Tuesday, May 13, 2014

13/5/2014: No, Johnny the Foreigner didn't do it... our own Government did...

Ah and so it rolls, Irish national media obsession with who (from abroad) pushed (presumably unwilling) Irish Government (so deeply concerned with national wellbeing) to guarantee bondholders (presumably the elderly investors from pension funds and teachers, nurses and fire(wo)men) back in September 2008 (because, you know, the Government did not beat the 'Great Irish banks Inviolable drum for the good part of 2008).

The latests instalment is on the role of Timothy Geihtner (based on his book) and it is available here: http://www.irishtimes.com/business/economy/timothy-geithner-keeps-it-short-when-it-comes-to-haircuts-1.1792498.

So we know the drill:

  1. IMF called for haircuts. Well, I am not so sure. IMF does include haircuts in some of its 'rescues' and it is a part of the tool kit. But IMF never played an active part in Ireland or for that matter in the euro area. Just compare and contrast the Fund manhandling of Hungary against its waffling on in Greece. My internal IMF sources told me that staff was surprised Ireland did not burn the bondholders the way Iceland did. But then again, one's dismay is not Fund's advice, and Fund's advice is not Fund's order (oh, and IMF does issue 'orders').
  2. ECB barked at the idea of haircuts. Again I am not so sure. We do know ECB opposed them, but that is not a reason not to try them, is it? The argument goes that if Ireland were to go against ECB's will, the skye would fall onto us and the moon will no longer exert its tidal push and pull force on the Irish sea, making the entire island uninhabitable. Truth is, we have no idea what ECB would/could have done. Stop funding of Irish banks? Lots of good that funding did to us, I'd say - apparently even with ECB lending we had to bankrupt the nation to mummify the zombies (you wouldn't call this a rescue operation, since our banks are still zombies five and a half years into the mess).
  3. EU balked at the idea. Which means what? Olli Rehn had hiccups for breakfast? Both EU and ECB were, allegedly, powerless midgets incapable of stopping the spread of contagion from the inter-galactically important Irish banks (if they were just simple banks, why all the huff about their systemic importance) and thus needed Irish people to bite the missile (you would hardly call a guarantee the size of 2.5 times the nation's GDP a bullet) for them. So who exactly held the trump cards? 
  4. US and UK went apoplectic (although as we now know, Geithner did not oppose haircuts in principle, though he was against their timing). I must confess, I noticed no such reaction from Treasury and BofE officials I encountered in briefings around the time of the Guarantee and there after.
  5. Irish Government reluctantly, tragically, with tears in their eyes, was forced to introduce a guarantee of all liabilities. 

Now, just for nanosecond give this a thought: the Irish Government, that spent a good part of 9 months prior to the Guarantee staunchly defending the banks and since around July of 2008 - covering up their repeated violations of regulatory requirements (liquidity ratios etc), the same Government that apparently had no desire to know what was going on in the banks shares support schemes and didn't give a damn about abuse of derivative instruments to prop up the banks valuations, the said Government that had lost no sleep over the silencing of whistleblowers pointing to systemic problems in the banks… that Government today is being painted as having been 'bounced' into the Guarantee and subsequently the Troika bailout?..

Are we serious? Let's take a hard look into the mirror. The Guarantee was an act of the Irish Government to protect and secure Irish banks connected to the Irish elite's interests. Full stop. That it rescued a bunch of unsavoury bond holders and investment funds was a cherry on the proverbial cake, not the main spoiler of the 'benevolent Government' intentions.

That we did not exercise a sovereign right to, in a national emergency, impose losses on whoever we wish to impose them is not a corollary - it is a direct evidence of intent to rescue the banks at any cost to the nation. This is further collaborated by the fact that following the guarantee, the Irish Government (not the ECB or US Treasury or the EU Commission) sat back and did absolutely nothing to impose any terms and conditions onto the banks. It is evidence by the fact when our Government at the time was forced to start doing something about reforming the banks, it went about it in the following order:

  • First, losses were imposed on borrowers. Borrowers who are still (after numerous 'powder over the gaping wound' reforms of insolvency and bankruptcy codes) being milked by the banks to the loud approval from the Central Bank for every penny they might have or will have in the future.
  • Second, banks were given token targets on governance reforms (changes of boards, senior executive ranks, salaries caps etc). The banks blew past these like a boy racer blows past the '30 km/h' speed sign.
  • Third, the State created Nama which underpaid for the banks assets in order to secure brighter future for itself and its consultants and vulture funds (the latter now expect returns of 20% per annum and more on the assets they are buying from Nama, which Nama claims to be selling at a profit).
  • Fourth, more cash was injected into the banks to cover the hole blown in them by Nama. Cash was taken off the same taxpayers, many of who are the said borrowers being pursued by the banks with the blessing of the State.
  • Fifth, the banks were subsidised and protected from any competition - and still remain such: we have a massive penned up demand for credit (allegedly from top-quality SMEs and corporates and households with healthy balancesheets that everyone - from IBEC to myhome.ie claims exist all over Ireland) and we have rising lending margins, and yet we have not a single foreign bank coming into the country or expanding its operations (beyond PR releases) here. Why?

Do tell me that anything in the above suggests that the past Government shed a single non-crocodile tear in guaranteeing the banks? I simply can't believe that. It does not correspond to the facts at hand.

So to tidy things up: let's continue digging for the evidence that some Johnny the Foreigner 'bounced' Ireland into the Guarantee and the bailout and the rest of the mess we are in. Let's even keep digging for the evidence that the Martians are responsible for the original mishap of two Luas lines not being connected to each other.

But let's also remember - as a sovereign State, Irish State had choices. It made them. It made them to suit all of the objectives of supporting the banks that were consistently and persistently pursued by the State prior to the Guarantee. Subsequent to the Guarantee, Irish Government officially and repeatedly stated that it will provide all and any support needed by the banks, unconditionally, unreservedly and unceremoniously. Whatever Johnny the Foreigner did or did not do in such circumstances is secondary - interesting, important, intriguing, but still secondary. Primary is the fact that we were flushed down the proverbial banks sewer by our own.


Brian O' Hanlon said...

The important thing to realize though Constantin, is that here in Ireland, the changes that do happen,... even though they appear to take a long time to revolve around,... eventually they do.

Remember that when I was growing up in Ireland (when the Irish banks were indeed so 'strong and mighty), it was an Ireland, where citizens regularly consulted with local politicians in order to get a phone line connection. That was the case, even though we had no super fast data fibre lines to maintain, or nothing like that. All we had were phone lines, and a large organisation called 'Telecom Eireann', that ran that system.

What we had back then, was a environment of scarcity.

You know, we can understand a lot of these modern innovations - and not least, consumer credit systems - in the same way as we understand things such as tele-communications in the old days (and the old days were only 25 years ago). Yeah, there might be an attitude that is similar to the olden days in telecommunications - as it applies to consumer and small business credit supply systems today. Yeah, perhaps the dreaded 'duopoly', which professor Lucey often raises concern about in Ireland,... does exist, because of a similar mindset, like the one that we saw in tele-communications.

The truth of the matter is though, that in today's world of 2014, and more so as we enter into decades like the 2020's and 2030's,... those elements such as telecommunications and modern credit supply,... will become even more crucial parts of the national infrastructure.

Brian O' Hanlon said...

The question that we should ask maybe, is where this idea came from of 'the people', owning things. There was someone on national radio making this point quite plainly, recently. Unfortunately, I didn't make the effort at the time, to capture the individuals name, or if they had published a book, or something.

(I think he had written a book about the history of local government in Ireland, after the war of independence)

His point was quite simple. He was looking at the history post second world war in Great Britain. It was a time in Great Britain, where for the first time, people got the idea that they could own things. They would own the basic infrastructure of a modern Britain. They would own things like railways, airwaves, telecoms, housing, education, healthcare.

It was a time of great optimism.

That was in the post second world war years. We advance the 'clock' further on to the 1970s and 1980s in Ireland. We had these quite large nationally owned companies too. We had to figure out though, why in the 1980's, it had become so difficult to obtain things like phone lines for personal use.

It was similar to how the medical card system works today (there was quite a 'blow-out' on the Joe Duffy show lately, you will note, about the 'Act' governing the medical card system, was drawn up in the 1970s, forty years ago).

But, we should remind ourselves that systems like telecommunications, worked in a similar manner to how medical card still works today. It was something, where you kind of met up with the local politician and you lobbied on your own behave, or for someone else,... so that a politician or someone might turn some screw, or press some button,... so that the system, would roll into action,.. and one could obtain access to this rare resource.

There does seem to be a certain element of that present still, in how the banking system operates in Ireland, as you have described it above.

What makes it really, really difficult though, is the following. When the banking and credit supply system, begins to operate on 'auto pilot', without the level of intervention and representation from the political system,... (like in medical card, and telecommunications etc),... that it seems to require,... what does the politician then do.

Say, for instance, we somehow solved medical cards, we solved telecommunications and we solved consumer credit supply. The problem then, is that it takes the 'politician' out of the equation. The 'politician' doesn't have a function, as they had in the old system.

I used to criticize the fact that in the past, many of the politicians we had in Ireland, weren't experts in anything - but came from teaching professions, and local auctioneers etc. But of course, in the context of the old system approaches that we had in telecoms, healthcare and banking,... one can see how those grass roots connections, and ability of teachers to interact with their local neighbourhoods,... gave politicians the ideal 'skill set' to work in their job.

We have to ask the question, that if we begin to 'fix' more and more of these systems,... what will all of these people, such as politicians do with themselves (and people who are used to working with that kind of system?)?

Brian O' Hanlon said...

An awful lot of what we do here in Ireland, would have modelled what had happened across the water in Great Britain, and from the second world war onwards.

When we look at banking in Ireland, I think what we have to look at, is the old operation of these large state owned programs, in all kinds of areas of national infrastructure. What you had in telecom's and in consumer banking,... in Ireland, which was a 'poor' country,... was very low levels of consumption.

What we found is that because there was such low levels of consumption of many services,... the old system, where the politicians was the sort of intermediary between the consumer and the 'service', that it worked. However, the problem that we face increasingly in a modern economy in Ireland, is that old intermediated system,... and the organisations, that existed in that old system (the duopoly banks included),... does not seem up to the task any longer.

Brian O' Hanlon said...


We do really need to understand Ireland as that kind of 'place'. Ireland was really just a incubation chamber for populations of millions and millions of citizens, who from the 1840's on wards, left in ships and added to the population count of very far away places. There was never really a program in post-famine Ireland, ever, to run a modern economy or have a modern society.

The job of the politician, was to stand in 'on behalf' of the citizenry, and extract out of whatever system existed, some service that they should be entitled to.

The needs of the 'people' were really very simple (much of it was to do with a Catholic program, that involved raising very large families on a poor island, and sending those citizens around the world to live elsewhere).

Those very simple needs of the people who did live on the island of Ireland, were mainly serviced, through this bureaucracy, which required personal interventions by politicians, to get anything done. I mean, when the Tom Gilmartin's etc, were coming back from Great Britain and trying to get things done here, they would have interacted directly, with a system that was locked up basically by politicians.

Irish politicians were kinds of creatures, like priests are in the Catholic church. They stood guard as it were, in front of the resources, that belonged to the Irish nation, and one had to interact with these characters directly, in order to get anything done here.

The efforts on behalf of Irish politicians in the 2000's, to 'save' the banking system, on behalf of the 'people' of Ireland (and all of the subsequent analysis in the media in Ireland afterwards), needs to be seen in the light of the above. It is like the politicians of Ireland, stood guard and protected things like the telecommunications infrastructure up until the 1980's. In fact, they protected the telecommunications infrastructure so well, that we ended up with a poor (almost unavailable service), that cost an absolute fortune to maintain and operate.

Do you sense a kind of pattern emerging?

It is the same, more or less, with the banking system. The whole effort and emphasis was to save the banking system, because it was something that the Irish people own, and are entitled to,... but unfortunately, don't get access too,... because access is somehow frustrated, by some difficulty, it getting the credit etc delivered.

As this narrative goes, and always goes,... the important thing, is that we have these wonderful politicians, who are there to 'protect' stuff for us. It is stuff that we can never get to use when we want to, but it is stuff that we at least own, and it is ours, so to speak. This cycle, this process that keeps on happening in so many areas of life, is very important to Irish people.

It doesn't have to function, that is the essential point. It just has to be our's, and we need to save it, every time it seems to be in jeopardy. And we need our politicians to be there, like the security guard always, on hand, to save the infrastructure (that we can't access).

Brian O' Hanlon said...

I honestly think, that education about finance is necessary in Irish schools. Kids from the youngest level upwards, should be introduced to the concept of what a banking and financial services system in, in outline, in basics. What we have in Ireland, is an entire adult population, who are under-consumers of things like finance. We just don't understand, or want to understand, the 'basics' of how these things operate.

I can think of no better form of community service for bank executives in Ireland, than having to go around to school rooms full of secondary school economics classes, and explain to them, about servicing Ireland's banking debts. Or going around to national school classrooms, and telling the senior kids there, what a bank does, and what is a mortgage.

We should have bankers I think, around to national schools, to speak to children and explain to them what banking is (make room for it, by cutting back on the hours and access that the Catholic church gets to teach kids about holy communion etc). We should teach our kids how the political and democratic systems operate.

It is some mixture, or combination, and properly functionality of a few vital systems, that will define the success or otherwise of the next generation or two. Things like information technology or programming (in the broadest, outline sense), communications, finance, modern functioning democracy and probably foreign languages too.

We should have teachers in every secondary school now, who are trained in computer programming - but we probably don't. Forget about whether we have subjects or exams for it. At least one mathematics teacher in every school should be trained in one basic computer language. And some of that, might in turn rub off on children.

We have had a lot of bitter and acrimonious debate in Ireland, in relation to many aspects of 'education'. But I have not heard an awful lot of debate about education, that relates to our national goals for the foreseeable future, and areas, where we need to achieve goals. It is probably fair to say though, that given the high-tech complexity of the world that the next few generations of Irish are about to inhabit,... that we should be helping them more now. That is, by providing the 'alternative route' through education, that I described (more exposure to the kinds of systems that they as citizens in a more modern Ireland, will be expected to interact with and consume as part of their daily lives).

It's shocking though, that the education system that we presently have, is still built firmly around that idea, of an environment of scarcity,... a mixture of Catholicism and Gaelic. Kids come out of schools etc, without even knowing what a 'mortgage' or anything is (the people signing up for these products are educated in how they function), and of course they do become sitting ducks. The old sort of banking duopoly, is what is maintained for another whole generation or two, or three.

Brian O' Hanlon said...

I was informed that a recent national teachers conference in Ireland, that after the bitter screaming matches about special needs, loosening the hold of the Catholic church on education, and reform of the junior cert had be dealt with,... that discussion moved on, to how the 'boys with honours maths',... had bankrupt the whole country.

(And that was the teaching professionals themselves who were making this particular claim)

The truth is though, it would probably be no harm, if some teaching professionals were sent off too, to summer boot camp, to learn some honours mathematics, and the basics of a computer language? And while they are there, they should also be given the fundamentals classes in modern finance, from the Gurdgiev's, or the McWilliam's of the world,... and then, they might have at least some idea, of the kind of world that the very kids they are teaching,... are expected to compete in.