Financial Crisis

[geysir]

Not exactly, you use models to predict this and the problems occur when the models don't correctly predict the number and magnitude of defaults.

What ever the models banks use to calculate risk,
the horses have bolted away from the restraints imposed by the models of predictions ages ago.
Even if you could try to make a case for that, at the very least then it would be about the criminal stupidity of a banking system that built its foundation of their risk/ loans policy on a little limited prediction model while at the same time ignoring the screams of all the alarm bells of prudent banking procedures being shattered.

You have Whoa, this is now liquidity risk, not credit risk, which is what you were discussing above.

I mentioned only one aspect of deregulation, specifically the deregulation to do with ratio of cash reserves held by banks/to savings on deposit, which you considered irrelevant.
Please note that in the U.S., while the reserve ratio for checking accounts is 10%, there are no reserve requirements on savings accounts and fixed deposits, thus theoretically allowing banks to create an infinite amount of money.
The cash reserve ratio has just but a part to play but it has significance. When a bank is not required to hold 20 % to 30% in cash/ liquid assets in reserve from a depositer then it will loan it out/ invest it elsewhere. A bank cannot loan out what it should be required to hold in reserve from a depositer.
A bank can lend out 100% of the money held on deposit, there is no reserve ratio imposed. In this case the money supply can increase indefinitely. The total money supply is even more than 10 times the total amount of cash printed by the government.
In 2006, when the Federal Reserve stopped publishing those M3 figures, there was roughly 700 billion US dollars of currency, i.e. bank notes and coins, in circulation ("real money", if you like) whereas the broad money supply, including checking accounts, fixed deposits, money market funds, etc., was 10 trillion dollars ("bank money"). Therefore, only 7% of the money in the USA is issued by the government and the rest is created by the banks. That is what makes a credit crunch in the society today such a dangerous thing and why it is so difficult for the government to contain it.
To have the banks circulating money is quite different from allowing banks to create 93% of all money in circulation.
In Australia, currency in circulation in 2007 was about AUD 40 billion, while the total money in banks etc. was AUD one trillion.
Speculation and take-over bids do not add any real wealth to the society.
The whole balancing act works until some speculation goes sour and loans cannot be paid
back. Then the whole house tumbles down.
The Banks make up the regulations to suit themselves but just need the blessing of a Regulator who has guidelines somewhere written in a complicated language. The same regulator who gave the Iceland banks in England a licence with triple A rating . So you will have to forgive me if I dismiss the effectivness of current regulations process out of hand. In practice, it is absent with leave until the shít hits the fan. And this is just the so called regulated sector.

No, does not follow. A bank run will kill any bank, regardless of their loan profile

As I said, runs on bank happen (after certain circumstances) when trust goes.
What we have around the world, instead of banks collapsing, are Government bailouts. Since the bailout when the South Sea Bubble burst in England in 1720, up until today, all bailouts in history tend to be a way for the lower income people to subsidise the rich and protect their profits.
The limited liability of corporations is an insurance policy for the rich, which makes speculation a win-win for them. If the loss for the bank is too high, the government steps in and bails them out at the expense of ordinary people. In effect, what is in place is not capitalism. It is
socialism for the rich.

To date, its been fear of future credit losses that have caused liquidity issues, not actual credit losses

I don't go along that, or that if there was just less fear around then everything would start rolling again. Truly, that is a con.
This recession is evidence based, not fear based. Fear is a symptom, not the disease. Future credit losses are a reality, the fear of that happening is based on rational analysis.

Of course, this is just afaics now.
It´s probably much worse.
The troubles in the banking and stock market systems are only the beginning of economic problems

[OneRedArmy]

What ever the models banks use to calculate risk,
the horses have bolted away from the restraints imposed by the models of predictions ages ago.
Even if you could try to make a case for that, at the very least then it would be about the criminal stupidity of a banking system that built its foundation of their risk/ loans policy on a little limited prediction model while at the same time ignoring the screams of all the alarm bells of prudent banking procedures being shattered.

Yes, the models didn't work, thats clear. But seriously, whats your point? You're going to have to do better than vague, sensationalist pronouncements like the emboldened above. Thats pure Joe Duffy.

I mentioned only one aspect of deregulation, specifically the deregulation to do with ratio of cash reserves held by banks/to savings on deposit, which you considered irrelevant.
Please note that in the U.S., while the reserve ratio for checking accounts is 10%, there are no reserve requirements on savings accounts and fixed deposits, thus theoretically allowing banks to create an infinite amount of money.

The cash reserve ratio has just but a part to play but it has significance. When a bank is not required to hold 20 % to 30% in cash/ liquid assets in reserve from a depositer then it will loan it out/ invest it elsewhere. A bank cannot loan out what it should be required to hold in reserve from a depositer.
A bank can lend out 100% of the money held on deposit, there is no reserve ratio imposed. In this case the money supply can increase indefinitely. The total money supply is even more than 10 times the total amount of cash printed by the government.

We live in Ireland and operate under EU rules that I quoted previously. You read a few pages on wikipedia which referenced Fed rules, which are not relevant here.

Please explain, in as much detail as you can, how European banks can create infinite amounts of money? Personally, I can't see it. If you could track it from monetary policy through to M0 that would be ideal.
I still maintain that loan, and therefore money supply growth, is bounded by regulatory capital rules (Basel II).

I don't go along that, or that if there was just less fear around then everything would start rolling again. Truly, that is a con.
This recession is evidence based, not fear based. Fear is a symptom, not the disease. Future credit losses are a reality, the fear of that happening is based on rational analysis.

Thats not what I said. I said the bank runs to date were caused by expectation of future credit losses. Those catastrophic losses had not YET crystallised in many of the instutitions which suffered liquidity problems. Thats a fact. I'm not arguing the recession isn't real, nor am I arguing that lending wasn't excessive. It clearly was. But by the same token I'm not throwing my hands up in the air and screaming "won't someone please think of the children" unless I can identify a better way of doing things.

There's no doubt requiring banks to hold more reserves would have reducing the likelihood and impact of the credit crunch, but it would obviously have impacted global growth significantly over the last 20 years. That is undeniable.

Therefore the rest of your argument is effectively anti-capitalist, which, whilst having merit, is purely theoretical unless someone can come up with an alternative. As I said earlier, capitalism by its nature is cyclical. I don't know why this seems to surprise people every time we enter a recession

I didn't see many people complaining during the good times.

[Stuttgart88]

The limited liability of corporations is an insurance policy for the rich, which makes speculation a win-win for them. If the loss for the bank is too high, the government steps in and bails them out at the expense of ordinary people. In effect, what is in place is not capitalism. It is socialism for the rich.

I largely agree with that. Would Goldman Sachs have behaved the same way if they still operated as a partnership with the partners on the hook when things go wrong?

[pete]

Irish Times

The Bank of England slashed borrowing costs today by 150 basis points to soften the blow of a sharp economic downturn. The cut took interest rates to 3 per cent.

Apparently the ECB has also dropped rates but by 0.5% down to 3.25%.

[John83]

...Since the bailout when the South Sea Bubble burst in England in 1720, up until today, all bailouts in history tend to be a way for the lower income people to subsidise the rich and protect their profits...

The alternative is something like what happened to Argentina a few years back, when the country becomes something of a minor hell for the lower and middle classes.

[OneRedArmy]

The market basically doesn't believe their [Irish banks] forward projections, particularly their ability to sustain high dividends.

Time will tell.

I'd be mildly surprised if we get to the end of this week without something coming out, very surprised if the Irish banking market looks the same at the end of October and absolutely shocked if haven't seen some change by Christmas.

I made the above posts in mid-late Sept and I'm honestly surprised its taken so long for movement, which nowappears to be happening very quickly.

Its going to be a long weekend for some people in Dublin, looks out for gangs of pinstriped M&A bankers and Private Equity yanks roaming around!

Listened to the IBOA muppet on the radio this morning, he made the Siptu Aer Lingus reps seem like Ghandi, they've a real shock coming when the slash and burn asset strippers from the US takeover. The 10% wage claimed lodged by the IBOA a few months ago will be the last of their worries. I'd expect thousands of layoffs from top to bottom.

On the proposed mergers, I'm not sure putting the two big residential lenders (BoI and PTSB) and the two big commercial property lenders (AIB & Anglo) together is a particularly sensible choice, diversification surely would mean reversing these combinations?

Interesting week ahead in whats been a staggering year.

[pete]

On the proposed mergers, I'm not sure putting the two big residential lenders (BoI and PTSB) and the two big commercial property lenders (AIB & Anglo) together is a particularly sensible choice, diversification surely would mean reversing these combinations?

Interesting week ahead in whats been a staggering year.

Putting BoI, PTSB, AIB & Anglo into 2 new entities will destroy competition in the Irish market. Once you create those monsters cannot break them.

Not keen on government bailout but state taking preferencial shares seems a good alternative as the state is already stuck with deposit/loan guarantee so might actually make some money out of the deal. It is suggested state could get 8-12% interest on that investment.

Maybe Anglo should be allowed go bust as it has little retail business & remains can be carved up among the remaining banks.

[OneRedArmy]

Putting BoI, PTSB, AIB & Anglo into 2 new entities will destroy competition in the Irish market. Once you create those monsters cannot break them.

Not keen on government bailout but state taking preferencial shares seems a good alternative as the state is already stuck with deposit/loan guarantee so might actually make some money out of the deal. It is suggested state could get 8-12% interest on that investment.

Maybe Anglo should be allowed go bust as it has little retail business & remains can be carved up among the remaining banks.

Agree on Anglo, no risk to depositors or of contagion so it just be left to fight for itself.

Re the Government participating, last I heard Carlyle and JC Flowers were doing the dealmaking and asked they Government if they wanted to get involved (and not the other way around).

Given the increase in spreads on Government debt and the catastrophic predictions on public borrowing with the fall in tax revenue, I really don't think the state can afford to put a whole lot in. Otherwise they'd have done it earlier.

[Student Mullet]

I have a question.

Instead of capitalising the banks, why doesn't the government capitalise the post office? Let them give the loans and treat the whole thing like a utility.

[BohsPartisan]

I haven't really been following this thread but I presume its mostly just along the lines of "BohsPartisan was right all along!"

[pete]

Given the increase in spreads on Government debt and the catastrophic predictions on public borrowing with the fall in tax revenue, I really don't think the state can afford to put a whole lot in. Otherwise they'd have done it earlier.

Use the Pension fund? Last I heard they had 18 billion or so. As far as I can see it is a fairly secure investment in the long term... VCs would mean Eircom Mark II with banks resold every few years.

[Student Mullet]

Use the Pension fund? Last I heard they had 18 billion or so. As far as I can see it is a fairly secure investment in the long term... VCs would mean Eircom Mark II with banks resold every few years.

Would that be more expensive than cashing in the pension at the bottom of the market?

[OneRedArmy]

I have a question.

Instead of capitalising the banks, why doesn't the government capitalise the post office? Let them give the loans and treat the whole thing like a utility.

Are the staff in the post office any better at deciding who a good risk is than the banks?

[OneRedArmy]

Despite an early bounce yesterday the Government re-capitalisation is generally being viewed poorly in comparison with UK and other government actions.


1)Its too little. Even with the most optimistic projections leaves the banks less well capitalised than international competition and could be a lot worse given potential for Ireland to fare much worse comparatively
2) It doesn't gave enough Government control for the period of issue and also limits the upside potential for tax-payer return
3) Its the wrong type of capital. Despite (poorly informed) press reports, its not pari passu with equity and will (rightly) be viewed as inferior. The core equity ratios therefore are unchanged and the banks will still be relying on tapping existing investors (or private equity) to improve this.

[MariborKev]

Are the staff in the post office any better at deciding who a good risk is than the banks?

At this stage, they can be no worse....

[pete]

This says it for me

The Post Office don't really run a bank in the normal sense. It is really just a retail arm of another bank in Irelands case Fortis where customers can access savings, lodge cash etc...

[JerseyRed]

Have several friends over here who work in the finance industry and thought they were pretty bullet proof due us being an offshore island. Increasing murmurings of difficult times ahead over here.

[Stuttgart88]

The more I think about it the more I believe that banks should be run & regulated like utilities. Their role should never be solely to maximise profits, as traditional economic theory assumes private companies strive to do (in an upturn anyway). Provision of essential services such as health, power, heat and water have to be more tightly regulated to ensure compliance with safety standards, continuity of service and abuse of market position to avoid profiteering. I’d say food provision is different because barriers to entry are lower and hence a normal widely competitive market is easier to create.

Changing Investment Banks’ corporate status to limited liability private companies from their partnership structures was one key factor in getting to where we are now. Look at how the UK building societies fared having shed their mutual status (though it’s not as if the remaining mutuals were unaffected).

This isn’t just hindsight. During the boom here in the UK I was calling for the banks to be levied on their enormous profits, just to get them to think twice and to add some symmetry to the bank-state relationship. I think the same has happened in Ireland previously. Systemic state bailout has always been assumed in banking, just like state intervention to guarantee power provision, so why shouldn’t the state have more input into how banks can behave? Sure, let banks try to earn good returns for shareholders but these shareholders should invest in the knowledge that unchecked free-marketism isn’t the environment in which they’ll operate.

In most areas the private sector allocates resources more efficiently than the state sector. But utility provision has unique circumstances – for example, would you let a nuclear power provider operate “at the lowest point on its average cost curve” as traditional competition theory dictates? Letting banks go unchecked, or regulated badly, has caused near-meltdown of a different type.

[Student Mullet]

The more I think about it the more I believe that banks should be run & regulated like utilities. Their role should never be solely to maximise profits, as traditional economic theory assumes private companies strive to do (in an upturn anyway). Provision of essential services such as health, power, heat and water have to be more tightly regulated to ensure compliance with safety standards, continuity of service and abuse of market position to avoid profiteering. I’d say food provision is different because barriers to entry are lower and hence a normal widely competitive market is easier to create.

This is what I agree with.

[pete]

Building Societies are probably more corrupt than the banks as almost impossible for the members to change the boards - I would l;ike to see less of them & not more.

If the Regulator did his job would we be in the current situation? How does he still have a job? See this clip from the start of October after the state had to jump in with deposit guarantee.



Good article again in the Irish Times about the golden circles in the Irish banks. The fact that the author was a former chief economist with the Central Bank and a board member of the International Monetary Fund says a lot.

The banks have been bailed out without any sanctions. The fact that Anglo-Irish Bank is deemed to pose a systemic threat is surprising - clearly the Government's Christmas spirit knows no bounds.

Banks are part of the establishment in Ireland, and have been for many years. In the 1960s and 1970s virtually every family in the country hoped to get one or more of their children "into the bank".

It is also worth remembering that the major mistakes made by the banks were centred on lending to property speculators, who are also part of the establishment. The bailout of the banks will also take pressure off property speculators and avoid forced sales of land and buildings.

By giving massive guarantees and capital injections to the banks, the Government has severely constrained its own ability to borrow. Hence, taxpayers and consumers and workers will have to pay the price over the next few years - for mistakes which they had absolutely nothing to do with.