The Government: Have they failed?

ART6

The problem, I suspect, is that the Irish government simply does not have the means to do any bail outs. We are already heavily in debt for such a small country, and the piggy bank is empty. So the question is how many billions would it need to keep BoI from collapse? Bear in mind that the financial industry talks money that is way beyond the resources of smaller countries. If the government borrows to do a bail out, Ireland's credit rating will hit the floor, and we will vastly exceed the debt provisions of the Single Currency, with all of the potential penalties that implies. Our current borrowing requirement is peanuts compared with the commitments of most of the banks.

In any case, what is the actual effect of the BoI share collapse? All it means is that the shareholders have been selling off their shares, theoretically decreasing the shareholder value but not actually affecting the profitability or financial stability of the bank. The shareholders are losing out big time, but that's all that's happening unless international banks take fright at why they are selling.

oscarBravo

donegalfella wrote: »

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Let's say BoI collapses. This will force the government to make good on their guarantees, which will (a) cost a fortune, and (b) as you've pointed out before, still leave some depositors short. The inevitable consequence is a run on every other bank, as depositors there panic and start demanding their cash. Several of those banks will collapse in turn. Outstanding debts will be called in, forcing many businesses into bankruptcy, leading to a sharp increase in unemployment.

Explain to me how this is better than the alternative?

donegalfella wrote: »

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I've answered this before: the government puts equity into the bank, in return for a say over executive remuneration (and indeed survival).

The accountability comes when the government says "we're rescuing your bank. Now, bugger off: you're fired."

Permabear

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nesf

ART6 wrote: »

In any case, what is the actual effect of the BoI share collapse? All it means is that the shareholders have been selling off their shares, theoretically decreasing the shareholder value but not actually affecting the profitability or financial stability of the bank. The shareholders are losing out big time, but that's all that's happening unless international banks take fright at why they are selling.

The shareholders aren't the concern really, if BoI's share price collapses it indicates that the market views it very negatively, if the market views it negatively BoI are going to find it extremely difficult to raise funds in the money markets and elsewhere. If BoI can't raise funds to meet it's day to day running it collapses itself, if it can meet these but not raise anymore then it isn't in a position to lend funds to anyone, no matter how good their credit record which sees the problem transferred further down the line and you have companies in different sectors being unable to raise funds to meet their day to day running or fund expansion which has a broad negative effect on the economy. If BoI collapses, it could bring down the other Irish banks with it since their business models are fairly similar and they're exposed to mostly the same risks and if they go down as well it would paralyse the economy.

The shareholders losing their money is neither here nor there really when it comes to why we need to prop up banks and yes it leaves a bad taste in my mouth too that they get away with their overly risky behaviour of the past decade but that's the way it is unfortunately.

nesf

donegalfella wrote: »

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The moral hazard comes from the situation where we both poorly regulate banks and allow them to get big enough that we can't afford them to fail. They aren't like other businesses, if one fails it can bring down businesses in completely uncorrelated sectors, this means we can't treat them like ordinary businesses. Basel I is essentially why the house of cards collapsed, we left large loopholes in the regulation and are now paying the price of allowing banks to move things off the balance sheet.

I'd agree in principle that most of the time propping up a failing business or industry with public funds is a bad idea but banks are a different proposition to other businesses whether we like it or not.

Permabear

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nesf

donegalfella wrote: »

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They should recapitalise, punish the banks by taking a fair amount of preferred shares in the bank as well as charging interest on the the debt incurred by the bank. Regulation will have be fixed at international rather than national level given the nature of the global markets. There is only moral hazard if the bail out is free or cheap for the banks to avail of.

Permabear

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nesf

donegalfella wrote: »

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I agree, that's why we need both a bail out and strengthened regulations that force banks to keep more realistic reserve levels in the boom times. We can't leave them fail, so we need to hold them to a higher standard etc.

Permabear

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nesf

donegalfella wrote: »

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Increased regulation is needed to fix the problems of Basel I though. If we're going to regulate we need to do it properly and ensure reserve requirements reflect the real risk profiles of the banks and don't ignore certain kinds of activity. This has to be fixed and while Basel II did deal with some of the problems it might need revisiting. It is also something outside our direct control so again, something we can't really blame our politicians for.

Permabear

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Riddle101

Fighting Irish wrote: »

I'm not that into politics, but as far as i can see, Cowen was just in the wrong place at the wrong time. You telling me that when Bertie was in charge everything was great and there was no sight of an end to the greatness?
:rolleyes:

No Bertie wasn't great either but Bertie was a more efficient manager. He knew what needed to be done, maybe not for the right reasons but if you look at Berties compared to Brian you can see Bertie was more organised and was able for the job. Cowen strikes me as the type of guy who's office is littered with Cigarette butts on the floor and desk is full of stacks of papers, constantly pacing around the room like a mad yoke and repeating himself over and over again. He also strike me as the type of guy who looks as if any day now he's going to run away and never comeback to Ireland ever again, and leave Ireland to rot. Then who will we turn to. All i'm saying is Brian needs to get his act together before Ireland implodes

BenjAii

donegalfella wrote: »

It's not a coincidence that this whole mess has coincided with our joining the euro and ceding control over our interest rates to Brussels.

The opposite side of that coin is Iceland; a country who's fate we might be sharing if it were not for the protection offered by the Euro.

I have never quite understood the argument against the Euro that there can never be "one size fits all" interest rates for the eurozone, as inevitable they will too high or low for different regions.

This never seems to be a problem for the US which has exactly the same issue to deal with.

I would disagree with you on regulation. If banks are so stupid that they threaten themselves with bankruptcy through bad business practices, then I'm afraid regulation it is. It would only be forcing them to stick within parameters of good lending that they agree with anyway.

ninty9er

donegalfella wrote: »

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donegalfella wrote: »

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This:

ART6 wrote: »

In any case, what is the actual effect of the BoI share collapse? All it means is that the shareholders have been selling off their shares, theoretically decreasing the shareholder value but not actually affecting the profitability or financial stability of the bank. The shareholders are losing out big time, but that's all that's happening unless international banks take fright at why they are selling.

What information is the market looking at, and more importantly is the market qualified to make the judgment that this info means that BOI is going down the tubes, if there are benefits to the market of such an occurrence, be it even so petty as an "I told you so" victory.

nesf wrote: »

The shareholders aren't the concern really, if BoI's share price collapses it indicates that the market views it very negatively, if the market views it negatively BoI are going to find it extremely difficult to raise funds in the money markets and elsewhere.

Which is the perfect argument for the private/family owned, organically grown company, with no equity to **** around with confidence, because it's not a matter of confidence if no more than 2-3 handfulls of people own the company, like Mars, or Fexco for example.

Permabear

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oscarBravo

donegalfella wrote: »

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Meant to pick up on this. I'm assuming he's talking about the laissez-faire economic policies of the government of the time, which greatly exacerbated the effects of the famine in Ireland. The government were extremely reluctant to provide aid to famine victims, reasoning that to do so would have a distorting effect on free trade.

Permabear

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BenjAii

donegalfella wrote: »

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The logic in saying that seems a bit like asking which came first the chicken or the egg.

If the banks hadn't followed unsound business practices at the most basic level (US - lending to subprimes, IR - lending based on vastly overvalued collateral of property developers) then he wouldn't have the problem either.

In any case is not the suggestion you are proposing, controlling money supply, just another form of regulation ?

oscarBravo

donegalfella wrote: »

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In this context I'm blaming laissez-faire for one thing only: the government's delay in responding to a massive humanitarian crisis.

Far from sitting back and not intervening, as you suggest, the British government launched a massive welfare program by building workhouses all around the country under the Irish Poor Laws.

Eventually, and reluctantly, yes.

The liberal Archbishop Richard Whately, a champion of free markets, argued passionately against the workhouses. He believed that poverty should be alleviated not by taxation and government welfare but by investment and charity. But the government ignored his advice, directed money away from useful investment—which could have improved agricultural output—and raised taxes so that they could fund welfare programs oriented around building roads to nowhere.

"Useful investment which could have improved agricultural output" doesn't feed people who literally haven't eaten anything whatsoever in days.

I'm not getting into an argument about the causes of the famine - you're right that they are many and varied. The main point for me is the sacrifices that must be made on the altar of free-market ideology: a century and a half ago, it was preferably that hundreds of thousands of people die than that market-distorting measures be taken. At least these days it's just small and medium businesses and people's pensions.

Permabear

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carveone

Is it possible for the government to bypass the banks? Ie: to provide credit to small/medium companies without the banks being involved? They did something to attempt to shore up house prices in the budget didn't they? Don't know but the government need to act very soon before SMEs go to the wall.

The opposite side of that coin is Iceland; a country who's fate we might be sharing if it were not for the protection offered by the Euro.

I hear that. Remember 1993/1994? A similar interest rate in 2008 would have turned the economy into swiss cheeese. Iceland is practically at a state of collapse - 18% interest! Wow, it's like putting the whole country on your Visa.

oscarBravo

donegalfella wrote: »

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You keep telling us the government did, in the CRA. I've yet to see you quote the actual legislation that mandated that.

nesf

oscarBravo wrote: »

I'm assuming he's talking about the laissez-faire economic policies of the government of the time, which greatly exacerbated the effects of the famine in Ireland.

Not my area but from chatting to a few people that have looked into it, the blaming of laissez faire economic policies for the famine in Ireland seems to be misguided and the people throwing around the term laissez faire in the historic literature don't seem to really understand what the term means.

Permabear

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oscarBravo

nesf wrote: »

Not my area but from chatting to a few people that have looked into it, the blaming of laissez faire economic policies for the famine in Ireland seems to be misguided and the people throwing around the term laissez faire in the historic literature don't seem to really understand what the term means.

Again, I'm not claiming that the famine was entirely and solely the result of laissez-faire policies. I'm pointing out that the government's reluctance to interfere in the operation of the market contributed to the death toll. The idea that money shouldn't have been spent on direct relief, but on improving agricultural productivity, is a case in point.

Give a man a fish, and you feed him for a day. Teach him to fish, when he hasn't eaten for a week, and you have one less man to worry about feeding.

nesf

oscarBravo wrote: »

Again, I'm not claiming that the famine was entirely and solely the result of laissez-faire policies. I'm pointing out that the government's reluctance to interfere in the operation of the market contributed to the death toll. The idea that money shouldn't have been spent on direct relief, but on improving agricultural productivity, is a case in point.

Give a man a fish, and you feed him for a day. Teach him to fish, when he hasn't eaten for a week, and you have one less man to worry about feeding.

I've poked someone who's studied this area to respond to this thread.

Flamed Diving

oscarBravo wrote: »

The main point for me is the sacrifices that must be made on the altar of free-market ideology: a century and a half ago, it was preferably that hundreds of thousands of people die than that market-distorting measures be taken.

I'm sorry, but you are completely wrong, as is half the historical community in Ireland, with this respect. For example, the British Government imported Indian Corn and used it to suppress the price of food in the Irish market. In economics, this is referred to as a price ceiling, and is completely at odds with the idea of a free market as it creates distortions which do not allow the market to clear. This is just one of many examples of the free market being curtailed by the British Government during this crisis. In my time studying both economics and history as an undergrad, I found the economic knowledge of historians to be paltry, at best. It is something that seriously needs to be addressed in the treatise of that crisis.

oscarBravo

donegalfella wrote: »

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There's none so blind as them that will not see. The problem is that you start with your assumptions about what I mean, and then interpret what I say to fit.

Let me make it real simple for you: imagine that you quite literally haven't eaten anything whatsoever for several days. Which would you prefer:

(a) a lecture on how your plight is the result of the government meddling with the free market,
(b) a government-sponsored program to improve your agricultural productivity, or
(c) food.

Answers on a postcard.

Permabear

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oscarBravo

Flamed Diving wrote: »

I'm sorry, but you are completely wrong, as is half the historical community in Ireland, with this respect.

Would it help if I reiterated that I'm not trying to explain the entire cause and course of the famine? I'm just trying to make a single point - see my previous post.

Flamed Diving

donegalfella wrote: »

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I think OB has been reading a bit too much of...

http://www.libraryireland.com/Last-Conquest-Ireland/Contents.php

oscarBravo

donegalfella wrote: »

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Newsflash: in the context of the Irish banking system, the house is on fire.

Yes, but if you teach him to fish before he starts to starve, he will eat for a lifetime.

I'm sure he'll be delighted to hear all about it - after you've fed him.

Flamed Diving

oscarBravo wrote: »

Would it help if I reiterated that I'm not trying to explain the entire cause and course of the famine? I'm just trying to make a single point - see my previous post.

You said that free market ideology was partly to blame for the crisis, I have showed you how the government pursued a non-free market course.

Fin.

oscarBravo

Flamed Diving wrote: »

I think OB has been reading a bit too much of...

http://www.libraryireland.com/Last-Conquest-Ireland/Contents.php

I'm pretty sure he hasn't read it at all.

Straight question: as a historian and economist, do you believe that the appropriate course of action for the government in 1846 would have been to completely withdraw from all interference in the market in Ireland?

oscarBravo

Flamed Diving wrote: »

You said that free market ideology was partly to blame for the crisis, I have showed you how the government pursued a non-free market course.

Fin.

I see you subscribe to donegalfella's "if it ain't snowy white, it's jet black" school of thought.

Permabear

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Flamed Diving

oscarBravo wrote: »

I'm pretty sure he hasn't read it at all.

Straight question: as a historian and economist, do you believe that the appropriate course of action for the government in 1846 would have been to completely withdraw from all interference in the market in Ireland?

No.

Permabear

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oscarBravo

Flamed Diving wrote: »

No.

Thank you.

My point was never - and I can't really see how it could have been construed as being - that the government of the day was completely committed to a perfectly free-market ideology, and that that was the sole and only cause of the famine. My point was that the governments ideological reluctance to interfere in a free market exacerbated its effects. You could also make the case that such ideological reluctance was especially inappropriate, given that such a free market didn't actually exist.

The point of all of this, which donegalfella is characteristically indisposed to accept, is the analogy with the present day: argue all you want about whether it's over- or under-regulation that has led to the crisis, but right now small businesses can't get credit, and will go out of business, unless someone does something. Once something is done, we can re-examine the broader question of government's role in the markets.

oscarBravo

donegalfella wrote: »

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When you start replying to what I write, I'll resume replying to you.

Flamed Diving

oscarBravo wrote: »

My point was that the governments ideological reluctance to interfere in a free market exacerbated its effects.

Yet despite this 'reluctance', they went on to interfere in the markets.

On the one hand we have abstract notions, on the other hand we have real action. Yet you think the abstraction exacerbated the effects, even though the fulfillment of these abstractions never came to fruition.

Interesting.

Permabear

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oscarBravo

Flamed Diving wrote: »

Yet despite this 'reluctance', they went on to interfere in the markets.

On the one hand we have abstract notions, on the other hand we have real action. Yet you think the abstraction exacerbated the effects, even though the fulfillment of these abstractions never came to fruition.

Interesting.

Let's try an analogy.

A chip-pan goes on fire on my cooker. I'm reluctant to get near it; it's dangerous. I eventually pluck up the courage to turn off the heat - this helps somewhat, but it's still on fire, and the surrounding cupboards are getting scorched. Finally, I cover it with a wet towel and carry it out.

My reluctance to take action exacerbated the effects of the situation, even though my actions themselves helped.

Is that really so hard to understand?

Flamed Diving

oscarBravo wrote: »

Let's try an analogy.

A chip-pan goes on fire on my cooker. I'm reluctant to get near it; it's dangerous. I eventually pluck up the courage to turn off the heat - this helps somewhat, but it's still on fire, and the surrounding cupboards are getting scorched. Finally, I cover it with a wet towel and carry it out.

My reluctance to take action exacerbated the effects of the situation, even though my actions themselves helped.

Is that really so hard to understand?

Therefore the Irish were sacrificed on the alter of free-market ideology. Would you agree that this statement is just a tad over-dramatic in light of your above description? Or were your cupboards sacrificed on the alter of your arsonphobia?

oscarBravo

Flamed Diving wrote: »

...were your cupboards sacrificed on the alter of your arsonphobia?

Yes. That's the entire point of the analogy. The damage, while a result of the fire, was greatly exacerbated by my reluctance to deal with it. The fact that I did deal with it doesn't mean I wasn't reluctant to deal with it.

If your issue is with the phrasing I used, I apologise for any offence caused.

Permabear

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molloyjh

donegalfella wrote: »

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So if the banks didn't take advantage of the bubble we wouldn't be in this mess, therefore bad business practice had as much a part to play as bad policy, more-so infact as it was not required to follow blindly behind the poor policy decisions....as a great fictional character once said, "Who's the more fool. The fool or the fool that follows him?".

Ultimately the ECB rate was lowered fair enough, but the banks took advantage of that and the Irish Central Bank, by permitting the banks to reduce their rates as they were looking to do, also played their part. Every part of the machine failed so act responsibly. To lay the blame solely at the feet of the ECB is ridiculous. Save for a few commentators noone raised the cheap credit thing as an issue for most of the time it was available.

Flamed Diving

molloyjh wrote: »

the Irish Central Bank, by permitting the banks to reduce their rates as they were looking to do, also played their part.

Could you please explain the process of how the ICB could 'permit' Irish banks to reduce their rates, under current structures?

Permabear

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