What would be the cost to the economy of letting the banks fail?

Slice

This is probably naive but I was just thinking about NAMA and how it's purpose is to return liquidity to the economy by allowing the banks to extend credit lines again. This got me wondering; what if we allowed the banks fail? What impact would that have on the economy? What if the Government had invested the money that was used to sure-up the banking system to set up a public bank instead? One that would return liquidity to the economy in the same way NAMA is intended on doing without exposing the taxpayer to any of the toxic debts built up by overly ambitious developers. What am I missing out on that such an idea was not considered?

meathstevie

In the short term chaos. In the medium to long term it probably wouldn't have made a blind bit of difference. What probably would have happened would have been continental players moving in on the local market and probably supplying a better service level compared to what was there.

Does anyone for example remember the names of 5 big financial institutions that went to the wall after the crash of 1929 ? The world hasn't exactly stopped from turning then either. You can argue that the end to that depression was the end of WWII and the following reconstruction of much of Asia and Europe but the world isn't exactly a beacon of peace now either.

Slice

But how would it bring about chaos to anyone other than the bank shareholders and the developers that were given over-extended credit? This is exactly what we're seeing now isn't it? Except the difference with nama is that public finances are now burdened with a huge amount of risk

Apparently the gates of hell will open.

Sarn

Slice wrote: »

But how would it bring about chaos to anyone other than the bank shareholders and the developers that were given over-extended credit?

Not having access to any form of credit or your own money (as you would need to wait for the government to pay back your cash) would pose a problem. In the absence of short term credit availability everything would grind to a halt. While there would still be some financial institutions remaining, the stress on those as people swap over would be huge. That's assuming people would trust these and not pull out whatever cash they have causing further collapses.

If it were allowed to happen I think several months in a foreign country would be called for.

is_that_so

Well there's that cash you might have in the bank, never mind the cash an employer has in place or the savings that pensioners have. A collapsing bank tends to generate a bank run and it's first come, first served and the smallest usually lose out. Look at how badly affected small shareholders were by the collapse in share prices in our banks.

The government guarantee was put in place to help reduce the possibility of a massive flight of capital from the Irish system. In our system they were all so cosy that the biggest banks were tied to the smaller ones like Anglo Irish. Lehman Brothers, rightly or wrongly, was allowed to fail on the basis that it was not systemic or likely to pull the whole system down.

Anglo Irish, the real bad boy in all of this, in calmer times probably would have been let go,. However, because of how they appeared to have wrapped themselves around the rest, they couldn't really be let go without posing a risk to the others and the whole system.

I suppose it's a bit like the old adage If you owe €1000 to the bank, it's your problem. Owe them €1 billion it's the bank's problem. And if the bank has €28 billion of loans it's our problem.

Sand

Short answer is nobody knows for sure...nobody has any idea whats hiding on Irish bank balance sheets. Other than they have been run by incompetents and the irish regulator has wilfully colluded with balance sheets being massaged to deceive investors.

Not knowing for sure (he only thinks the banks are solvent because he thinks the banks would tell him if they werent after all), Lenihan is assuming that if AIB or BoI were to fail that the hordes of hell themselves would descend upon us.

There is one thing hes sure about - if banks were to fail, bank shareholders and bankers get hosed.

Seeing as shareholders>taxpayers, the idea is to throw the taxpayers under the bus to save the shareholders.

Its a trade off, but its one Lenihan is comfortable with.

So bank failure - shareholders wiped out, bankers fired. Some cost to depositors and bond holders but after the dust settles, everyone picks themselves up and moves on. Government can borrow 54 billion for something economically useful.

NAMA - Bankers and shareholders win. Taxpayers, and their children get shackled with generations of debt and more decades of quality AIB banking services...tax evasion, overcharing, incompetence and bail outs. Oh and the government has used up 54 billion of debt "worthiness" making it harder to raise other money for economically useful projects.

Win win, right?

BobbyD10

Looks like Anglo will be looking for some more money.

http://www.sbpost.ie/news/state-faces-new-anglo-cash-call-44495.html

Boskowski

BobbyD10 wrote: »

Looks like Anglo will be looking for some more money.

http://www.sbpost.ie/news/state-faces-new-anglo-cash-call-44495.html

What a shambles. Lenihan is an idiot to have guaranteed the bonds. They have us by the balls now. Of course he tells us this is a 'must'. Only way to cover up his own failure which probably isn't really a failure but something he had to do.
What I think is going on here that this is the biggest cover up/blackmail operation in Irish financial history/politics. These guys can't fail because nobody in the banks and also in politics could stand the investigations after a collapse of Anglo. I'd say if only a fraction of the carry on came to light we'd be talking prison for a lot of politicians and bankers. Of course if we had something like - I don't know - the FBI or so. But what we have instead is a net of protection and cover ups. 'Filz' as we call it in Germany.