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Ireland crisis = euro banking crisis

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Paul Mason | 13:25 UK time, Thursday, 18 November 2010

Sometimes one press article sums it all up - and one chart. Today the article that sums things up is the FT's editorial. (If you can get past the firewall read it here). Since you're not supposed to quote direct anymore I will summarise:

Ireland's banks need to be recapitalised quickly or the huge exposure of other European Union (EU) banks will mean another euro-wide banking crisis. But saving the system does not mean saving every institution: big banks should get ready (all over Europe) to take over the operations of little ones.

What the FT is intimating here is that we may be at a similar moment to March 1933 when FDR imposed an enforced four day bank holiday, during which about a third of the banks were shut down. (There is a briliant free history book about it from the Fed here, schoolteachers please note).

Though there is no run on the Irish banks from savers (and no need for one, since there is an EU-backed guarantee on deposits up to E100,000) the FT - and market participants I am talking to - notes the potential for a wholesale funding run, and for it spreading to the rest of the EU.

Where next? Sometime between tonight and Monday Ireland will agree on the size of a bailout and there will be haggling with the Germans and Dutch etc about how tough the conditions are.

But the long term issue is the funding requirements of the banking system - and this IS a UK problem and IS impacted by Ireland. See the chart a the top of this page.

According to the Bank of England 2011 the crucial year for UK banks rolling over their debts. About 250bn falls due next year. As the Bank puts it (Financial Stability Report June 2010 p51/52):

"The UK authorities are working with the UK banks to assess the individual and collective credibility of their strategies for meeting the refinancing challenge."

The risk is that they collectively assume there will be a rise in retail deposits. If this does not happen then, as the Bank explains:

"If, in aggregate, banks' assumptions about retail deposit growth and asset disposals were to prove optimistic, larger amounts of wholesale funding would be needed, potentially at a higher cost."

In addition, the whole process if vulnerable to shocks. Re-funding ground to a standstill in May when there was a Euro crisis.

UK Chancellor George Osborne has insisted that the UK's involvement in any Irish bailout has nothing to do with the challenges facing UK banking, pointing out that the UK banking system is well capitalised at present and has passed the EU stress tests:

"Our engagement in this is because we are good neighbours of Ireland, not because we have particular concerns about any particular UK bank."

This brought some sharp commentary this morning. City economist Graham Turner issued the following note to clients:

"In truth, the rumoured £6-7bn of support for Ireland is effectively QE2 by the backdoor. Despite the UK chancellor's denials, the bi-lateral aid for Ireland is absolutely an attempt to pre-empt further difficulties for UK banks. The huge increase in wholesale liabilities of UK banks due to roll over in 2011 shows that perhaps the UK had more than any other country to lose from an outright default of Irish bank and sovereign debt."


  • Comment number 1.

    don't give them any money...what can they REALLY do to you, give them fifty bob a week...they cannot say no.....

  • Comment number 2.

    yup your right, why not let them earn the money that they needed

  • Comment number 3.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 4.

    Difficult situation. We're all in this together and need to hold each other up to avoid a crisis.

  • Comment number 5.

    Ireland's banks need to be recapitalised quickly or the huge exposure of other EU banks will mean another Euro-wide banking crisis.
    No, I don't believe this.
    Ireland is well-financed until June, 2011. Thereafter, or as soon as Irish bonds return to the market, there is a promise, a commitment by the Chinese Government to buy Irish bonds; in fact, to support all of the STUPID PIIGS (e.g. Spain, Portugal, Italy, even the United Kingdom)as they work through the financial, disastrous complexity caused by American derivatives, negative default swaps and other sordid, marginal gambling (yet legal) activity.
    The Chinese Premier made this commitment at the EU Summity. Surprisingly, there has been little reporting of this very important subject. I think the Chinese offer is the biggest secret in the United States and the UK, or maybe it's just not considered news.
    We are no where near that moment in 1933 when FDR imposed an enforced four day bank holiday, during which about a third of the banks were shut down...unless of course this occurs in the United States itself with its Q.E.2, which could cause all sorts of chaos. (Three more American banks have gone under within last two weeks.)
    Of course there is no run at irish banks.
    Why would there be?
    There is no need, since there is an EU-backed guarantee on deposits up to E100,000).
    There will not occur a wholesale funding run either.
    Where next?
    China has agreed to buy Greece's debt, including soverign debt.
    China has upped trade agreements with Portugal, and has agreed also to buy Portuguese bonds.
    Cnina has committed to buy Irish bonds, just as soon as they return to the market, expected slightly after June, 2011.
    In short, China has offered to assist any and all EU countries that were so badly hit by American nefarious, scheming, financial trading practices that barely met legality.
    If Ireland accepts a bailout now, it will make itself a Q.E.2 experiment...And that is simply not the way to go.

  • Comment number 6.

    See my post 9. from yours headed " This is about Lisbon, not just the euro" 16 Nov - I made similar points. Look at Germany's exposures, its claims on Ireland are almost as large as those it has on Italy. Hence, on 17 Nov I said we were at a Lehmans moment.

    Whilst banks' capital has been improved, their liquidity remains subject to special support by taxpayers through central banks. The BoE's discount windows, repos and special liquidity schemes are taking the strains for UK and UK headquartered banks ( ? Irish ones). The ECB has done the same to its limits viz Ireland within the eurozone. The funding shocks of the huge hike in Ireland's interest rates must already be travelling along the complex counterparty routes.But, can the UK taxpayer now stand in for the ECB by financing both its liquidity operations AND those of the BoE? Where does this end? Arent we doubling up our risk?

    Where does this leave confidence in the Committe on Europeam Banking Supervisors's stress tests in the summer when it was said all was calm for the banks in the EU - I suppose they'll say, ah that was all about capital not liquidity.....mushrooms and manure come to mind.

  • Comment number 7.

    4. At 2:53pm on 18 Nov 2010, CheaperVanSales wrote:
    Difficult situation. We're all in this together and need to hold each other up to avoid a crisis.

    If it was not for the fact that we are already in the crisis, surely you mean "to yet again delay a crisis"?

  • Comment number 8.

    "If, in aggregate, banks' assumptions about retail deposit growth and asset disposals were to prove optimistic..."

    If the problem is that the retail deposit base in Britain is too small to support the loan book then the obvious solution is to raise interest rates. At the moment, government/B of E policy is to encourage borrowing and discourage saving by keeping interest rates at 0.5% and pushing inflation North of 4% (RPI) through QE and devaluation of the pound.

  • Comment number 9.

    Interesting and intriguing blog No. 5. If true it is obviously something the BBC does not appear to have picked up. Ireland is well financed but is it not the case that in effect their sovereign debt is highly sensitive to the level of confidence in the nationalised Irish banks. There must be concern over the institution/large investors panicking about the ability of the banks to meet their commitments but when have they seriously lost out?

  • Comment number 10.

    ..big banks should get ready (all over Europe) to take over the operations of little ones...

    or rather the competent ones should take over the incompetent which may give a different set of banks? Some of the small ones have been competent.

    ..FT is intimating here is that we may be at a similar moment to March 1933 ..

    i did post back in 2008 that the banks in the usa [and thus here] were going to be closed for a week. The door signs had even been printed.

    once again public money is being used to buy time for private banks and their shareholders rather than solve the situation which looks unsolvable except through bad banks vanishing.

    the govt would not worry over the markets except that its probably their old school chums? A phased controlled closure of one bank at a time would be in everyone's interest and re establish moral hazard into pensions.

  • Comment number 11.

    #5 BluesBerry
    I heard Patrick Honohan's interview with Irish RTE this morning. He said it was well known public knowledge that there had been substantial capital outflows from Irish banks since April, he says. As tripleA ratings fell away foreign investors didnt renew, he says, their deposits and investments and so the ECB stepped in to fill the gaps with liquidity support. As I understand it, the ECB want the EU/UK to refinance them. Mr Honohan said that the loan is required as contingent capital funding to maintain investor confidence. He didnt know what interest rate was to be charged on the loan curriously although he thought it might be the same as the IMF would charge ( whatever that was). I gained the impression that he thought the loan was needed to shore up confidence in the banks.

  • Comment number 12.

    So we're to save to provide the banks with deposits to shore them up but we're to spend to make good weak aggregate demand from private and now public sector deleveraging.

  • Comment number 13.

    I strongly recommend this New Statesman article and the associated links, especially as to why Germany is pushing Ireland to raise corporate taxes.

    Also, an April article by Eric Hobsbawm - in my view the most thoughtful Marxist of modern times.

    (Go on Jaunty - take a look - I'd welcome your thoughts! :-)

  • Comment number 14.

    GREAT story Paul - thanks for posting it.

    It's quite true that the Irish Banks have their deposit protection up to £100k, but that is NOT THE CASE for UK banks, where deposits are only protected up to £35k.

    There is also the issue of credit default swaps, which would decimate much of the value of pension funds invested indirectly in them through their shareholdings in insurance companies holding the CDS policies.

    This means that for anyone who has money in the bank and a reasonable pension pot, their savings and pension are now exposed to the Irish debt crisis quite directly and it is highly likely I'd say that the current situation will deteriorate by the time we reach the 2012 point highlighted by the FT.

    What should we individually do about this?

    I'm so unconvinced by the snow job going on now that I'm going to set up a self-invested personal pension scheme and pull all my pension pot out from the insurance companies and stick the whole lot into buying productive farm land - it's a commodity that has a finite supply and essential to produce food, so is not going to lose all its value.

    I'm also going to take the kids' inheritence money out of UK bank deposits and put it in a Swiss deposit account, where hopefully it won't be exposed to the pound or the Euro banking crisis.

    The truth is that although there is no point in staging a Northern Rock type banking panic, the risks to individuals right now are real - particularly to our pension funds, many UK equities and if there is a crash in property prices in the UK our banks will probably go over the cliff and it will not be possible to stage another huge UK bail out.

    The prospect of the taxpayer/pension holder/bank depositor being expected to fund another bail out of the banks in the UK to my mind has gone beyond the issue of "moral hazard" - we need to make it quite clear to the government and the banks that if they cannot sort their problems out themselves, we consider the damage a second bail out would do to our society poses an even bigger moral price which we cannot and will not pay.

    Therefore I'd hope that Cameron & Clegg would spell this out to them right now: THERE WILL NOT BE A SECOND BAIL OUT - UK BANKS WILL BE ALLOWED TO GO TO THE WALL - and the Bank of England will then move in to take over failed banks without compensation to create a National Bank to replace them.

    The prospect of whole nations being held to ransom for the debts of a tiny number of speculators and their greedy bankers isn't a "problem": it's a massive crime that should be recognised for what it is and those responsible for it need to be held to book as wellas those who bankrolled this protection racket, who should lose their shirts as well.

  • Comment number 15.

    #8 Kilpatrick wrote..." If the problem is that the retail deposit base in Britain is too small to support the loan book then the obvious solution is to raise interest rates. At the moment, government/B of E policy is to encourage borrowing and discourage saving by keeping interest rates at 0.5% and pushing inflation North of 4% (RPI) through QE and devaluation of the pound.
    This has to be finely judged - the policy objectives of the low rate of interest are to maintain economic activity, discourage saving and protect Bank balance sheets. However, if the rates were hiked to draw in retail deposits that in turn would increase RPI as cost of mortgages would creep up. This would in turn challenge the serviceability of floating rate mortgages and may lead to higher default levels further attacking the asset values of mortgage debt on bank balance sheets. The latter falls in asset values may counteract/defeat the effect of attracting higher retail deposits.

  • Comment number 16.


    Not enough is being made by Labour of Osborne's history of bigging up Ireland - although I thought Paul did a good job last night.

    Forcing an increase Ireland's corporate tax rate would be a wonderful idea - it's about time to stop the race to the bottom and the use of this by the multinationals. Presumably this is why the Irish government is making noises about their sovereignty.

  • Comment number 17.

  • Comment number 18.

    Tell them to get a paper round!

    This, of course, could just be FUD - Fear, Uncertainty & Doubt - designed to put fear into the Public again as distraction whilst the bankers do a slight of hand and pour billions into their own accounts.

    On the other hand...

    We could be days away, or months at most, from a second banking crisis. The UK has had a property bubble as mad as the Irish - probably more so due to the fact that most of the money lent for the Irish housing ponzi scheme was lent by British banks - and our house prices have reached ludicrous heights no different than Eire.

    Well, the only difference is that Ireland has had their property crash and ours has not yet begun. No wonder King is so desperate to prop up house prices.

  • Comment number 19.

    ..perhaps the UK had more than any other country to lose..

    the uk?

    if you do a flowchart of who is exposed to debt, the political class and their relationships with those exposed to debt what might be revealed? an inner empire of oligarchs?

    ...The Tories still rely on contributions from the City of London and financial services, especially hedge funds and fund managers, to a considerable extent.....

    so if people say the 'uk' has a lot to lose that isn't the same uk who might lose billions if their tax money is never paid back?

    Shouldn't there be a national vote on giving risky loans to private banks of a foreign country? [ if it was a non bank they would never qualify given their debts, past incompetent management performance and poor risk control? ie the banks wouldn't lend to a firm with the same risk profile as themselves?]

  • Comment number 20.


    the three reasons osbourne identifies , good education, R&D and tax rates, as the most important lessons behind ireland's success could still be true but now its a failure. So none of those three 'lessons' can be said to be behind ireland success.

    The 'success' was from euphoric bonus based lending that created a bubble.

  • Comment number 21.


    can't see how Eric Hobsbawm can claim communism has failed when state nationalist communist china has the world by the throat? If, say, we take wealth as the highest idea of the mind then they must be doing something 'right'?

    the credit crunch isn't due to market failure. It was the ignoring [some might say organised criminal deception] the laws of the market that caused it. This 'correction' are the laws of economics reasserting themselves forcibly upon people wilfully trying to ignore them for private gain.

    given he starts with these two fallacies, the death of communism and the failure of capitalism, his conclusions are going to create a confused labyrinth?

    he gives his real agenda away at the end with talk of 'the environmental crisis'? which is a 'crisis' caused by black propaganda by those who own the carbon exchanges and those who seek the world to be run by a 'council of elders'.

    Do they get paid by the word to write such stuff?

  • Comment number 22.

    There was a report on the 15th from Bloomberg , quote

    “ECB Pressure
    In a Nov. 12 conference call of ECB officials, Ireland was pressed to seek outside help within days, a person briefed on the discussions said on condition of anonymity. Bundesbank President Axel Weber has called for ending the ECB’s emergency bond-buying program, which has benefited deficit-laden countries such as Ireland, Portugal and Greece.
    The risk for the ECB is that buying those bonds could eventually hurt the central bank’s balance sheet, damaging its independence. “

    Helpful !

    Switching to EU politics , hasn't the EU President been asked by the Council of Ministers to come up with specific amendments to the Lisbon Treaty as to put the Eurozones 'permanent crisis mechanism' on a sounder legal footing.
    Isn't President Rompuy suppose to deliver these text changes at a summit in December ?
    I wonder how 'interested' parties could influence this process, in making sure the wording of this new text is strong and robust enough, that one could sell it to a increasingly sceptical electorate , say, in the 2012-13 time frame ?

    I suggest after the December Council summit is finished , things will cool down again for the UK.

    And if I had to make a guess, by late or end of 2011 interest rates will be being raised in the UK, that will attract liquidity and extra profits into the banks , combine that with a MIRAS type of system to help those with real family mortgages, who would otherwise struggle with higher interest rate, so I am still positive about the future.

  • Comment number 23.

    I was at the dentist today having a double root canal, sat in the chair, as you do, my mind turned to matters of global economics and the relationship between the elite and those they are supposed to serve.

    A scene from a long forgotten film I watched in my youth came to mind and I found the relevent clip on U-tube.

    Watch the following clip and just imagine Steve Martin represents the global banking system and Bill Murray represents hard working families and small business.

    There you have it, the whole human dynamic captured in a tragi comic scene from a 1970s musical.

    It is an absolute gem....


  • Comment number 24.

    @21 Thank you for responding :-) Like many, I also don't see China as communist in any meaningful sense. I see modern China as a new mercantile imperialist power. The label and history are irrelevant: "by their fruits shall ye know them". Incidentally, in a similar vein, I don't think that the modern US Republicans, the party of the "southern strategy", can honestly claim to be the successor of the party of Abraham Lincoln. It often happens with political parties that the brand name stays the same, but the substance changes completely.

    As for the environmental debate, I disagree with you totally on the principle there, though I share your cynicism about carbon trading. I'm 55 and the British and world climates have changed considerably since my youth. My background is in maths and science, and I am inclined to be convinced by the science. (I did get involved with FOE when I was a teenager - and still a one nation Tory in those days).

    However, IF the science is uncertain, one has to ask oneself what are the consequences of being wrong. Firstly, if science is uncertain one applies the precautionary priciple. Secondly, fossil fuels are a valuable resource, for chemicals as well as fuel. Even if climate science is wrong, which I don't believe, I believe that conservation of coal and oil stocks is equally important, as is population control.

  • Comment number 25.


    The Al Gore approach is utter incaution, aka a bandwagon. Are you up to speed with the electrical nature of weather? And Piers Corbyn? (He's pretty electrifying too!)

    I agree coal and oil are a priceless non-fuel resource. But they belong in the 'Big' file: Pharma, Arms, Nuclear etc. Why else would the renewables effort be diverted into wayward wind, rather than timely tides? I believe wind is set up to 'fail'.

    Power is money - money is power. Truth has no value.

  • Comment number 26.

    An interesting piece in the Irish Independent this morning. Let us hope it is not just talk talk.


    Developers will have to sell off their 'jets, yachts and Bentleys'

  • Comment number 27.

    @23 Thanks Jericoa, I enjoyed that, though I do not think that the general public are masochists, except by proxy. ;-)

    @24 Barrie - that was a very interesting article. There are two complementary types of cognitive dissonance in science, and society in general. The first is dismissing real evidence because it "ought not" be true, the second is believing something because you want it to be true. Given that none of us has complete information, it is very difficult to strike a path beteen between them.

    Eminent scientists well versed in the accepted norms of scientific method are still prone to unreasonable behaviour. I remember studying a chemical controversy back in the '70s, on the structure of the norbornyl cation. The leading chemical journals printed a number of personal attacks by the principals upon each other.

    @26 good link - hope it's true!

  • Comment number 28.

    The very fact that there was the first banking bailout predicates that there will need to be a second if circumstances require. The entire logic for supporting the banks in the first place is to sustain a semblance of economic confidence.

    What is wrong is that retail banks were allowed to engage in reckless risks, trading in financial products the content of which they totally failed to comprehend.

    So logically there has to be banking reform that separates out the retail banks which are needed by the taxpayer from the so-called investment banks which do the risky stuff. This would mean that the taxpayer backed guarantee would only apply to the retail banks leaving the risk takers to front up their risks themselves. This will also resolve the bonus issue.

    What is apparent from the above chart that leaving this matter for a Commission to report on in about nine months time might not be such a good idea. I would think a more expeditious approach would be preferable.

  • Comment number 29.

    Le Monde is reporting that the Eu is pushing the Uk to stump up the cash for Ireland. The EU see this as an opportunity to get Germany etc. off the hook. This is v interesting as it demonstrates the pr spinning taking place. The EU are worried!

  • Comment number 30.

    the EU is a dead duck...not even lame....and the Euro is the first sympton of it's demise, about twelve months should do it.....

  • Comment number 31.


    Glad you enjoyed it and thanks for the links yesterday.

    Masochism by proxy via the media (property porn, making millions off investment schemes etc etc) is probably a good way of explaining it. The reality is hapless mortgage owners are having the fiscal equivalent of having thier teeth drilled out without any anaesthetic and coming back for more.

    Looking at the clip again Rick Moranis is clearly the usually mild mannered socialist (he is wearing a red jacket), who has come to the end of his tether and is there to take out the dentist by force of arms.

    Maybe I should wright a paper on how the dentist scene from the 1986 movie ( based on the 1960 original shot in 3 days)is really a metaphor for the relationship between finacial institutions, socialism and the media.

    Actually I think i will just watch the clip again and laugh at the wonderful obsurdity of it all.

  • Comment number 32.


    The retail / investment debate is irrelevant unless you attack the the achilles heel of the current system, which is Securitisation!.

    I have studied this for more than a year and the case against it is virtually watertight:

    The five points in short speak:

    1) Lending money has always been problematic (i.e. risky), but recently it has been handed over to the markets to deal with

    2) Markets can't reduce or manage this risk better than banks, in fact they are worse at it

    3) Markets can diguise this risk and make it look like gambles are worth paying off, so everyone joins in the Ponzi scheme

    4) When it goes wrong, just make sure that you aren't holding the risk (instead pass the problem on to Gvt, they created the climate for this and were the ones always banging on about Perpetual Growth anyway, so let's stick it to them)

    5) Given that the Gvt is helping to disguise the REAL problem, us bankers can all make out that everything is going to be OK whilst stuffiing our trousers with loot

    I'll get around to publishing the full document hopefully over the weekend.

  • Comment number 33.

    Addendum to #32

    Excerpts from the conclusion of the aforementioned ICB submission:


    To accept that securitisation (even under promised conditions of increased supervision / sanitisation) is necessary for modern banking is to implicitly condone the continued growth of debt levels of potentially deteriorating quality. Not only are they a risk in themselves to banking stability but it is clear that they pose a more substantial systemic risk to the nation by providing the means for even further debt expansion as well as the obfuscation of risk ownership and exposure levels.

    The current situation is a heady cocktail of perverse incentives, lax supervision and bewildering complexity. Ripe conditions for fraudulent conduct and ambiguous larceny. An important point that Akerlof & Romer (1993) make is that the extent of harm or damage to wider society caused by looting parties may be far in excess of the ill gotten gains of the perpetrators.

    A managed transition back to non-traded loan origination would help to avert compounded risk problems until at such point there was clear evidence that initial moral hazard concerns had truly been overcome. Continuing with the status quo appears akin to leaving ones back door constantly on the latch.

  • Comment number 34.

    Paul, there has been no real explanation as to why, suddenly, the ECB finds itself towards the limit with Ireland and is involving Member States including the UK in to the problem. The eligibility criteria for ECB acquisition of bonds under the Securities Markets Programme makes it mandatory for bonds only to be eligible if they are of high credit quality by reference to ratings from the agencies. On 6/7 October there were a flurry of downgrades and reviews. Moodys was due to review their rating on receipt of the Irish four-year plan next week. Is this a factor in the rush?

  • Comment number 35.


    Thanks for the information.

    I must confess to being old-fashioned but surely the rate of interest charged on a loan should reflect the perceived risk. This methodology has worked well for a very, very long time as it builds the issue of possible default into the lending agreement from the very first day.

    Are you telling me that bankers have changed this very structured behaviour which concentrates the mind for something more casual? I note your brief statement mentions the word `market'. No doubt this word has been used to legitimise such casual attitudes as, heck, if it all goes wrong the taxpayer will pick up the pieces long after the bankers have taken their bonus on the transaction. I mean that's The Market, innit mate!

    I know it is the modern way that all of us crusty old men are somewhat stupid: we thought the same in our time. However, there is a marked difference between doing a job thoroughly and being what used to be called a `flash harry'.

    What you have told me is that the banks are full of the `flash harry' type when they should be jammed packed with crusty old fools who take a studied view of risk and its potential downside.

    In splitting the banks between `retail' and `investment' I expect a return to a studied approach to lending so that a loan can be securitised from the quality of the values, both financial and cultural, implicit to a proper business transaction rather than two spivs passing betting slips in the street.

    I see this as an uncomplicated and very simple process. It cannot be called rocket-science or even horse-and-cart science it is simple commercial usury. Whole books have been written on the subject.

    I do find it very odd that I sit here dealing with auditors from all sorts of organisations who are very keen to check every dot and comma of our processes and products to ensure compliance when the people in the banking system seem to be allowed to do whatever they like, get well rewarded for it and are allowed to ruin everyone in the name of some pantheon known as The Markets!

    My view is that if something doesn't work then change it into something simple that does work: reform the banks, limit the guarantee and stuff The Market!

  • Comment number 36.

    Sasha @ 13

    Re: your Hobsbawm link. We can transcend this Socialism verses Capitalism dichotomy. Sorry if I come across as a preacher but I'm still of the opinion that the ideas of Buddhist Economics put forward by Schumacher are the way to go. A world where capital serves people instead of people remaining slaves to capital.

  • Comment number 37.


    "surely the rate of interest charged on a loan should reflect the perceived risk."

    That's pricely the point! It SHOULD but it hasn't for about the last 10-15 years. Credit quality is inversely proportional to credit quantity. So given that we have witnessed massive debt growths we are in fact deluding ourselves that this was sound investment and won't come crashing down at some point.

    Securitisation creates the appearance of risk taming (i.e. low interest rate) but is in fact risk transfer to an unsuspecting (irrational or ignorant) counterparty (hmmm.. taxpayers??). It is tantamount to state sponsored fraud!

    I'll get the full paper of mine up as soon as possible, but in the meantime here are some excerpts to whet your appetite:

    Recent deregulation of the banking sector has led to the feasibility of trading loans on a secondary market, also known as the "originate and distribute model". Tasks that would normally be the integrated responsibility of banks would become dissected, with one of the most critical aspects, the pricing of risk and the supervision of borrower behaviour, placed within the hands of the market.

    Ultimately, with credit risk assessment becoming separated from credit risk responsibility it takes an extreme stretch of the imagination to believe that this approach would lead to anything other than a decline in the quality of loan evaluation:

    "Lack of screening incentive created by the separation of origination from the ultimate bearer of the default risk has been a contributing factor to the current mortgage crisis." (see slide 11)

    "either banks are originating and selling bad loans based on unobservable private information, similar to the events in the current subprime mortgage crisis, and/or the severance of the bank-borrower relationship allows the borrowers to undertake suboptimal investment and operating decisions, in the absence of the discipline of bank monitoring"


    Some even believe this outcome was "engineered in":

  • Comment number 38.

    Post script to #37

    How many people think that ratings agencies assessment of credit risk / default risk is a reliable indicator of actual risk?

    Thought so. See Reinhart & Rogoff "This time is different" for a damning indictment of Rating Agency risk assessment.

    Given that markets predominatley rely on ratings agencies to help price risk, then we are left with this conclusion:

    Markets never have, and never will be able to correctly price risk!

  • Comment number 39.

    More pressure.

    I hope the UK is making the right soundings and moves so that President Rompuys proposals for the Lisbon Treaty changes are not already a fait accompli by the time they are presented to the Council of Ministers at the December summit. Any proposals that may imply tax rate harmonization should be strongly resisted by the UK and Ireland , each of whom have use of their veto on any proposed treaty changes.

  • Comment number 40.

    Paul Mason writes: "This is the EU's secret of success so far: its
    deliberations are opaque, nobody quite seems responsible for anything,
    and the accountability mechanisms are one stage removed from the

    Opaque indeed.

    Doesn't it make anyone think back to the European Project being a post
    war American Marshall Plan invention? It began with coal and steel (the
    means of production), and by creating the EU they reasoned that they
    would effectively emasculate Germany (and any other independent European
    state like the UK) this would ensure that American capitalism would
    reign supreme. This became even more important once the USA came off the
    Gold Standard in 1971 once its gold reserves dwindled, and since then,
    what have dollars printed by the USA been backed by? What can other
    countries do with their US dollars? They can't buy US assets like
    domestic companies, all they can buy is Treasury Bonds, i.e USA debt.
    This is why the USA is seen by some as the world's big bully, and why
    its swagger is greatest where it successfully opposed and replaced
    authoritarian governments in the past: i.e. Germany, Japan and then,
    even though it effectively won the war in Europe, Russia What a sorry
    tale was told there on BBC Newsnight last night!

    China is the new boy on the block - will this be the USA's undoing or
    will its own Tea Party with the help of cynics like Jon Stewart do

    On the recommendation of Hawkeye Pierce, I watched Michael Hudson's
    account of what's been going on over the last century. Hudson gave a
    talk to the American Monetary Institute in October 2010, which some may
    find helpful:

    I also looked up Karl Kautsky's pamphlet "Ultra-Imperialism" (as that
    seems to be the source of Hudson's main book title "Super Imperialism".
    Kautsky's "Ultra-Imperialism" was written in 1914, just before World War

    Kautsky also wrote something else in the same year (1914) which Hudson
    touches on in his talk and which is also relevant. See pages 6 and 7 of
    chapter 5 of Kautsky other book listed some early 20th century
    statistics for Prussia and Berlin. Those who are dab hands with a
    spreadsheet might like to do a scatterplot graph of the years vs
    numbers. Consider these in relation to the figures below which are also
    now widely available. Bear these figures in mind given the property
    bubble to which Hudson gives a considerable amount of time in his talk.

    The above article must have been very widely read surely? Kautsky is
    said to be second only to Engels when it came to these sorts of
    analyses. Did he sow the seeds of a devilish idea?

    The following are EU projections for 2000-2050. Many currently topical
    (the PIGS) Europeans states seem to be headed for negative population
    growth it would appear This is percentage negative and the absolute size
    of the populations in millions. Remember, the number of homes and size
    of homes is a function of family sizes.

    Portugal = -10% (10m -> 9m)
    Poland = -12.6% (38.6m ->33.8m)
    Greece = -13.1% (10.6m -> 9.2m)
    Spain = -18.6% (40m -> 32.5m)
    Italy= -21.9% (57.6m -> 45m)
    Hungary= -22.7% (10.1m ->7.8m)

    This makes me, (at least) ask: doesn't this mean that house prices
    should be falling in these countries? Why would people ever have been
    encouraged to invest in properties there if demand was projected to fall
    and continue falling. How would owners ever sell except to naive

    The BBC is a public service broadcaster (as is CH4) so why have neither
    commented upon this in recent years? In not doing so, did they not serve
    the interests of property developers and the banks lending to them (e.g.
    Anglo Irish Bank which I understand lent to commercial developers)?

    There have been no end of property programmes on TV over the last
    decade, usually with attractive looking women enticing viewers to buy
    homes in up and coming locations like Hungary, Bulgaria, Poland etc
    (.not to mention Italy, Greece and Spain).

    I point this out because I'd like to know why projected birth rates were
    never mentioned given mortgages are issued as long term loans over 25 or
    30 years. What were the implications of these population changes? How
    was a demand for less housing through less children ever going to lead
    to property asset GROWTH? Surely the figures would have told smart
    property developers that more houses becoming available as the aged died
    would lower values not raise them? Isn't the realisation of this why
    the building stopped and why the prices started falling? I'm pretty sure
    I read about this here a number of years ago, am I right Debtjuggler, or
    anyone else who's been here for a while - Barrie Singleton? I'd
    askTabblenabble02 but he or she seems to have been reduced to a number
    (not even a free person?).

    Finally, a question I'd like to ask Paul:

    If the EU Project IS part of a squid like American Project run from Wall
    Street aided and abetted by Hollywood, California, weren't the property
    programmes (and their controllers) helping to offload liabilities onto a
    very large, but overly trusting public in order to hasten the demise of
    Big Government which might get in their way? If so, what sort of public
    service was that? Where was the regulator? What is one to make of BBC
    and CH4 as public bodies these days? Can they be trusted not to self
    destruct like the UK, taking us all down with them?

  • Comment number 41.


    Thank you Hawkeye.

    You have confirmed what I suspected. All the regulation has been put onto those of us who bring goods to market (of which some rules are justified) but the people who can wreck our lives have ceased even to regulate themselves.

    All the more reason for banking reform.

  • Comment number 42.

    @36 "A world where capital serves people instead of people remaining slaves to capital." I'm all for that! :-) - thank you very much for the link - I did read all of it, though I found that the theology (and the unfortunate references to Burma) detracted from the merits of the argument.

    The New Economics Foundation has been arguing for a long time that well-being is more important than GDP:

    BTW have you heard of "Buy Nothing Day" and Revd Billy of the "Church of Stop Shopping"? (He is a mock televangelist is trying to save us from the "Shopocalypse")

    The following are three-part discussion of the film "What Would Jesus Buy" and the responses to it.

  • Comment number 43.

    How did Eire manage to have a property bubble anyway, it's three times the size of Wales and only 1.5 times the population ?

    (perhaps all the houses they were bulding had really big gardens :)

    Paul said

    'Though there is no run on the Irish banks from savers (and no need for one, since there is an EU-backed guarantee on deposits up to E100,000)'

    which is the accepted wisdom but if you think about it from a rational savers point of view then the guarantee is useless if I can't get to my funds when I need them.

    How soon would funds be released in the event that the guarantee is invoked and what measures are in place to stave off my own impending liquidity crisis.

    The only reason the savers haven't run yet is that there is nowhere else less risky to put it.

    Although talking of runs, it seems that Eric Cantona (ohh ahh) is calling for a 'peaceful' protest against the banks on Dec 7th that might trigger a run in the days leading up to it. this site has an interesting take on the issue.

    Some very good links on the last few blogs and Hawkeye your #35 on the previous blog is excellent.

  • Comment number 44.

    You said that "there is no run on the Irish banks from savers", but today's Guardian ( shows this to be untrue - there have been "€13bn of outflows this year" at Allied Irish Bank.

    We could soon see queues outside the Allied Irish and other Irish banks like with Northern Rock. Even though all deposits are guaranteed by the Irish government, they clearly don't have the money. Even if the EU or IMF coughs up the funding, you may have to wait a while (bang goes your Christmas!)

    The rational thing for savers in Irish banks is to withdraw your money as soon as possible. The proposed UK £7 billion loan would be throwing money down a black hole. The bankruptcy of Irish banks and the Irish Republic itself is clearly on the cards.

    You, Paul Mason, in a video blog, predicted a "second banking crisis" when governments go bankrupt. Governments bailed out banks in the first banking crisis and mainly got the money from other banks. Perhaps the Irish economy is not big enough to cause a massive crisis, but the implications when other PIIGS countries (Portugal, Italy, Greece and Spain) in the eurozone, or the UK for that matter, go the same way would be huge.

    In my opinion, the euro will be dead sooner or later. The Irish Congress of Trade Unions should launch an indefinite general strike and run society itself, with a "people's pound" as an alternative to the euro. Onwards to socialism!

  • Comment number 45.

  • Comment number 46.

    Sasha @ 42

    Thanks for taking the time to read the link. It's not the most exciting of subjects I admit, however there must be another way of running our lives that is for the benefit of all instead of a few. It is a shame that events in Burma did not turn out the way Schumacher envisioned, but the main thrust of his argument is still valid.

    The New Economics Foundation link you gave was interesting. It seems that Cameron is copying Blair's idea of a 'happiness index' - which is all fine words but low on action. The NEF article also gave an interesting link to a NYT blog ( which gives a valuable outsiders view.

    I will be participating in Buy Nothing Day next Sunday, thanks for the reminder. Perhaps I should buy a copy of Adbusters on BND! I know Jesus would!

    That Rev Billy is a good man. His Church reminds me of the Christian Socialism that inspired me in my youth (I haven't changed much except I'm now an atheist and a bit more of an anarchist). You have to respect a Reverend for being banned from every Starbucks for performing exorcisms on their cash registrars! Hallelujah!

  • Comment number 47.

    Paul, there is an implicit threat of system-wide collapse pushing the inexperienced UK chancellor toward making loans and/or giving guarantees in support of the financial stability of the Eurosystem.Alistair Darling steered away from this course some time ago. The Ireland event could be the opener to other bailouts or underwritings by the UK taxpayer of the ECB, its support operations and the wider Eurosystem. I am writing to my MP asking him what debate is to be held prior to a UK decision and what reciprocal arrangements, if any, are being negotiated, in return, for Eurosystem support of the Bank of England special liquidity measures and the schemes for our institutions ( indemnified by UK Taxpayers) which have undoubtedly benefitted a number of large and small Eurosystem institutions and sovereigns.Next year is an important year for our banks, as you point out. I hope you can ask similar questions of your own.

  • Comment number 48.

    So the Irish have been bailed out.

    I am not even sure the bond markets will even pause for breath before attention is focussed elsewhere this time.


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