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ECB, developers, bankers,..who else will we blame?
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08-11-2014 12:32amI'm not sure if anybody sees recent Irish economic development in the same way as I do but media in this country seem to be continuously trying to pin the blame for Irelands failed economy on the wrong people. The ECB was giving Irish banks billions of euros to keep them in business after the colapse of Lehman Brothers in the US triggered a tightening of credit availability worldwide. Looking for their money back by writing a few letters to the Irish government does not seem to me to be too far out of line. Developers who took land and turned it into offices homes and business premises were also like banks just trying to make a profit which to my knowledge is standard practice in business.
I believe it was government by a succession of center right fina something parties that decided it was OK to charge people quarter or half a million euro or more depending on where you live in the country simply to own a home. It might be OK for well paid politicians and senior civil servants to pay this much for a roof over their heads but for people in most jobs in this country affordable housing has never been delt with. This cost effects everyone and forces people to seek higher wages as we can not survive on the lower wages found in better organised economies.
Since the fine something parties are voted in by older people (who already have a home in most cases) the fact the country has become too expensive to have any quality of life was not a problem( for the politicians and beurocrats that make decisions). What is the answer from the failed political system here? Another civil war party with an Irish name and no idea of how world economics impacts on people?1
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macraignil wrote: »I'm not sure if anybody sees recent Irish economic development in the same way as I do but media in this country seem to be continuously trying to pin the blame for Irelands failed economy on the wrong people. The ECB was giving Irish banks billions of euros to keep them in business after the colapse of Lehman Brothers in the US triggered a tightening of credit availability worldwide. Looking for their money back by writing a few letters to the Irish government does not seem to me to be too far out of line. Developers who took land and turned it into offices homes and business premises were also like banks just trying to make a profit which to my knowledge is standard practice in business.
I believe it was government by a succession of center right fina something parties that decided it was OK to charge people quarter or half a million euro or more depending on where you live in the country simply to own a home. It might be OK for well paid politicians and senior civil servants to pay this much for a roof over their heads but for people in most jobs in this country affordable housing has never been delt with. This cost effects everyone and forces people to seek higher wages as we can not survive on the lower wages found in better organised economies.
Since the fine something parties are voted in by older people (who already have a home in most cases) the fact the country has become too expensive to have any quality of life was not a problem( for the politicians and beurocrats that make decisions). What is the answer from the failed political system here? Another civil war party with an Irish name and no idea of how world economics impacts on people?
This letter from Jean Claude Trichet that the government keeps going on about is a joke. Nobody forced Ireland to accept a bailout. Ireland choose a bailout because it was to cowardly to do what Iceland did.
Iceland may not have had a choice but to reiterate, Ireland did have a choice to accept a bailout and it took that choice. Since Ireland choose to be bailed out, it cannot now pretend that it was forced into it.
Besides all that, the housing bubble and overall structure of the economy was all the fault of the Irish government with its light touch regulation.
Ireland and Ireland alone is solely responsible for the mess it is in.0 -
realitykeeper wrote: »<...> Ireland and Ireland alone is solely responsible for the mess it is in.
We're collectively responsible for joining the euro without really thinking or understanding the discipline that a single currency would bring.
We're collectively responsible for pursuing policies that encouraged borrowing to be funneled into construction, and all that went with that.
To be honest, I don't think its rational for us to expect any system of financial regulation to reverse the outcome of both joining the single currency and active promotion of the construction sector. That said, the ECB seem to have a particular sensitivity which leads them to stress regulation to be a domestic responsibility. That leaves out quite a lot of the involvement of European institutions in promoting a common regulatory regime across Europe.
They won't want to be reminded of it, but the European Commission was pleased to say in 1999http://www.boards.ie/vbulletin/showthread.php?p=88181070#post88181070
The EU’s supervisory and regulatory regime has provided a sound basis for the emergence of a true single financial market which goes hand in hand with prudential soundness and financial stability.
We're responsible for being part of all this, and for assuming Europe knew what it was doing when it set up a single currency. We're responsible for approaching euro changeover thinking that the process was mostly about telling people it was worth about 80 pence. But, in saying all that, we shouldn't be blind to the fact that this shows up the EU in a very poor light.0 -
We borrowed recklessly but European banks lent recklessly and didn't complain about profits made from these reckless loans.0
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realitykeeper wrote: »Ireland and Ireland alone is solely responsible for the mess it is in.
That's right, the ECB and they were pouring fuel on the fire, not just in Ireland but in every other overheating peripheral eurozone country. Which is why every peripheral country suffered the exact same boom and bust cycle.0 -
Blaming foreigners is an old and tested excuse.0
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macraignil wrote: »I believe it was government by a succession of center right fina something parties that decided it was OK to charge people quarter or half a million euro or more depending on where you live in the country simply to own a home. It might be OK for well paid politicians and senior civil servants to pay this much for a roof over their heads but for people in most jobs in this country affordable housing has never been delt with. This cost effects everyone and forces people to seek higher wages as we can not survive on the lower wages found in better organised economies.0
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But if you don't agree with blaming bankers, developers etc. for your problems why blame politicians and senior civil servants? Why not simply blame yourself for the problems you are faced with?
I was not intending to personalise this thread with my own problems but was hoping to discuss the problems facing this country.
Bankers and developers are by their nature interested in making a profit and that is my reason for not agreeing with the media reports I have seen over recent years that seem to blame the financial colapse in this country on them. Politicians and senior civil servants are supposed to look out for the interest of the country and that is why I blame them for failing to do so.
There are problems I face that have been coused by those in political and beurocratic positions of power and I will continue to hold them responsible for their mistakes. As a country our external debt in US dollars stands at 239,672,886,310. The interest payments alone on this debt will make Ireland an expensive place to live and do business for decades to come. While I am quite happy to blame myself for mistakes I have made I do think there is a wider issue in Ireland of a failed political system leading to a disfunctional economy that I have no control over.0 -
macraignil wrote: »I was not intending to personalise this thread with my own problems but was hoping to discuss the problems facing this country.
Bankers and developers are by their nature interested in making a profit and that is my reason for not agreeing with the media reports I have seen over recent years that seem to blame the financial colapse in this country on them. Politicians and senior civil servants are supposed to look out for the interest of the country and that is why I blame them for failing to do so.0 -
But if you take a senior civil servant, yes, they serve the country, but they do so according to how they are directed by their department. They can therefore argue that they individually performed their duty at all times. If you take a local politician, they can argue that their job is to campaign for election, sort out local constituency issues (passports, medical cards for constituents and so forth) and obey the party whip when it comes to Dail voting.
Yes they can argue they were just doing their job. In the middle east the islamist state members that are behedding western journalists and charity workers can also claim they are simply performing their duty as soldiers of the islamic state. I don't believe everyone in positions of power can simply say they were doing there job and not take some responsability for the disfunctional beurocratic and political system in Ireland.0 -
macraignil wrote: »Yes they can argue they were just doing their job. In the middle east the islamist state members that are behedding western journalists and charity workers can also claim they are simply performing their duty as soldiers of the islamic state. I don't believe everyone in positions of power can simply say they were doing there job and not take some responsability for the disfunctional beurocratic and political system in Ireland.
So you think we should hold them to higher standards than that. But if you are going to do that, why stop at politicians?
You say politicians are supposed to look out for the country, but that may merely be a common misconception. It may be that politicians are no more obliged to look out for the country than bankers, developers and everyone else. It may be the case that all politicians are supposed to do is whatever it takes to get elected.
OK, I'll get to the point. You can't narrow down blame (or for that matter credit) to a particular group at the exclusion of others. Everyone both internal and external has a part to play.
For example, in the case of the ECB and Irish government's role in the bailout. Ireland is responsible to getting to the stage where a bailout was probably inevitable at some point in the months after it did happen. However the ECB's intervention ensured that it happened at that precise time and that it could dictate terms - i.e. that the burden of bad lending was going to fall disproportionately on irish tax payers (among other things that we may have done differently had the choice been ours).
If we want politicians to be held to a higher standard then we can't only hold politicians to a higher standard.
If bankers, developers and everyone else merely wanted make money free of interference from the state, that would be fine. The problem is that when things go wrong, they expect the state to dig them out and clean up the mess. Therefore they have duties towards the state beyond merely looking after their own self interest and can be validly criticized when they fall short of those duties.0 -
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If we want politicians to be held to a higher standard then we can't only hold politicians to a higher standard.
Elected politicians and civil servants are paid by the state and because of this they should have a greater level of responsability to the state. You can argue that other groups should also have responsability to the state but it is up to elected politicians and the beurocrats to insure that they meet these responsabilities.
Things went wrong in Ireland in my opinion mostly because we have failed to create a political and civil service capable of maintaining prosperity in the country. Those in power were paying themselves so much they were oblivious to the overheated economy that preceeded the economic colapse. The increased living costs and stagnating private sector wages that have made life in this country very difficult for many, were not addressed and it is the people of Ireland who are suffering the consequences while those in power have huge pension payments that mean they will not have to worry about the mess they have made.0 -
macraignil wrote: »Elected politicians and civil servants are paid by the state and because of this they should have a greater level of responsability to the state. You can argue that other groups should also have responsability to the state but it is up to elected politicians and the beurocrats to insure that they meet these responsabilities.0
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macraignil wrote: »I'm not sure if anybody sees recent Irish economic development in the same way as I do but media in this country seem to be continuously trying to pin the blame for Irelands failed economy on the wrong people. The ECB was giving Irish banks billions of euros to keep them in business after the colapse of Lehman Brothers in the US triggered a tightening of credit availability worldwide. Looking for their money back by writing a few letters to the Irish government does not seem to me to be too far out of line. Developers who took land and turned it into offices homes and business premises were also like banks just trying to make a profit which to my knowledge is standard practice in business.
I believe it was government by a succession of center right fina something parties that decided it was OK to charge people quarter or half a million euro or more depending on where you live in the country simply to own a home. It might be OK for well paid politicians and senior civil servants to pay this much for a roof over their heads but for people in most jobs in this country affordable housing has never been delt with. This cost effects everyone and forces people to seek higher wages as we can not survive on the lower wages found in better organised economies.
Since the fine something parties are voted in by older people (who already have a home in most cases) the fact the country has become too expensive to have any quality of life was not a problem( for the politicians and beurocrats that make decisions). What is the answer from the failed political system here? Another civil war party with an Irish name and no idea of how world economics impacts on people?
The biggest fallacy surrounding Irish economic policy is that successive governments have prevented people from owning their own house.
We have the highest home ownership in the EU! Possibly the highest in the OECD!!!0 -
OK but if you are saying that it is the duty of elected politicians to make sure they meet their responsibilities (i.e. hold them accountable) then you are also agreeing with me that these other groups can be blamed for their part in the mess and action be taken against them. On the surface at least, this is different to your earlier position (correct me if I'm wrong) that bankers, developers etc. couldn't be blamed as they were merely doing their job of making money for themselves.
I am not saying bankers did not lend irresponsably and developers did not take excessive profits at times. Some developers have become bankrupt and share holders of banks have voted out some bank management that saw their investment in bank shares reduced to almost nothing. I am saying that the responsability for regulating banking and property development was the governments and civil services duty to the state.
I am still saying that there is a much greater level of responsability for the mess this country is in with the politicians and civil servants who were in power when the economy was clearly overheating with spiraling increases in costs in all sectors of the economy. Legislation allowing upwards only rent agreements and an affordable housing scheme that set zero control on how much profit could be made on affordable homes are just two examples of completely irresponsble government. Besides getting to take a well paid early retirement no action has been taken against any politician or civil servant and it would be unfair to take action against other groups when this is the case.0 -
The biggest fallacy surrounding Irish economic policy is that successive governments have prevented people from owning their own house.
We have the highest home ownership in the EU! Possibly the highest in the OECD!!!
I agree we have one of the highest levels of home ownership in the world in Ireland. If you look at how high home rental costs are here, it gives some explaination of why this is. In other more progressive countries there is control over rent chargable so people are not kept in perpetual poverty by the cost of renting a home.
If you have ever tried to get planning permission to build your own home you would see how the beurocracy in this country is used to limit home ownership. We have one of the lowest population densities in the EU but if you are not from and working in a particular rural area there is very little chance of building your own home. Even if you are able to get around this restriction planning permission is granted only with a long list of regulations that add to the cost. Even after a colapse in house prices most jobs in Ireland do not pay enough to buy a house in what is a very restricted market.0 -
The biggest fallacy surrounding Irish economic policy is that successive governments have prevented people from owning their own house.
We have the highest home ownership in the EU! Possibly the highest in the OECD!!!
It's fair to say that the Irish did not ALWAYS have this outlook. There was a time in our history when ownership of one's own house was recognized as requiring a bit of thought.
Those who could'nt/would'nt accept these restrictions,were facilitated by the Local Authority Rented Accomodation schemes,which for the great majority of "ordinary" people worked very well indeed.
This combination of Local Authority Rental / Private Ownership served Ireland well,and I suggest SHOULD be continuing to serve us as a realistic,appropriate and affordable means of housing our populace.
Sadly,for those of a reasonable disposition,the success of Margaret Thatcher's policies in the UK,with it's promises of rags to riches stories all bound up with Property Ownership,seemed just TOO good to ignore,and off we trotted to secure our own place on the "Property Ladder"....the rrest,as we say,is History.
Personally,I believe that,unless and until we accept that our Country cannot sustain this mantra of "Entitlement" to residential property ownership then we are forever destined to be slaves to all which comes with it.
Those who bought during the past 3 decades,were able to do so without having to even nod in the direction of the various life-long expenses about which,other countries citizens knew only too well.
Now,as the inevitable rebalancing act takes place,the hugely skewed home OWNER members are suddenly realizing that OWNING this Luxuty 3 Bed Semi in Commuter land is going to mean never ending bills of many varities to pay.....even into retirement !!!
Getting us out of our fatal attraction with Home OWNERSHIP,and facilitating a renewed accquaintance with a well regulated and monitored Private Home Rental system has proven impossible for successive Irish Administrations to consider,let alone implement as policy...:(Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.
Charles Mackay (1812-1889)
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... the ECB and they were pouring fuel on the fire, not just in Ireland ...
That`s a bit rich. ECB interest rates may have been low but the Irish government choose to allow light touch regulation. Consequently, all those unregulated Irish banks were able to pour ever more fuel on an overheating housing bubble.
And that wasn`t the only fuel the Irish government poured on the fire. When the construction sector needed more workers to feed the frenzied house building, the government facilitated that by opening the floodgates to immigrants from East Europe.
Had they not done so, the cost and the shortage of domestic construction workers would have acted as a constraint against the over heating construction sector.
The Irish government did everything in its power to fuel the construction boom because of the property tax they needed to bribe the electorate every five years.
Like I said, Ireland and Ireland alone is solely to blame for the mess it is in. Not only that, the present Irish government is repeating the mistakes of Fianna Fail by opposing the Central Banks attempt to regulate bank lending. Government coffers grew this year on the back of property tax, just like FF when they were in power.0 -
macraignil wrote: »I am not saying bankers did not lend irresponsably and developers did not take excessive profits at times. Some developers have become bankrupt and share holders of banks have voted out some bank management that saw their investment in bank shares reduced to almost nothing. I am saying that the responsability for regulating banking and property development was the governments and civil services duty to the state.
I am still saying that there is a much greater level of responsability for the mess this country is in with the politicians and civil servants who were in power when the economy was clearly overheating with spiraling increases in costs in all sectors of the economy. Legislation allowing upwards only rent agreements and an affordable housing scheme that set zero control on how much profit could be made on affordable homes are just two examples of completely irresponsble government. Besides getting to take a well paid early retirement no action has been taken against any politician or civil servant and it would be unfair to take action against other groups when this is the case.
The 1/3 from bank losses whilst certainly created by the bankers and developers, at the end of the day was foisted on to the Irish people/tax payer by the government and senior civil servants.0 -
We borrowed recklessly but European banks lent recklessly and didn't complain about profits made from these reckless loans.
This remains a highly popular myth, but is wrong on two counts - first, European banks had little involvement in the Irish domestic banking sector, about €17bn at peak, which is nothing compared to the domestic banks' balance sheets of c. €440bn.
See: http://www.centralbank.ie/POLSTATS/STATS/CMAB/Pages/Money%20and%20Banking.aspx
Second, banks don't borrow to lend. I appreciate that's what everybody thinks they do, but it's not correct. When a bank makes you a loan, it creates a matching asset and liability - a loan and a deposit. It requires nothing more to do this than the trust of other banks, who will accept the deposit as money.
See: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf
cordially,
Scofflaw0 -
Second, banks don't borrow to lend. I appreciate that's what everybody thinks they do, but it's not correct. When a bank makes you a loan, it creates a matching asset and liability - a loan and a deposit. It requires nothing more to do this than the trust of other banks, who will accept the deposit as money.
So for example, Paddy the developer approaches Anglo for a 1Bn loan to buy land in Leitrim. Anglo agrees and puts 1Bn euro in Paddy's account at the same time noting that Paddy owes anglo 1Bn. No problem here. Anglo is still holding that 1Bn sitting in Paddy's account.
The thing is that that 1Bn is not going to stay in Paddy's account. It is going to be taken out to purchase the land. Therefore Anglo needs to find 1Bn from the markets to cover this or else it will be undercaptialized, it will be digging into its reserves.
The money that Anglo lent will go to Joe the land owner in Leitrim. Now Joe could have an account in Anglo in which he deposits the money (in which case Anglo owes Joe 1Bn) or he could deposit the money in an account in another bank (in which case Anglo has to raise 1bn through borrowing).
Either way, I hope you can see that Anglo can't lend to Paddy without borrowing in some form.
The conceptual problem goes away if we redefine the moment of borrowing not as the moment the simultaneous entries are created in Anglo's ledgers but rather the moment at which Paddy actually extracts the cash.
Theres a bit of a conspiracy theory going around that banks can create money out of nothing. I hope you can now see that this is not true.0 -
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The BOE is of course correct in that when a bank makes a loan, a deposit is simultaneously created in the borrowers bank account. But we need to remember that a deposit is actually a type of loan from the depositor to the bank. So therefore no money has really been created. So far it is just entries in a ledger.
So for example, Paddy the developer approaches Anglo for a 1Bn loan to buy land in Leitrim. Anglo agrees and puts 1Bn euro in Paddy's account at the same time noting that Paddy owes anglo 1Bn. No problem here. Anglo is still holding that 1Bn sitting in Paddy's account.
The thing is that that 1Bn is not going to stay in Paddy's account. It is going to be taken out to purchase the land. Therefore Anglo needs to find 1Bn from the markets to cover this or else it will be undercaptialized, it will be digging into its reserves.
The money that Anglo lent will go to Joe the land owner in Leitrim. Now Joe could have an account in Anglo in which he deposits the money (in which case Anglo owes Joe 1Bn) or he could deposit the money in an account in another bank (in which case Anglo has to raise 1bn through borrowing).
Either way, I hope you can see that Anglo can't lend to Paddy without borrowing in some form.
The conceptual problem goes away if we redefine the moment of borrowing not as the moment the simultaneous entries are created in Anglo's ledgers but rather the moment at which Paddy actually extracts the cash.
Theres a bit of a conspiracy theory going around that banks can create money out of nothing. I hope you can now see that this is not true.
That's certainly the case for each individual bank, but when you consider the world financial system, it's clear the system must generate money entirely from scratch...not sure how that works just yet, so I'm constructing some (simple) models to see what happens.
cordially,
Scofflaw0 -
That's certainly the case for each individual bank, but when you consider the world financial system, it's clear the system must generate money entirely from scratch...not sure how that works just yet, so I'm constructing some (simple) models to see what happens.
So Sea Sharp's comment is valid. Irish banks lent unwisely, but in order to do this, others including eurosystem banks needed to lend unwisely to them. While this lending was profitable they didn't complain. Only when it became apparent to them that they made bad lending decisions did Merkel, Sarkozy and Trichet step in to make sure they didn't have to pay for their decisions.0 -
realitykeeper wrote: »ECB interest rates may have been low but the Irish government choose to allow light touch regulation.Irish banks lent unwisely, but in order to do this, others including eurosystem banks needed to lend unwisely to them.
That dangerous tinfoil hat eurosceptic and turf-cutter, Peter Nyberg, was willing to pepper his edgy, provocative report with this kind of wild assertionhttp://www.bankinginquiry.gov.ie/Documents/Misjuding%20Risk%20-%20Causes%20of%20the%20Systemic%20Banking%20Crisis%20in%20Ireland.pdf
<...>To fund the rapid growth of assets, deposits had to be increasingly complemented by wholesale funding that had become readily available in large quantum and at attractive pricing for all eurozone banks. <...>To fund their growing asset portfolios, banks therefore began to look to the wholesale markets. This was facilitated by the introduction of the Euro which provided easier and cheaper access to seemingly unlimited funds.<...>On joining the Eurozone, Irish banks gained increased access to wholesale funding at a relatively low cost.<...>0 -
So Sea Sharp's comment is valid. Irish banks lent unwisely, but in order to do this, others including eurosystem banks needed to lend unwisely to them. While this lending was profitable they didn't complain. Only when it became apparent to them that they made bad lending decisions did Merkel, Sarkozy and Trichet step in to make sure they didn't have to pay for their decisions.GCU Flexible Demeanour wrote:Indeed, and I think it has been pointed out elsewhere that the "80% of their funding was from the UK" line is allowing a statistical distortion to cloak the significance of the euro in all this. It would be very strange for Ireland to join the euro, and then find our banks raising the bulk of their funding denominated in Sterling. It would actually make no sense at all.
I don't really want to have to deal with the point again that the idea that the euro banks were heavily involved lacks two major pieces of evidence - first, evidence of a large amount of euro-area money recorded in the Irish banks, and second, evidence that what eurozone money there was came from eurozone banks.
Irish banks raising money in the UK and US is not even slightly surprising - it's where they have traditionally done business, and traditionally have overseas operations, including branch networks. They have never had any equivalent presence in eurozone countries.
The foreign claims and liabilities of Irish banks remain predominantly focused on the UK, which is generally the home of at least 50% of all foreign assets and liabilities in Irish banks, as you can see from the CBI's locational stats:
http://www.centralbank.ie/polstats/stats/locational/Pages/releases.aspx
The involvement of eurozone banks in our domestic banks remains a popular story - so popular, indeed, that people will cheerfully claim, on the basis of no evidence whatsoever, that if the CBI recorded foreign funding in the Irish banks as not being eurozone, it was "really" eurozone money coming in via non-eurozone countries. That's a pretty obvious piece of special pleading, given that nobody has put forward evidence for it.
The quote from Nyberg does not claim (let alone offer evidence for) that the foreign funding in Irish banks came from eurozone banks, or even the eurozone - it says only that on joining the eurozone, Irish banks had access to wholesale markets, without further qualification. I'm not sure how Icelandic banks apparently managed the same trick without joining the eurozone, so I'm not sure of the value of the comment generally.
Anyway, be all that as it may, and I've laid it out at length and repeatedly without anyone offering a better counter than "well, it was, so there", so I don't really want to do it again.I think it is probably fairly clear that if one bank can't lend without borrowing, then neither can two and by extension any number of banks. The exception of course being the central bank. But Ireland doesn't have a central bank in this sense.
Which implies that the only money being created in the world financial economy is created by central banks, which is apparently not the case.
It also implies that if there was an increase in the amount of money in Ireland over the course of the boom, that money must have come in from abroad. If an Irish bank must get money from somewhere to finance lending in Ireland, and the Irish banks between them cannot create net money in the Irish system, then we should expect to see a rough equivalence between foreign input and Irish money growth, no?
And I'm not sure about that. What the BoE model suggests is that what you should expect to see is growth that's primarily related to lending opportunities - they don't mention as a constraint on lending the need to borrow the money once it moves out of the lending bank. Nor is it impossible for a closed bank system to create net money without any recourse to external sources - what happens is only that loans as a proportion of assets increases:
Derived from the BoE Quarterly on Money Creation.
Here, AIB and BoI have lent out a total of €130bn, but because they're a closed system, each loses deposits only to the other. As such, all that happens is that the overall loan-to-deposit ratio increases, and the proportion of reserves to assets falls. But net money is definitely created, without any recourse to external sources.
What the BoE quarterly says is:So far this section has considered the case of an individual bank making additional loans by offering competitive interest rates — both on its loans and deposits. But if all banks simultaneously decide to try to do more lending, money growth may not be limited in quite the same way. Although an individual bank may lose deposits to other banks, it would itself be likely to gain some deposits as a result of the other banks making loans.
and:There are a number of reasons why many banks may choose to increase their lending markedly at the same time. For example, the profitability of lending at given interest rates could increase because of a general improvement in economic conditions. Alternatively, banks may decide to lend more if they perceive the risks associated with making loans to households and companies to have fallen. This sort of development is sometimes argued to be one of the reasons why bank lending expanded so much in the lead up to the financial crisis. But if that perception of a less risky environment were unwarranted, the result could be a more fragile financial system.
Those two points seem to me to address the Irish situation. Irish banks simultaneously decided to lend more into the Irish economy - in fact, they played follow my leader on it like sheep - and lost deposits primarily to each other, since the movement of deposits was primarily related to settlement of property purchases between Irish people banking with Irish banks. So the Irish domestic banking system was a largely closed system, in which the decision of all the Irish banks to increase lending together increased the money supply in Ireland by the creation of loans.
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Having said all that, Irish banks both borrowed and lent abroad just as they did in Ireland, and something interesting in the CBI aggregate stats is that the net Irish position of domestic banks is asset-heavy - there's an excess of Irish assets over Irish liabilities - while their foreign position is liability-heavy.
And, yes, the two are much more than roughly comparable - there's usually a difference of less than a million. The net asset situation in Ireland is exactly balanced by the net liability position abroad.
So while the explanation is not that Irish banks could only create money by borrowing from abroad, what they did do was balance off the net assets they were creating in Ireland through excessive lending by net borrowing from abroad. The size of that money import is, at height in January 2009, about €173bn, representing about 21% of the banks' balance sheets, compared to €28bn and 12.5% in January 2003.
If the Irish banks had to borrow from abroad to create net money in Ireland, they would have had to import, between 01/2003 and 01/2009, about €420bn, because Irish assets (lending into the Irish economy) increased by that much.
Instead, the increase in Irish assets seems to have been balanced by a mix of increased Irish liabilities (€278bn), and increased foreign liabilities (€173bn) - about 62% vs 38% respectively. As far as I can see that represents roughly the balance between domestic money creation through unanimous lending into the property bubble by all the Irish domestic banks, and the creation of foreign liabilities (import of foreign money) to balance the net asset position created in the Irish market.
The eurozone's role, though, is again small. In the early part of the bubble the EZ was a net asset location, only swapping over to being another source of balancing liabilities in about 2005, and reaching €18bn or 10.5% of the total net foreign liability in September 2008, before dropping to 4.3% the following month.
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TL;DR: the Irish banks created the bubble through net money creation within the Irish banking system, driven by the available lending opportunities, lost some of the deposits so created to non-Irish banks, and balanced their net asset position in Ireland against a net liability position abroad, primarily in the non-eurozone, and likely primarily in the UK, where they had active branch networks.
The current position of the Irish banks is now only net €10bn asset-heavy in Ireland, still balanced against a net €10bn liability position abroad. This represents a smaller amount of capital import than in January 2003.
cordially,
Scofflaw0 -
Which implies that the only money being created in the world financial economy is created by central banks, which is apparently not the case.
It also implies that if there was an increase in the amount of money in Ireland over the course of the boom, that money must have come in from abroad. If an Irish bank must get money from somewhere to finance lending in Ireland, and the Irish banks between them cannot create net money in the Irish system, then we should expect to see a rough equivalence between foreign input and Irish money growth, no?
But there's no new narrow money in circulation. If a bank has lent out all the money its depositors have lent it, then it can't lend out any more without either
a) attracting more deposit money (i.e. increasing the amount it owes to depositors).
b) digging into its reserves (which may be at a minimum)
c) calling in loans from other areas.
or finally
d) borrowing money.
For the property bubble to occur to the extent it did, the banks had to borrow extensively from outside. Narrow money had to be brought in. Joe the Leitrim landowner doesn't want bank assets. He requires cash.
A bubble can't be inflated without narrow money. It can be diverted away from other areas in the initial stages but it can't be manufactured by the banks themselves. Beyond a certain point, it must be obtained from abroad.
Here's how the BOI explains the Paddy and Joe example:For example, suppose an individual bank lowers the rate it charges on its loans, and that attracts a household to take out a mortgage to buy a house. The moment the mortgage loan is made, the household’s account is credited with new deposits. And once they purchase the house, they pass their new deposits on to the house seller. This situation is shown in the first row of Figure 2. The buyer is left with a new asset in the form of a house and a new liability in the form of a new loan. The seller is left with money in the form of bank deposits instead of a house. It is more likely than not that the seller’s account will be with a different bank to the buyer’s. So when the transaction takes place, the new deposits will be transferred to the seller’s bank, as shown in the second row of Figure 2. The buyer’s bank would then have fewer deposits than assets. In the first instance, the buyer’s bank settles with the seller’s bank by transferring reserves. But that would leave the buyer’s bank with fewer reserves and more loans relative to its deposits than before. This is likely to be problematic for the bank since it would increase the risk that it would not be able to meet all of its likely outflows. And, in practice, banks make many such loans every day. So if a given bank financed all of its new loans in this way, it would soon run out of reserves.
Banks therefore try to attract or retain additional liabilities to accompany their new loans. In practice other banks would also be making new loans and creating new deposits, so one way they can do this is to try and attract some of those newly created deposits. In a competitive banking sector, that may involve increasing the rate they offer to households on their savings accounts. By attracting new deposits, the bank can increase its lending without running down its reserves, as shown in the third row of Figure 2. Alternatively, a bank can borrow from other banks or attract other forms of liabilities, at least temporarily. But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending. And the cost of that needs to be measured against the interest the bank expects to earn on the loans it is making, which in turn depends on the level of Bank Rate set by the Bank of England. For example, if a bank continued to attract new borrowers and increase lending by reducing mortgage rates, and sought to attract new deposits by increasing the rates it was paying on its customers’ deposits, it might soon find it unprofitable to keep expanding its lending. Competition for loans and deposits, and the desire to make a profit, therefore limit money creation by banks.
I've highlighted a number of point here. The individual bank can't lend without without either running down its reserves or seeking external funding.
A group of banks can't likewise collectively increase their lending excluding interbank lending without collectively seeking funds.0 -
GCU Flexible Demeanour wrote: »Not really so. Our financial regulator had to implement an EU-determined legally binding minimum standard. This is an aspect that the EU are anxious to forget.
Speaking of Iceland, the Icelandic people were asked in two referendums if Iceland should pay the bondholders and in both cases it was rejected by a sizable majority. In this country we only have referendums about stupid things.0 -
realitykeeper wrote: »It had to implement a minimum standard but it was free to go beyond the minimum standard. The reason it did not do so was because the government of Bertie Ahern put pressure of the financial regulator to do the minimum, i.e. light touch regulation. Therefore Ireland must pay its debts in full. The EU are in no way responsible for the succession of poor governments in this country.
One would assume though that the ECB would review this minimim standards given the scale of the banking crisis it spawned .. anyone have details of the ECB response in this context?0 -
realitykeeper wrote: »It had to implement a minimum standard but it was free to go beyond the minimum standard. The reason it did not do so was because the government of Bertie Ahern put pressure of the financial regulator to do the minimum, i.e. light touch regulation. The EU are in no way responsible for the succession of poor governments in this country. Ireland choose to bail out the banks despite having the same options open to them as Iceland.
Speaking of Iceland, the Icelandic people were asked in two referendums if Iceland should pay the bondholders and in both cases it was rejected by a sizable majority. In this country we only have referendums about stupid things.0 -
Well here's where it gets a bit complicated. It depends on your definition of money. The example I gave involving Paddy and Joe in Leitrim was about base or narrow money. I was showing that base money did not increase when a bank lent money out. There are other measures that do increase when lending occurs. For example if I lend you 10 euros and you give me an IOU, then I can use that IOU as collateral to borrow money. In a sense the IOU is a form of money and so the money supply according to this broader definition has increased. We don't need multiple banks to illustrate this. A single lending institution is sufficient. When a bank lends money, as the BOE points out, an asset is created of a certain value which can be traded.
But there's no new narrow money in circulation. If a bank has lent out all the money its depositors have lent it, then it can't lend out any more without either
a) attracting more deposit money (i.e. increasing the amount it owes to depositors).
b) digging into its reserves (which may be at a minimum)
c) calling in loans from other areas.
or finally
d) borrowing money.
For the property bubble to occur to the extent it did, the banks had to borrow extensively from outside. Narrow money had to be brought in. Joe the Leitrim landowner doesn't want bank assets. He requires cash.
A bubble can't be inflated without narrow money. It can be diverted away from other areas in the initial stages but it can't be manufactured by the banks themselves. Beyond a certain point, it must be obtained from abroad.
I don't see that that's been shown at all. Narrow money - which includes bank deposits - is exactly what commercial banks create.Here's how the BOI explains the Paddy and Joe example:For example, suppose an individual bank lowers the rate it charges on its loans, and that attracts a household to take out a mortgage to buy a house. The moment the mortgage loan is made, the household’s account is credited with new deposits. And once they purchase the house, they pass their new deposits on to the house seller. This situation is shown in the first row of Figure 2. The buyer is left with a new asset in the form of a house and a new liability in the form of a new loan. The seller is left with money in the form of bank deposits instead of a house. It is more likely than not that the seller’s account will be with a different bank to the buyer’s. So when the transaction takes place, the new deposits will be transferred to the seller’s bank, as shown in the second row of Figure 2. The buyer’s bank would then have fewer deposits than assets. In the first instance, the buyer’s bank settles with the seller’s bank by transferring reserves. But that would leave the buyer’s bank with fewer reserves and more loans relative to its deposits than before. This is likely to be problematic for the bank since it would increase the risk that it would not be able to meet all of its likely outflows. And, in practice, banks make many such loans every day. So if a given bank financed all of its new loans in this way, it would soon run out of reserves.
Banks therefore try to attract or retain additional liabilities to accompany their new loans. In practice other banks would also be making new loans and creating new deposits, so one way they can do this is to try and attract some of those newly created deposits. In a competitive banking sector, that may involve increasing the rate they offer to households on their savings accounts. By attracting new deposits, the bank can increase its lending without running down its reserves, as shown in the third row of Figure 2. Alternatively, a bank can borrow from other banks or attract other forms of liabilities, at least temporarily. But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending. And the cost of that needs to be measured against the interest the bank expects to earn on the loans it is making, which in turn depends on the level of Bank Rate set by the Bank of England. For example, if a bank continued to attract new borrowers and increase lending by reducing mortgage rates, and sought to attract new deposits by increasing the rates it was paying on its customers’ deposits, it might soon find it unprofitable to keep expanding its lending. Competition for loans and deposits, and the desire to make a profit, therefore limit money creation by banks.
I've highlighted a number of point here. The individual bank can't lend without without either running down its reserves or seeking external funding.
A group of banks can't likewise collectively increase their lending excluding interbank lending without collectively seeking funds.
Again, I don't see that you've shown this - the collective case is quite different from the individual case, and that point is highlighted by the BoE just after the section you've quoted as a different situation.
Coming back to my little model, and the point about Joe not wanting "bank assets" but cash:
One of the major points there is that without borrowing anything from outside the two-bank system, the amount of deposits - that is, money even according to Joe - has been increased by €130bn, or 2.3 times. From Joe's perspective, the fact that the banks' assets are now more in the form of loans than reserves is completely irrelevant - Joe, and everybody else, has not been paid with "bank assets" but with deposit money.
And you can simply keep running that model. Reserves don't get depleted unless they're lost outside the system.
cordially,
Scofflaw0 -
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The quote from Nyberg does not claim (let alone offer evidence for) that the foreign funding in Irish banks came from eurozone banks, or even the eurozone - it says only that on joining the eurozone, Irish banks had access to wholesale markets, without further qualification.I'm not sure how Icelandic banks apparently managed the same trick without joining the eurozone, so I'm not sure of the value of the comment generally.realitykeeper wrote: »It had to implement a minimum standard but it was free to go beyond the minimum standard.0
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