THIS IS NOT THE FINAL BILL. THINGS ARE GOING TO GET WORSE.
Today’s announcement brings full clarity to the costs and methods of recapitalising the banks. These costs are fully manageable in the context of the programme of fiscal restraint to which the Government is committed.” (Brian Lenihan, 30 September 2010)
A bank makes money by selling credit. It charges for financial transactions but essentially it makes money by selling money to people and businesses who need it. It sells different types of credit - mortgages, car loans, personal loans, business loans, etc - but fundamentally that’s the business plan.
Credit is expected future earnings, realised today.
It is issued on the expectation of future earnings. In the case of mortgages, for example, house prices are directly influenced by the estimated future earnings of the workforce. (At least, they should be. Bubbles occur when house prices are divorced from realistic appraisals of potential future earnings.)
In 2008 the Irish banking system was on the verge of collapse. Banks were issuing credit, and had been for over a decade, which was not based on the expectation of future earnings, but which had been bought on the international financial markets and then sold in Ireland. Credit had been ripped from any sense of realistic earning potential.
Irish banks were not the only banks to do this - this was an international financial meltdown after all - but the Irish government did something which virtually no other government did.
The Irish government, at a time of fundamental economic meltdown, guaranteed a bubble. It guaranteed the earning potential of a bubble that had finally collapsed.
Most moves to protect credit systems are based on guaranteeing deposits - actual accumulated deposits of value which act as security for credit.
The Irish government, however, guaranteed everything, including credit which had been bought in by banks and sold in Ireland - credit which bore no relation to the actual earnings and potential future earnings of the State’s citizens and businesses.
The trouble which awaits us down the line arises out of the fact that mortgage and business credit issued pre-2008 has not been renegotiated to reflect the changed economic circumstances.
Remember, credit is expected future earnings, realised today.
Households are paying for credit which even at the time bore no relation to the potential future earnings of the wage-earners, but which now is supposed to retain its value while householders are made unemployed, or are struggling with a reduced pay-packet via wage-cuts and tax hikes.
It can’t be done. Households and businesses are going to default on these loans.
The credit which is in the system is not going to be realised because of pay cuts, business shutdowns, and massive unemployment.
AIB was taken over yesterday by the State in anticipation of this second wave of credit collapse - the credit collapse which is linked to the collapse in the future earning potential of the State’s citizens and businesses.
The government has absolutely no strategy to deal with this second wave except to attack the future earning potential of the State through a four-year deflationary process.
The only way to make credit work is to make more money than the credit is worth.
That was never going to happen in Ireland’s case as the credit it was sold was never based on a realistic appraisal of Ireland’s potential future earnings. Instead, a bubble was created.
The government, our government, needed to renegotiate the credit in the system so that it was based on a realistic appraisal of potential future earnings - in other words, access the burst bubble and give the creditors a realistic price for their loans - while at the same time stimulating the economy so that the economy creates more money than it owes.
It has done neither.
It has slashed the earning potential of the Irish economy while at the same time ensuring Ireland’s credit bill remains at pre-2008 levels of value.
The bubble is guaranteed while the economy is deflated. Boom-time debt in a post-bust world.
It cannot work.
This is not the final bill. Things are going to get worse.
Discussion
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Comment by: WorldbyStorm
Oct 2nd 2010 at 08:10
Grim reading, but spot on Conor.
Comment by: William Wall
Oct 2nd 2010 at 11:10
If I could find my lifejacket (supposedly under my seat) I would get off the island now.
Comment by: Pope Epopt
Oct 2nd 2010 at 23:10
Yep.
The model is debt-slavery. The debt-farmers want to put us in position of the worse-than-poor in India who are owned by those who lent their father / father’s father money to buy rice seed.
However a good debt-slaver doesn’t overburden his victims. He ensures a maximal and continuing return.
Whether they have overestimated the cravenness of the Irish citizenry remains to be seen. Certainly they can rely on the current government and the government-in-waiting to try to impose whatever it takes to continue the fiction.
We could save civilization (again) and refuse to service the debt-slavers. With luck the refusal could be contagious.
Comment by: Conor McCabe
Oct 3rd 2010 at 07:10
I think you are being very generous by calling this a model, pope. Virtually no other country did what Ireland did - use the entire resources of the state to guarantee the burst value of a property bubble. Debt-slavery is a key element of modern capitalism, but to explain what the Irish state did as a model of debt-slavery is to confuse two issues with each other. The way the Irish state works, and has worked for decades, is key to understanding what went on, and why Ireland’s answer to the problems it faced was out of step with the rest of Europe. and I don’t mean austerity measure here, I mean the bank guarantee. That’s not a debt-slavery model, that was a move to avoid the investigators coming in and uncovering the scale of corruption that permeates Ireland’s financial and political worlds. There’s a reason why the bank inquiry commission will not be naming names, and it has nothing to do with debt-slavery.
Comment by: William Wall
Oct 3rd 2010 at 08:10
That’s a very interesting charge, Conor (and I use the term ‘charge’ because that’s what it should actually be). I think you’re right. What the government did is inexplicable except as:
(a) Crass stupidity of the lowest order - a very attractive description that I’m constantly drawn to, or
(b) The usual ‘cute whoor’ manoeuvring of FF to guard its own arse and the arses of its backers. This latter description does not exclude the first.
But a glance at the international press will show you what the world thinks of it. Nobody understands the form of the guarantee. They get the idea of guaranteeing deposits (up to a certain amount) – but bondholders? Transferring the dodgy loans and high-yield bonds into sovereign debt? It is inexplicable except as (a) or (b) above.
Comment by: Conor McCabe
Oct 3rd 2010 at 08:10
I can’t definitively prove this, and given the limits to access to information in the banks, I won’t be able to for a long time, but the reason why the bank guarantee was given was not to protect the economy, it was given in an attempt to avoid the truth about the scale of corruption in Irish society coming out.
If Ireland were to ‘burn’ the bondholders and let Anglo go, the bondholders would send in the international finance equivalent of The Viper to get some of their money back. The books would have to be opened, and if they were we’d see the whole rotten edifice which is the Irish State - politicians, bankers, senior civil servants, judges, doctors, all those who had their dirty fingers in Anglo’s rotten pie. That is the reason why the bank guarantee was set up, and why NAMA was set up. To make sure the actual truth about the scale of corruption stays out of the public eye. There is nothing stupid about doing that. It makes perfect sense from a self-preservation point of view, but that is what is going on.
Anglo Irish is where endemic state corruption meets modern capitalism. Ireland is not unique in this - if we were to graph it Ireland would be somewhere between Italy and Nigeria - but it is not a debt-slavery model.
Proving this is not going to be easy. We can show the structure, though, and the history of political and financial corruption in this country, and hopefully that will point people in the right direction. circumstantial evidence, if you will, rather than the smoking gun.
Comment by: Conor McCabe
Oct 3rd 2010 at 08:10
I should add that the one person who has come closest to exposing the endemic state corruption surrounding Anglo Irish is Frank Connolly - and while he was doing that he was publicly attacked not only by Michael Mcdowell but by the very Irish journalists who today are wringing their hands and asking “how could all of this have happened?”
In the article linked below, Frank Connolly explains his investigations, and why he was shut down.
http://www.shelltosea.com/content/ireland%E2%80%99s-property-crash-could-have-been-avoided
Comment by: William Wall
Oct 3rd 2010 at 09:10
In the nature of these things, unfortunately, the corrupt will be untouchable by the time the truth comes out. Thanks for the Frank Connolly link.
Comment by: Tomboktu
Oct 3rd 2010 at 10:10
Atlantic really does seem to have turned 180 degrees since then. NGOs they are funding are being told of the need to work with the State and its organs and not constantly fight against it.
Comment by: Pope Epopt
Oct 3rd 2010 at 10:10
Maybe we are talking about two different things.
I too, am convinced the guarantee and subsequent desperate propping up of zombies was to avoid washing FFs laundry in public. Stupidity only goes so far as an explanation (although it is sufficient in the case of the Irish Greens).
There are (at least) two sets of players, however, in this stitch-up. I want to know what’s in it for the Goldman Sachs of this world, who presently wield more influence than the Irish Government.
I’m interested in the point of view of the debt-farmers in the hedge funds, and what that says about capitalism ‘going forward’. And I think their plan (perhaps it’s too grand to call it a model - they only half believe in it themselves) is simple. They don’t care about ‘growth’ any more. It’s a zero-sum game of extracting whatever they can in the form of interest and the sequestering of cheap national assets from subservient governments, for however long the system totters on.
Comment by: Conor McCabe
Oct 3rd 2010 at 11:10
Ireland is in a bind directly because of the bank guarantee - a guarantee that pissed off Germany, France, the UK and the rest of Europe at the time. If the bank guarantee was part of a ‘zero-sum’ game where growth is not important any more then how come no other country in the eurozone went for it?
European governments did what they could to protect the credit bubble, but once it burst, well, that was a game-changer. Ireland was the only country in the Euro, and I believe the only country in the world bar one, which said that the bursting of the credit bubble wasn’t a game-changer. I don’t think Goldman Sachs explains that at all. For that element of the puzzle, we need to look at the way Irish society works, its economic, political and social dynamics.
Debt-farming, hedge funds, sequestering of cheap national assets, none of these explain the bank guarantee itself, and I feel that point has to be made. We need to understand the nature of Irish banking and its dynamic within the Irish body politic.
for me, the long-term effect of having an economy which lacks an indigenous industrial export base is that it has given the banks free reign to dictate monetary policy. The normal tension between banks and industry over the value and function of money was weak – so weak, in fact, that from 1922 to 1979 the value of the Irish pound was set at such a disproportionately high rate that it became a significant hurdle in the development of indigenous Irish industry. It was held at a constant parity with sterling.
The move to import foreign industry to Ireland in the 1950s was directly linked to monetary policy. The alternative – affordable credit to boost indigenous growth but a weaker Irish pound - was strenuously opposed by both Irish banks and their soul-mates in the Department of Finance.
Since the 1950s, indigenous industry has remained comparatively weak - the exception being those industries associated with construction. In other countries, up the 1980s at least, the power bloc of industrial and business exporters kept a check on the power of finance. Since the 1980s, though, this dynamic has changed in those countries in finance’s favour. However, in Ireland, we NEVER had those checks and balances, which means that we’re much further down the road in terms of what a country ends up like when financiers have free reign to set economic policy, when rent and speculation, and not trade and production, sets the economic agenda.
In many ways we are the future, and the rest of Europe and the world should look at us and get very worried indeed. and because of that it is harder to squeeze Ireland into templates drawn from other countries because we’re the ones setting the trend. We are what happens when bankers have inter-generational control of your economy - where speculation, not trade or industry, is the dominant element for decades.
I mean, around 8 per cent of the Irish workforce produces 88 per cent of exports. Nine out of every ten jobs in the country feeds off the dynamics of the national economy. That’s why half of the workforce earns less than €25,000 a year. The papers tell us the average wage is, what €40,000 a year? sheer nonsense. Same as the property bubble, or holiday homes.
When we look at the history of the Irish economy, its past and present dynamics, the bank guarantee makes perfect sense. It’s happening within the dynamic of international finance, the Goldman Sachs of this world are involved, but we have to realise that Ireland is a world-leader in what happens when bankers run your economy. We’ve had decades of experience.
Comment by: Pope Epopt
Oct 3rd 2010 at 11:10
I don’t disagree about the uniqueness of Ireland vis-a-vis the guarantee, or that our (sorry their) unique historical subservience to banking interests is important in explaining the bank guarantee. And you are spot on about this dominance being responsible for the lack of an indigenous economy.
However look beyond at what has happened since the guarantee. Now Ireland is a key part of an attempted stabilisation of an inherently unstable system, and are providing a precursor/experiment for a what may be coming to other ‘advanced’ economies.
As you say, “in many ways we are the future.”
Preventing the contagion of debt default means maintaining stagnating economies and sucking whatever finance capital can out of them, while they have the chance. This is the way the master of the universe have operated for years in the developing world, and that discipline is now being imposed on the ‘developed’ world. Given the lack of an alternative, this could go on for years before it implodes.
Comment by: Conor McCabe
Oct 3rd 2010 at 12:10
Oh I agree. Ireland, Spain and Greece are being forced to deflate their economies so Germany won’t have to. God forbid the Germans should suffer for the ‘don’t ask don’t tell’ attitude of their banks when they were giving loans to Anglo Irish. The money that is being sucked out of the so-called ‘peripheral’ countries is being used to shore up the Euro. Ireland will not be kicked out of the Euro because its role in the Euro is to take the pain for the dominant States.
Again, a study of Ireland’s relationship with Sterling, 1922 to 1979, could throw some light on the type of future that the ‘peripheral’ countries might face in the eurozone - although many countries were linked with sterling, Ireland had actual parity, and because of that, I think it reveals what such a relationship holds - that is, different economies with parity in a single currency. In the case of Ireland 1922 to 1979 we have a working historical model of such a relationship.
Oh. I’m not saying that Ireland is unique - just that we got here first.
Comment by: Pope Epopt
Oct 3rd 2010 at 12:10
Hmmm… not sure we didn’t get a good bit from ‘the Germans’ in EU structural funds.
You are right in thinking that the extent to which Deutsche Bank and others are desperately trying to cover the disastrous punt on the Irish property bubble, is not exactly top of the German media. They bankers are doing well - the Irish crisis seems to register hardly at all with the German media. Compare this with the British media, who seem to have Lenihans number. The Süddeutsche Zeitung had one short article last week, as far as I can see, and no mention of the €100bn exposure of German banks to Irish debt.
Anyhow, ‘the Germans’ have a ruling class and the rest, just like us. It’s just their ruling class is a somewhat cleverer and given to longer-term thinking.
Comment by: Conor McCabe
Oct 3rd 2010 at 12:10
I don’t understand your mention of EU structural funds and the present collapse in international credit markets.
Are you saying that EU moves to pass the deflationary pain onto the peripheries is payback? That it’s some form of quid pro quo?
I would see it as a defence mechanism. In order to avoid riots in Berlin, we’re having them in Barcelona and Athens.
Comment by: Pope Epopt
Oct 3rd 2010 at 21:10
No I’m not suggesting it is or should be payback time.
However there is considerable danger that the naked class war being conducted by the financial elite against everyone in Europe (the CDU/FDP government in Germany, for example, are engaged in their own programme of cuts, while at the same time pumping money into the banks, the nuclear industry and a vanity project in Stuttgart) is going to be masked by turning it into a periphery versus centre conflict. This plays straight into the hands of those, like Murdoch, who have the breakup of pan-European institutions high up on their agendas, for a variety of commercial and political reasons.
Comment by: Pope Epopt
Oct 4th 2010 at 08:10
Excellent article, I forgot to say Conor.
Thank you.
Comment by: Conor McCabe
Oct 4th 2010 at 09:10
Thanks pope. I don’t quite agree with you with regard to the ‘periphery-core’ issue, but I don’t exactly disagree either. It is certainly a complicated, and contradictory, issue.