s difficult to pray with purpose when there is so little detail behind the Government’s ’proposals’. They didn’t announce what exactly they were going to do, when they were going to do it, who they were going to do it to and how much it was going to cost. A package of ‘upwards’ of €10 billion – made up of private and public capital, possibly (not definitely) using the Pension Reserve Fund to recapitalise banks unknown. Maybe its in the nature of inching towards a solution that proposals are, inherently, fluid. But a little more substance would help the debate.
And that debate starts with some home truths. The conduct of senior banking executives has been nothing short of criminal, economically speaking. They have obscured the real situation of their banks, have refused to engaged in a wider public debate, have subjected us to an irrational discourse that is mind-boggling (only last month, AIB’s Eugene Sheedy stated with unabashed arrogance that his bank would ‘rather die than raise equity’; I leave readers to ponder the irresponsibility contained in that statement); and all the while they have overseen the unprecedented carnage of their share prices. What a bloody swagger.
And while I would agree with David McWilliams’ contention that they should be shown the door (and when autumn comes they should be marched out to the fields to bring the harvest in) and replaced with better talent, this is not sufficient. The root of the problem doesn’t lie in the conduct of a few people; it is systemic. Only a wholesale reform can bring us back to the optimal position – that finance must serve the economy.
In that context, the debate is not even about whether €10 billion is enough. David McWIlliams claims that it’s more like €30 billion, others suggest different numbers. Whatever is necessary will have to be found. But even then it will not be sufficient, no matter how necessary. There are two more elements:
One is the culture of banking and that is why I’m dubious that a few different new faces at the helm of our banks will make a lot of difference. Essentially we have a banking system that has always prioritised investors over depositors, borrowers, employees and the economy at large. We can remove some of the more extreme practices that have emerged in recent years – the unsustainable bonuses linked not to performance, but to share price and how much one could lend out – but that won’t change a deeply ingrained culture.
Another issue is the health of the economy. There is a near universal and understandable demand that banks begin lending to businesses. However, we should strike a note of caution. To what extent are we demanding that banks lend to businesses that are, on an objective basis, not credit-worthy? Would we be in danger of creating a new tier of dubious assets? Economic recessions are marked by failing businesses and extending them credit is, in many cases, only postponing the inevitable. The problem is that no one has confidence that our current banking system is either capable, or interested in, assessing the difference between what is credit-worthy and not. And the anecdotal evidence is that otherwise healthy businesses are unable to access credit.
The ultimate problem is that no one has confidence in the banks. No one believes senior executives when they say they don’t need capital or when they say they can contain their debts. Likewise, no one believes the regulatory agencies when they say our banks are adequately capitalised and have passed the various stress tests that were administered. This lack of confidence is bleeding throughout the economy.
So what is the radical action necessary to (a) recapitalise, (b) transform the culture and (c) create the confidence necessary to contribute to growth? Fortunately the Left and trade unionists are not afraid to use the word nationalisation anymore. But what exactly will that mean? It won’t mean a shift away from liberalised markets – there will still be competititon and a ‘private sector’. But now is the time to reframe that debate and redefine those terms.
First, after all the mergers and acquisitions we will need at least two strong banks, capable of competing in an open market. This process should be done on the basis of public interest (which means that the State should acquire the redundant infrastructure to put it to productive use) and should be accompanied by capitalisation from the state. This would allow for strong state and employee representation on these boards.
Second, the introduction of both a strong regulatory regime (the reform of our asleep-on-the-job regulatory agencies is a matter for another day), combined with forums of public accountability, will also be necessary to transform the culture and instill confidence.
But third, and just as a crucial, is the establishment of a new third-force banking network. As I’ve written before, this could be modeled on the US community development banking system, linked up to An Post and even the credit unions This linkage, utilising the branch infrastructure that the state assumes from smaller banks (this is one of the things I mean by a rationalisation on the public interest terms), could become a major competitive force but with radically different mission objectives (non-profit, community and regionally based, executives made up of stakeholder interests). This ‘People’s Bank’ could become a major player in the financial market.
It is imperative that similar strategies be created and debated by the Left. For we have lost the initiative on financial issues. Whereas Labour was effective in its opposition to the first bank bail-out, the problem is that the crisis has gone beyond that. In any event, effectively opposing the Government is no substitute for proposing an alternative strategy. And a strategy which accepts the broad thrust of what the Government is doing, albeit with some amendments, is neither sufficient nor progressive.
What we must do is imagine a different landscape and then create the road-map to get us there. If we can do that, not only will the Left benefit, a nation may not need to rely so much on prayers to see us through next year.
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