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How much capital do Ireland's banks really need?

Robert Peston | 09:23 UK time, Wednesday, 24 November 2010

There's a funding crisis in the eurozone, inflation in China and anaemic growth in the US.

That's a pretty lethal combination when it comes to investors' appetite for risk.

Or to put it another way, there are reasons to believe that a global recovery in the price of shares and riskier assets may have come to an end - and it is far from easy to predict when it will resume.

As for the minuscule but potent nexus of this turmoil, the Irish financial crisis, the news overnight isn't good.

The ratings agency S&P has downgraded Irish sovereign debt by a couple of notches - which is yet another blow to the price of Irish government debt and the ability of the state to fund itself.

There will be many who will bemoan the continued influence of ratings agencies such as S&P, the fact that their ratings are "hard-wired" into the system that determines whether governments and vital institutions can raise money: the G20 leaders have pledged to reduce the power of the agencies, but have so far actually done precisely zip (a big hello to that galloping horse and the wide open barn door).

Entrance of the Bank of Ireland's head office

 

Against this background of risk aversion and the painful trial that lies ahead for the Irish state in trying to regain credit-worthiness, what kind of ratio of capital to assets would actually persuade commercial banks and investors to lend to Irish banks - and would stand a chance of breaking the vicious connection between the funding crisis of the banks and the funding crisis of Irish government?

The IMF, European Central Bank and European Commission - who are in Dublin divvying up €35bn of rescue funds for Ireland's banks and €50bn to fill the state's direct funding gap - are signalling that a ratio of 12% might do it:so that would require Ireland's big banks to hold equity capital equivalent to 12% of their loans and investments, as protection against future losses.

The current capital ratios of Bank of Ireland and Allied Irish Banks are a good deal less than 12%, so they would need to raise billions of euros of additional capital. AIB could only get this from the IMF/EU rescue fund, so it would become - at best - a whisker away from 100% nationalised.

As for Bank of Ireland, it would be largely nationalised, unless it can somehow persuade its long suffering investors to stump up a colossal amount of risk capital (which is even less likely than my team, Arsenal, breaking its long run of trophy-less seasons - yes, I'm in pain).

Even so, it's not obvious that a 12% ratio of capital to assets will reassure lenders enough such that there's any chance that they'll start lending to Irish banks again, or stop withdrawing their credit, on any useful timetable.

And the reason is Swiss. What I mean by that is that the Swiss authorities have recently ruled that the two biggest banks in Switzerland must hold equity plus bonds that automatically convert into loss-absorbing equity when needed that would be equivalent to 19% of assets.

Now there are similarities and differences between the Swiss banks and the Irish banks. The important similarity is that the domestic market shares of UBS and Credit Suisse, on the one hand, and Bank of Ireland and AIB, on the other, are pretty similar. Or to put it another way, UBS and Credit Suisse are huge in Switzerland, whereas Bank of Ireland and AIB are similarly vital to the functioning of the Irish economy: the argument of the Swiss, which many would find compelling, is that banks deemed more important to the functioning of an economy should be forced to hold relatively more capital than less important banks, because those systemically vital banks can't be allowed to fail.

Then there are important differences: Bank of Ireland and AIB have concentrations of risk, in the fragile property and housing markets, well in excess of UBS and Credit Suisse; Switzerland has one of the strongest economies in the world, and Ireland (ahem) doesn't; the credit of the Swiss government isn't in doubt (and you know what investors currently think about the Irish government's ability to repay all its debts).

So if 19% is the right ratio of capital to assets for UBS and Credit Suisse, it is possible to argue that 25% or more would be appropriate for Bank of Ireland and AIB.

Is that in fact where the IMF, ECB and European Commission will end up, when they finish their review of Ireland's financial requirements?

Well, it's not impossible. There are those at the IMF and ECB who will see the logic. But it would be very tricky for European governments to see Ireland's banks capitalised to that extent - because it would serve to highlight the number of other banks in vulnerable eurozone economies that have relatively little capital.

In other words, putting the ideal amount of capital into Ireland's big banks would raise the potential costs of any future rescues of eurozone economies and banking systems that may be needed.

On the other hand, some would argue, if the Irish economy and its banks are going to be rescued, better to do it properly, in a completely watertight way, rather then leave nagging doubts that the repair is a bit of a botch.

Update, 15:30: At the press conference announcing Ireland's National Recovery Plan, the finance minister Brian Lenihan gave a little bit of extra detail on how 35bn euros of IMF and EU money will be deployed to help Ireland's banks.

As we know, a chunk of this will be invested in Ireland's banks, to augment their capital resources, their shock absorbers against losses.

But Mr Lenihan said there would be two other dimensions to the rescue.

Ireland's toxic bin for the banks' lossmaking loans, the National Asset Management Agency, will be expanded, so that the balance sheets of Allied Irish Bank and Bank of Ireland can be shrunk and sanitized.

Also, Mr Lenihan acknowledged that Ireland's scheme for guaranteeing the borrowings of the banks, the Eligible Liabilities Guarantee Scheme, isn't providing the reassurance to lenders that it might, so it will have to be strengthened - presumably by putting the resources of the IMF and the EU behind the scheme.

PS As if the Irish haven't sacrificed enough, the Irish government has announced that it will create a new four-year "Solidarity Bond" so that the Irish people can lend to their government, to help fill that yawning gap between public spending and dwindling tax revenues.

What the government doesn't say is whether the terms and interest rate on this bond will be better or worse than the terms that'll be demanded by the IMF and EU on the credit they're providing.

Also there will be legislation to allow Ireland's sovereign wealth fund, the National Pensions Reserve Fund, which has just under 25bn euros of resources - a tidy sum - to "support the Exchequer's funding programme to the extent required".

Or to put it another way, if Ireland can't borrow from commercial investors, it will be able to borrow from the state's captive investment fund, so that Ireland's pensioners of tomorrow can bail out the public-sector employees of today.

Update 1705: Bond markets have given a massive thumbs down to the Irish National Recovery Plan, which rather implies that investors don’t think it’s deliverable in Ireland’s traumatic political climate.

The yield on the Irish 10-year bond has risen to 8.89% – yikes, back to record levels.

As for strike-riven Portugal, whose banks (like Ireland’s) are excessively dependent on central bank support (to the tune of more than 8% of their liabilities, on my estimates), its 10-year government bonds are yielding 7%.

Meanwhile the yield on the Spanish 10-year has crept over 5%, for the first time since 2002.

When benchmark bond yields rise in this way, there’s a knock-on to the funding costs of banks: it becomes more expensive for banks to borrow.

So to return to my boring refrain of late, this little local Irish difficulty still has the potential to wreak havoc across the eurozone and beyond.

Now normally in circumstances like these, when investors become anxious about risks, there’s a flight into supposedly uber-safe German bonds. That hasn’t happened today: the yield on the “bund” (traders’ vernacular for the German’s 10-year) has risen a bit, from 2.55% to 2.71%.

What should therefore perhaps worry the German government is that anxiety about the finances of Ireland and Portugal is infecting even the perceived credit worthiness of Germany (well, on the margin anyway).

Comments

Page 1 of 2

  • Comment number 1.

    A nationalised national bank! Well it will help with the distribution of the soon to be printed Irish Punt. It is an option you know.

  • Comment number 2.

    The Irish should just sit tight and not be the first to blink. This bailout will become a gift if they just sit tight. Why should they agree to the misery of their own people to stop other countries incurring their own misery. It is apparent that the rest of the eurozone are desperate to bail them out to save their own banking systems. I would have to ask what would happen if the Irish could not agree a new austerity budget for their people. They would just be bailed out anyway and whether the IMF or the ECB or whoever cried foul what could they do about it anyway. If I was in charge of Ireland I would be showing them all the door until they came back begging to bail me out with a package sugarcoated in gifts and promises.

  • Comment number 3.

    If anything good comes out of all this, surely it has to be the reform of the banking system.

    In the short term this may well have effects on the housing markets and our personal assets may fall in value [tough but necessary] but our economies have been built on a house of cards for the last couple of decades, a return to reality would not be a bad thing.

    ...and who knows may Arsenal can win the Title again when it happens

  • Comment number 4.

    The Euro is on a downward slide and the Irish 10 year is skyward bound! Just to add fuel to my earlier comment

  • Comment number 5.

    A quick question for my more knowledgeable co-commenters:

    How is Argentina's credit rating looking these days? They went completely kaput in the early noughtys from what I recall.

  • Comment number 6.

    RP:

    "Against this background of risk aversion and the painful trial that lies ahead for the Irish state in trying to regain credit-worthiness, what kind of ratio of capital to assets would actually persuade commercial banks and investors to lend to Irish banks - and would stand a chance of breaking the vicious connection between the funding crisis of the banks and the funding crisis of Irish government?"

    Well, if you think about it - no kind of ratio of capital to assets. Except 100%.

    And there's no capital ratio, either, that would "break the ...connection between the funding crisis of the banks and the funding crisis" of ANY government (not just the Irish) - less than 100%. All governments are equally bound in a symbiotic relationship with their banks. All banks depend in the last resort upon their central bank (which is just government in a different guise) to prop them up with public funds. The fractional reserve banking system cannot work without the existence of that "lender of last resort" (behind which stands the state treasury).

    That's what this mess we're living through is all about. Our financial and banking system is terminally ill because it can never stop itself from continually generating more and more violent swings from debt-fuelled boom to de-leveraging bust. Why? - Because the whole rickety edifice is built on sand. It requires the issuing of debt - on an ever-increasing scale - to enable it just to keep going: no debt, no money.

    Here's a proposal from Toby Baxendale, of the Cobden Centre, for dealing with the problem once and for all (the full article is on http://www.cobdencentre.org/?s=Kotlikoff
    sub-heading "The Emperor’s New Clothes: How to Pay off the National Debt & Give a 28.5% Tax Cut"

    1. Print cash and replace all the demand-deposits/IOUs that exist in the system with that cash. This means the government printing approx £850 billion in cash and injecting it directly into the vaults of the banks and into the accounts of individuals. Thus, if you deposited £100 once thinking it was “yours,” it now really exists in cash, with the bank acting as custodian of your money.
    2. Mandate all banks to hold your cash (100% reserved) on demand at all times.
    3. Wipe from the bank ledgers all the demand-deposits/IOUs as banks would not owe you money anymore. This means the “thin air” money disappears, to be replaced exactly with cash money. Note: this is not inflationary, as the cash replaces the demand-deposit which acted as money. As we have established, it is only thin-air that the banking system has created to facilitate the multiplicity of lending of the same bit of money, so its total replacement with cash would mean the money supply stays exactly the same.
    4. Require all banks to lend real savings that people knowingly place with banks to lend to businesses to get a return of interest and capital back when the business repays that loan. This is nice, simple and safe utility banking. This is what Mervyn King advocates.
    5. As you are not a creditor of the bank anymore, the banking system will only have its assets and its capital, i.e. no liabilities. This means that there never again could be a bank run.
    6. As for the banks, not having you the depositor as a liability anymore, they will suddenly be £850 billion better off, with no current liabilities and only assets (loans to business etc), post reform. The government can now put those assets into Mutuals, which would then immediately pay off the national debt, and leave the banks in exactly the same position net worth wise as they were prior to the reform, owned by their existing shareholders. As the national debt is still just under the £850 billion, which would be available as surplus assets of the banks, this could still be achieved.
    7. No national debt means no interest costs (currently £40 billion p.a) associated with paying for our borrowing. Therefore, give an immediate 28.5% income-tax cut. Total income-tax raised is £142 billion.

    Doesn't help Ireland, unfortunately, because she surrendered her monetary sovereignty when she signed the Treaty of Maastricht.

  • Comment number 7.

    Whatever capital ratio is used it won't take long to burn through it as wages are slashed and the property market continues to plummet.

    Which company will want to invest in Ireland now?!

    You can't cut your way out of recession yet the UK and the whole of Europe is testing the theory to destruction!

    The freewheeling freemarket theology of the last 30 years has failed the people big time.

    Those responsible have taken their bonuses and will no doubt flee the country or to their gated communities.

    The government of the UK and Ireland are still in the pocket of the bankers and big business - Mr Osborne has decided banks won't need to disclose their bonuses as recommended in David Walkers report (in opposition he said the rules didn't go far enough), Corporation Tax is being cut by getting rid of capital allowances for manufacturers. Ireland continues to allow companies to be untaxed on Foreign Profits - Google only paid 2.4% Corp Tax on its tax outside of the US due to this arrangement! Corporation tax in Ireland cannot go up yet the minimum wage and income tax does?!

    Depressing!

    We have chased money and profit before thinking of people - forgetting that its the people who produce the profit in the first!

  • Comment number 8.

    It must be time for crash, burn, rebuild.

    Are we (Europeans) waiting for the US to start the storm? Will this help start it: http://business.asiaone.com/Business/News/Story/A1Story20101124-248833.html

  • Comment number 9.

    At last. After all this time.

    The authorities are beginning to get their heads around the scale of the zombie banks problem.

    Earlier this week I viewed 12% as a pretty hefty amount for the Irish banks to hold in reserve. But now with mention of 19% in Switzerland and a totally mind blowing 25% in Ireland well, even the pessimists like me are reassured by this sort of number.

    Lets face it. One heck of a lot of bonds,and assets related to bonds, have gone pop. The total worldwide amount of lost bonds (=lost money) is well into the Trillions of Dollars (or equivalent). Pretending otherwise fools nobody worth fooling.

    If the western banks are going to be repaired then they should be sorted out properly - for the long run. 25% for the shaky banks....perhaps shrinking down to 10% for the most solidly run institutions sound like the right ball park.

    Probably the western economic system will slow to a snails pace for a number of years if the banks are forced to buffer-up such vast reserves. But and this is the point. Unless the system is fixed totally, properly and transparently there are much greater downside risks to the economy than grinding stagflation.

    BTW the inevitable deflation of the Irish economy is going to make Eire a low cost area for businesses to base themselves in. Northern Irish businesses (and householders) must surely be preparing for mass migration southwards. Thus even Northern Ireland will be deflating.

    Or to put it another way an important part of Britain is on the cusp of a huge deflation. OMG.......


  • Comment number 10.

    Buy silver! It's not too pricey yet, actually has important technical applications beyond cheap jewelery, is still just about under the radar of the truly panic-stricken.

    Alternatively buy shares in water or land...they ain't making any more of it!

  • Comment number 11.

    'Endearing' black Irish humour seems to be the order of the day throughout the Irish press about this whole catastrophe. While tales of Bob Geldof raising funds in Ethiopia for Ireland's aid does raise an ironic smile, what it also raises is the concern that the scale of this debacle hasn't fully hit home. Smirking aside Ireland has clearly demonstrated that is incapable of maintaining a political regime that will govern in the best interests of the country and those in need - there is an historical pattern of this with each decade since the republic was formed, identifiable by economic calamity due to corrupt (Haughey) or misguided (DeValera) government. The real smugly amusing point is the belief that Ireland has lost its national sovereignty as part of this bail out. In my opinion any sense of self governance and sovereignty was lost in the 90s when the multi nationals moved in to exploit the tax breaks and now have the country to ransom as they hold the key to continuing any kind of ongoing employment provision while the current regime remains.

  • Comment number 12.

    Good summary, but you fall into the common trap of imagining that more capital will reduce bank failures; this is like saying that bigger and better air bags will reduce the number of car crashes.

    Banks get into trouble because of poor lending practices. In the case of Irish banks this was lending on the basis that property prices could go up forever (trees could grow to the sky) and always be fully realisable. US banks just lent to people who couldn't afford the repayments. Neither would have been prevented by more capital, indeed this could have exacerbated the problem by encouraging a false sense of security.

    Basle III, with its still more complex methodologies of calculating bank's capital requirements is not the answer either. I am sure that in the future business school students will look back on this obsession with capital and wonder why the real problem - irresponsible lending - was not addressed directly.

  • Comment number 13.

    As the Irish economy contracted by between13% and 14%, this loan just resets the game by one year but with extra debt! Go figure. Its pure madness.

  • Comment number 14.

    It all seems to be crumbling and you have to think that the Swiss are the smart ones and all of the countries that took mad gambles on rising assets deserve to have their banks collapse.
    I can definitely see that the way forward is to have those structurally important banks hold 25% of capital but that may be post-Euro as it seems to have gone too far.
    I can see these issues running and running, it makes for interesting times.

  • Comment number 15.

    > Switzerland has one of the strongest economies in the world,

    What? You can't mean the finanical sector, because it was so weak it had to be bailed out by the taxpayers in 2008.

    So has there been a boom in cuckoo clocks and inclined railways?

  • Comment number 16.

    Just to add more gloom.

    Am i right in thinking that these banks were actually declared ok under the EU stress tests a few months ago ???? Perhaps the French dec 7th protest is not such a bad thing after all if it forces the bankers and politicians to actually change , and not just pile more agony on future generations.

  • Comment number 17.

    > The current capital ratios of Bank of Ireland and Allied Irish Banks are
    > a good deal less than 12%, so they would need to raise billions
    > of euros of additional capital.

    Yes. Little greedy bankers have loaned out too much again, eh? They are still at it, then.

    I thought we were going to hobble these greedy pigs, and put them on starvation diets. What’s the big delay sorting out this crowd of trouble-makers? They have to lead, follow or get out of the way – one way or the other, we will neuter these banking toadies.

  • Comment number 18.

    @6. torpare:

    This is essentially the solution (with some minor changes) advocated in the documentary "The Money Masters". What are the reasons it cannot be implemented, or why has it not been implemented thus far? It can't be beyond the best economists in the country to make it work - which leaves me to believe that without a root-and-branch eradication of corruption within the Establishment there is little point in pontificating about the necessary changes required. It seems there is a banking equivalent of the Stockholm Syndrome the governments and central banks and the bankers themselves are locked into.

  • Comment number 19.

    8. At 11:56am on 24 Nov 2010, Kit Green wrote:
    "It must be time for crash, burn, rebuild."


    But surely.....money printing must come first.

    "Are we (Europeans) waiting for the US to start the storm? Will this help start it: http://business.asiaone.com/Business/News/Story/A1Story20101124-248833.html"

    Things are moving slowly then. But......the US is still the largest market for China's goods.


    15. At 12:20pm on 24 Nov 2010, Jacques Cartier wrote:

    "So has there been a boom in cuckoo clocks and inclined railways?"

    Popular in China perhaps?

  • Comment number 20.

    A quick review:
    A massive property bubble brought on by lax lending standards and overly ambitious developers, it all eventually came crashing down. Banks that were left holding the debts of property developers suddenly had massive toxic assets on their balance sheets. The Irish government knowing that banks would default created the 'National Asset Management Agency' to buy up many of the bad loans. Of all the Irish banks receiving government aid, Anglo Irish Bank was in the worst shape. The bank was been split in two by the Irish government, in an effort to create a bad and good bank. Also, while Ireland technically exited recession in in June, its austerity budget may end in more negative GDP growth, according to ECRI. The latest budget sees cuts of €6 billion in 2011, with €15 billion in cuts planned by 2014.
    Ireland is trying to grow its export sector as a solution to declining spending on property development (all but dead) and government spending (being trimmed by austerity).
    A quick prediction:
    As the government has been cutting spending, Ireland has been increasing its bailout of Anglo Irish Bank. One economist, Morgan Kelly, sees the banking sector bailout, led by Anglo Irish, rising another €20 billion to €70 billion Euros. That means the new cuts the Irish government has put in place, worth €15 billion over four years, won't even cover the growth of the banking sector bailout!!! Ireland can choose more austerity and cut the government's budget further. This will lead to declining tax revenues, due to more government employees being unemployed.
    Ireland could put the burden of the banking sector bailout back on bondholders, and cut its losses with the sector. Ireland is preparing to cut out the tier two bondholders in Anglo Irish Bank, paying them out at 20% the bond's worth. But this may only be the beginning, as the costs swell for the Irish state.
    As I have posted here earlier (Post No.1)Ireland could leave the euro. This would have obvious efficiency damages with the broader European economy, but I have no data for estimates of those costs.

    So there you have the Irish story in a nutshell.

  • Comment number 21.

    I was looking at a plot of land purchased by an Irish company in April 2007 at £7.75M for development into a large apartment complex, the lender was Ulster Bank Ltd.

    Prior to the acquisition the land was in general industrial use, as this suited its location. In any event the land was acquired, the old industrial buildings demolished. But that’s as far as it got, because after the Northern Rock went down in September 2007 everything ground to a halt.

    So the question is:
    What’s its best us now.

    Unfortunately the demand for apartments has collapsed in the Northwest, and it now costs more to build them than you can sell them for, so it’s likely back to light industrial use or car parking.

    Which in turn means the land value now is likely a third of the purchase price, or less.

    I wonder if the ‘experts’ have truly marked to market all that development land and part completed developments currently held as security in the UK against failed promises to pay.

  • Comment number 22.

    'There are those at the IMF and ECB who will see the logic'

    Excuse me, Robert! This is serious stuff, so don't be polite.

    The Ivy League kind of logic, is that what you mean? Or the logic the rest of us on Planet Earth are used to? Or the Donald Rumsfeld kind of logic where there are known knowns, known unknowns, ........

    Don't suppose Jared Diamond's texts such as 'Collapse' get onto the Ivy League reading lists either.......

  • Comment number 23.

    Well there is no question the incompetent trinity that is EU/IMF/ECB has made yet another hash of things with Ireland, they seem completely unable to give straightforward, thoughout answers to anything. Considering the gravity of the situation one would think they would get it together more. It is yet another botched, sticky plaster solution and markets are not convinced by the effort. There may some temporary 'containment' but as fixed income expert here notes http://www.mindfulmoney.co.uk/2438/economic-impact/all-eyes-on-ireland-as-fallout-fears-grow.html next year could crunch time for many countries both in the eurozone and outside as they come up for large refinancing .

  • Comment number 24.

    Look on the bright side Robert Arsenal are the Germany of the foootball world. Liverpool would be Ireland or Greece annd Man U Spain or maybe Italy.

  • Comment number 25.

    Isn't it time to consider a sort of nuclear option; if a country's banks get into trouble, they are nationalised and the ECB issues the euros to cover the debt promises made to date only. Bank shareholders loose all their investment.

    Bank activities are also curtailed so that the higher risk [gambling?] aspects stop. Those employed in these are requested to pack and leave. Maybe the banks would then become more trusted by their clients who need the traditional services.

    Or am I being naive?

  • Comment number 26.

    6. At 11:55am on 24 Nov 2010, torpare wrote:
    RP:

    "Against this background of risk aversion and the painful trial that lies ahead for the Irish state in trying to regain credit-worthiness, what kind of ratio of capital to assets would actually persuade commercial banks and investors to lend to Irish banks - and would stand a chance of breaking the vicious connection between the funding crisis of the banks and the funding crisis of Irish government?"

    Well, if you think about it - no kind of ratio of capital to assets. Except 100%.

    And there's no capital ratio, either, that would "break the ...connection between the funding crisis of the banks and the funding crisis" of ANY government (not just the Irish) - less than 100%. All governments are equally bound in a symbiotic relationship with their banks. All banks depend in the last resort upon their central bank (which is just government in a different guise) to prop them up with public funds. The fractional reserve banking system cannot work without the existence of that "lender of last resort" (behind which stands the state treasury).

    That's what this mess we're living through is all about. Our financial and banking system is terminally ill because it can never stop itself from continually generating more and more violent swings from debt-fuelled boom to de-leveraging bust. Why? - Because the whole rickety edifice is built on sand. It requires the issuing of debt - on an ever-increasing scale - to enable it just to keep going: no debt, no money.

    Here's a proposal from Toby Baxendale, of the Cobden Centre, for dealing with the problem once and for all (the full article is on http://www.cobdencentre.org/?s=Kotlikoff
    sub-heading "The Emperor’s New Clothes: How to Pay off the National Debt & Give a 28.5% Tax Cut"

    1. Print cash and replace all the demand-deposits/IOUs that exist in the system with that cash. This means the government printing approx £850 billion in cash and injecting it directly into the vaults of the banks and into the accounts of individuals. Thus, if you deposited £100 once thinking it was “yours,” it now really exists in cash, with the bank acting as custodian of your money.
    2. Mandate all banks to hold your cash (100% reserved) on demand at all times.
    3. Wipe from the bank ledgers all the demand-deposits/IOUs as banks would not owe you money anymore. This means the “thin air” money disappears, to be replaced exactly with cash money. Note: this is not inflationary, as the cash replaces the demand-deposit which acted as money. As we have established, it is only thin-air that the banking system has created to facilitate the multiplicity of lending of the same bit of money, so its total replacement with cash would mean the money supply stays exactly the same.
    4. Require all banks to lend real savings that people knowingly place with banks to lend to businesses to get a return of interest and capital back when the business repays that loan. This is nice, simple and safe utility banking. This is what Mervyn King advocates.
    5. As you are not a creditor of the bank anymore, the banking system will only have its assets and its capital, i.e. no liabilities. This means that there never again could be a bank run.
    6. As for the banks, not having you the depositor as a liability anymore, they will suddenly be £850 billion better off, with no current liabilities and only assets (loans to business etc), post reform. The government can now put those assets into Mutuals, which would then immediately pay off the national debt, and leave the banks in exactly the same position net worth wise as they were prior to the reform, owned by their existing shareholders. As the national debt is still just under the £850 billion, which would be available as surplus assets of the banks, this could still be achieved.
    7. No national debt means no interest costs (currently £40 billion p.a) associated with paying for our borrowing. Therefore, give an immediate 28.5% income-tax cut. Total income-tax raised is £142 billion.

    Doesn't help Ireland, unfortunately, because she surrendered her monetary sovereignty when she signed the Treaty of Maastricht.

    .........
    What you describe is monetary reform. The only viable long term solution, that removes our unsustainable debt based monetary system. If idea has been around for 100s of years and yet the banks have persuaded politicians to stick with FRB ever since. Its time for change and for the creation of (interest free) money supply to be passed back to its rightful place, the state.

  • Comment number 27.

    5. At 11:52am on 24 Nov 2010, Dale_Lemma wrote:

    The Latinos are all doing well.

    The threw out the IMF. They threw out neoliberalism. It looks like there is a growing movement of people throwing the bosses out of the factories, taking them over and suddenly, the businesses are prospering rather than digging into debt (though I doubt the official UK ConDem government-led Big Society would approve!).

    Things are looking up in South America for an awful lot of people.

  • Comment number 28.

    Robert,

    Excellent article!

    One point I would like to highlight: "the G20 leaders have pledged to reduce the power of the agencies, but have so far actually done precisely zip"

    Isn't this more of a two headed problem? Political as well as economic?

    The last G20 did not bode well for our nation. David Cameron tried very hard to tell us either he and 19 other nations simply talked hot air at each other, or that 19 other nations merely ignored him!

    The rumours of lightweight are not helping.

    Which also brings be back to the point.

    Swiss society is dominated by economic conservatism. The heterodoxy of the past 10 years in this country has managed to slip Switzerland by - and they're hardly poorer for it.

    So, if the first problem is political (modifying influence of ratings agencies by consensus), then surely the more important - second problem - is already doomed? ie: changing/improving our current flavour of capitalism for something more robust - even Smithonian? Maintaining the current status quo will only render our nation poorer in the short term, as well as long term, when these events come to haunt us once again.

    Why am I left with the uneasy impression that Cameron spends more time thinking about his hairstyle than leading UK plc (and potentially world) through these troubled waters?

  • Comment number 29.

    8. At 11:56am on 24 Nov 2010, Kit Green wrote:
    It must be time for crash, burn, rebuild.

    Are we (Europeans) waiting for the US to start the storm? Will this help start it: http://business.asiaone.com/Business/News/Story/A1Story20101124-248833.html
    ..........
    This is the beginning of the end of the dollar. Watch its value plummet, and gold rocket.

  • Comment number 30.

    10. At 12:05pm on 24 Nov 2010, Anglophone wrote:


    Buy silver and perform a global favour!

    http://www.youtube.com/watch?v=Q9Gz2y62a_Q

    Now, where can I buy some silver coins - anyone know 'cos it just seems to be two on-line sites?

    I want my coins in my hand!

  • Comment number 31.

    A feature of our usurious financial system is that debts periodically get out of control. There are two solutions, the first is to sell yourself and your children into slavery to pay off the loans in perpetuity. The second, generally preferred in civilised society, is bankruptcy and starting again, recognising that those who make loans have some responsibility to check on the creditworthiness of the borrowers.

    At the moment, the Irish Government is still pursuing the first option. But few believe that the debt can ever be repaid, so taking on more loans will not help.

    As Krugman (link below) says, what the Irish need is debt relief rather than a bailout. Then, with a new government perhaps, the local and international fraudsters who put them where they are can be pursued through the courts and by taxation.

    http://krugman.blogs.nytimes.com/2010/11/23/hamping-europes-periphery/

    In particular, I commend the following point: "....higher rates make it even harder to meet Ireland’s commitments, which leads to still higher rates, and so on. The European bailout basically short-circuits this vicious circle... ...But the bailout will only work if the vicious circle is at the heart of the story — as opposed to being a symptom of the fundamental unsustainability of the austerity-and-full-repayment strategy...."

  • Comment number 32.

    18. At 12:32pm on 24 Nov 2010, Stuart Wilson wrote:
    @6. torpare:

    This is essentially the solution (with some minor changes) advocated in the documentary "The Money Masters". What are the reasons it cannot be implemented, or why has it not been implemented thus far? It can't be beyond the best economists in the country to make it work - which leaves me to believe that without a root-and-branch eradication of corruption within the Establishment there is little point in pontificating about the necessary changes required. It seems there is a banking equivalent of the Stockholm Syndrome the governments and central banks and the bankers themselves are locked into
    ................
    The only obstacle is a lack of political will. The politicians continue pander to their chums in the banks. This solution is as old as the hills;
    “Any intelligent novice, first introduced to the workings of the money system, must find the pyramiding of money on the fractional-reserve base incredible. A few of the nation’s foremost economists, led by Henry C Simons and Irvine Fisher, were of the same mind at the depth of the depression when they urgently advocated abolishing the system. The idea was simply to require 100 % reserves for all checking account deposits, so that all true money was government money. Instituting that system would have been little more than a bookkeeping entry, but after it was done all the evils of the fractional-reserve system would disappear. The idea was called the only fundamental creative idea to come out of the depression. But the idea passed into limbo. The best economic minds were in favour of it, but the commercial bankers could be counted on to resist to the bitter end the loss of their money machine, and the people and the legislators probably did not understand what it was all about. Little was heard of the idea in later decades except occasional, and rather inaudible, reminders by a few economists. This complacency would no doubt persist until still another series of disasters came to pass with the substantial aid and comfort of the fractional-reserve system.” P.150 (The Dying of Money Jens O Parsson 1974)

  • Comment number 33.

    BBC article about Euro Dominoes ready to fall is interesting reading.

    Greece is not sticking to its commitments and Austria has already pulled out of continuing aid until this is resolved.

    Ireland should not accept the bail out - go bust Ireland, go bust - default.

    I think everyone must be more desperate for Ireland not to default than Ireland is.

    Could we possibly have some analysis of a what if? nature?

    Take the two main scenarios - default or rescue package - roll forward 10 years and compare and contrast Ireland in 10 years time under either scenario.

  • Comment number 34.

    "How much capital do Ireland's banks really need? "

    Only a small fraction of that needed by the UK banks!

    The assessment of ALL banks needs to devalue their secured debt portfolio by 50% (at least!) So far as I can ascertain none of the stress tests so far done assume this. What is more any nation that does not see this 50% (or more) reduction in property values will be unable to compete as its property prices will inevitably cripple the whole economy.

    As much as I have a low opinion of the man, even Hector Sants now sees the virtue of lower property prices and expresses his concern about the lethargy of the Bank of England, FSA and the Treasury 'fessing up' (- see the Guardian).

    It is still amazing to me that even though the whole regulatory infrastructure now publicly admits is made a huge mistake in ignoring the voices of concern about the ignoring the inflation of property (such as mine and others who were saying this fro the past decade) - these guys are still running the show - WHY? How much longer will we have to put up with these terrible failures whose lack of economic judgement they now admit led to the bubble and crash - they MUST go!

    I could give figures for the U,K but in case I scare the horses I will not.

  • Comment number 35.

    '25. At 12:49pm on 24 Nov 2010, SleepyDormouse wrote:

    Isn't it time to consider a sort of nuclear option'

    That wasn't a very comforting thing to read today!

    Them bombs pointing at Iran and a bug US nuclear boat heading to North Korea today and a few folk writing newspaper columns in well-known US daily newspapers banging the drum for wars to sort out the global economy over the past year or so!


  • Comment number 36.

    15. At 12:20pm on 24 Nov 2010, Jacques Cartier wrote:

    > So has there been a boom in cuckoo clocks and inclined railways?

    Cheese, watches and milka. Oh and Leica Cameras and some pharmaceutical companies. But without overpaid bankers, who is buying the watches and Cameras?? (I am buying the chocolate.)

  • Comment number 37.

    Does anyone have any safety levels on morgtage? (for example 70k?)

    I ask this for if folks start to default, the entire lot will come crashing down.

  • Comment number 38.

    Bright stuff from Cobden. But, who do we pay the national debt to?

  • Comment number 39.

    You pose an interesting question in your title Robert. If you go on to compare Ireland with Switzerland then I can only come to the conclusion that Irish banks need more capital that Swiss ones at this time because of the state of the Irish property market.

    So somewhere in excess of nineteen percent of capital will be required if you use Swiss standards. Where will all this money come from?

  • Comment number 40.

    Let me see if I have this right.
    Irish banks borrowed money from foreign banks.
    They cannot repay these loans.
    They now borrow more money from foreign banks to repay the loans.
    I have a small brain, but there seems to be something wrong here.

    More bonuses - Hee Hee!

  • Comment number 41.

    35. At 13:00pm on 24 Nov 2010, copperDolomite wrote:

    '25. At 12:49pm on 24 Nov 2010, SleepyDormouse wrote:

    Isn't it time to consider a sort of nuclear option'

    That wasn't a very comforting thing to read today!

    -----------------------

    Maybe, but the analogy you have picked up on was entirely deliberate.

    If the authorities get this wrong and the euro splits up, what happens to all the credit default swaps sloshing around? How will the eurozonw banking system cope when there is no planned exit strategy from the euro - other than a period of total chaos. Without a banking system there will be a huge drop in trade, companies will go bust as their cash flows are destroyed and the banks aren't lending [will the government step in and force them to lend; answers on a postcard to numers 10 & 11 please].

    How, in the past, have severe difficulties been solved by the human race?
    Find a bigger and more immediate problem/enemy to unite behind ......................

    I could write more but I don't want to give away ideas that are horrendous.

  • Comment number 42.

    #31. Sasha Clarkson wrote:
    "A feature of our usurious financial system is that debts periodically get out of control."

    And just where is the theory that explains why debts get out of control?
    How did Keynes explain it?

  • Comment number 43.

    Thank you RP for your continuing commentary.
    However, the people crave wisdom and analysis.
    This is the best I've found and it's short.
    The video is by Mark Blyth, a Dundonian working at Brown Uni in the USA.

    http://www.youtube.com/watch?v=go2bVGi0ReE

    The message is clear.

  • Comment number 44.

    Let's face it Ireland is bust. However as previously stated we should not gloat as the same problems that broke the Irish banks and State could easily be applied to the UK.

    Loved the Idea of Patrick Honohan talking to Irish Chartered Accountants about .... well "Creative Accounting" in the Irish system. What irony!

    As a Spurs fan also appreciate an Arsenal supporter with a sense of humour (one of the few).

  • Comment number 45.

    Just how bad do they think people will let it get before action is taken. Look at Ireland and you see the future for us. That is unless the governments realise they cannot introduce the austerity without bankrupting the banks. I think they now realise that they must inflate their way of it. That includes wages too. They must devalue the pound they simply have to do it. The sooner they do it the greater the chance we can compete with Asia in a business sense. The way things are going our governments are dilitry and bereft of any foresight. I could see this happening when the crunch began but we still seem to be in exactly the same place.
    In europe the eurocrats have to wise up and fund all the banks to the relevant amount at whatever is thought correct and do it now and wipe out all the debt and start again. The way they are going about it is nonsensical to put it politely. The bailout should also factor in a massive reduction in property prices both commercial and residential to enable them to be competitive with the rest of the world.

  • Comment number 46.

    I am puzzled. The Irish are complaining that no-one will buy their Bonds, for reasons which have been well aired. But the IMF/ECB/youandme are lending Ireland c.£75billion.

    So why do they need to keep flogging their Bonds?

    And another thing, Ireland are looking to grow their economy. This means they need to export things. What, apart from beer and butter? No car plants, aero engines, plastics, oil & coal.....etc. Please don't say Financial Services.

  • Comment number 47.

    So make the banks have proper levels of reserves and knock them back to being simply a "utility" type business. Water, electric, post office, bank. Their rightful place in society. I love it. The greedy bankers would cease to be able to rake money out of the business and would have to do something else. No more mega bonuses as the banks would just be making pin-money.

    The "real" economy would grow in its wake.

    Please, please can we make this happen.....

  • Comment number 48.

    Swiss medicine could be painful for UK banks

    11:10am on 05 Oct 2010, RiskAnalyst wrote:
    But the capital requirements under Basle II were fine, untill the muck hit the fan? Whats new with Basle III?

    The amount of extra capital required only shows how severely leveraged these banks were in the first place. Untill we return to a full reserve banking system, this mess will never get sorted.

    -----------------------------------------------------------------------------------

    Starting to get closer to that full reserve system aren't we?

    This is nothing... Banks around the world aren't even valuing their assets at market prices and simply choose to account for them at 'book value'. If banks valued their assets at market prices they are all insolvent.

    This whole thing is inevitable. The Euro falling apart, banks collapsing and non manufacturing economies (including the UK) will ultimately default.

    There is nothing that will stop this from happening. All we can do is sit back and enjoy the ride.

  • Comment number 49.

    45. At 13:53pm on 24 Nov 2010, bmac1 wrote:
    I think they now realise that they must inflate their way of it. That includes wages too. They must devalue the pound they simply have to do it. The sooner they do it the greater the chance we can compete with Asia in a business sense.
    ----------------------------------------------------------------------

    The £ has already devalued against other currencies by an average of about 20% since the credit crunch.
    We have CPI inflation over 3% and RPI over 4% and have done for some time.

    I presume you want more but without hyperinflation?

  • Comment number 50.

    It is time for my bi-annual dumb question and it is this - why does the IMF not take over control of the government/sovereign bond market. That way they would control the rate at which governments borrowed and could eliminate the ratings agencies and predatory investors/ hedgies from targeting countries.

  • Comment number 51.

    50. At 14:24pm on 24 Nov 2010, The_Bongos_of_Doom wrote:
    It is time for my bi-annual dumb question and it is this - why does the IMF not take over control of the government/sovereign bond market. That way they would control the rate at which governments borrowed and could eliminate the ratings agencies and predatory investors/ hedgies from targeting countries.

    -----------------------------------------------------------------------------------

    Unless the IMF borrowed in its own name and then lent it out to other countries it cannot control the interest rates. Even then, the IMF would then just become a giant version of what the EU is and act as a central bank.

  • Comment number 52.

    "How much capital do Ireland's banks really need?"

    Well consider the following:

    - 1 in 8 of all residential mortgages in Ireland is already non-performing
    - A survey this week says that 30%+ of people are struggling to pay the mortgage
    - The above figure rose to 42% when asked about next year
    - 20% of all Ireland's housing stock is empty
    - There is ample evidence that house prices are down 50% from their peak

    So my guess for how much capital is needed is: enough to cover 20% of mortgage holders defaulting and assuming the banks cannot recover any of this (because there simply is no housing market here) for at least 12 months. A rough number for this is €25 billion, as I think outstanding residential mortgage debt is between €115-120 billion. So €25 billion leaves us with the same capital adequacy ratio as now, it just covers the mortgage write-offs that are coming down the track.

    By way of info, apparently €30 billion of the bail out money is earmarked for bank recapitalisation. I suspect this has been arrived at using similar thinking to mine.

  • Comment number 53.

    50. At 14:24pm on 24 Nov 2010, The_Bongos_of_Doom

    If you substituted ECB for IMF I don't think that's dumb at all. It is the obvious solution but seemingly politically impossible.

    One other point. I think that Irish property has much more value in it than many of the other assets still recorded on banks balance sheets around the world.

  • Comment number 54.

    Amazing, money for another country, another set of banks while Ark Royal is dragged up the Tyne to be chopped up, along with her Harriers, leaving the Falklands defenceless, us ready to be humiliated, oil available to be stolen and many more British workers chucked on the dole.
    The whole thing about bailing out banks is entirely discredited and was the worse thing any of the politicians did. We should let them all go to the wall. What possible damage can it do? The replacement - and there would be one - would be more careful and less greedy, the management would be less willing to suck billions in bonuses out of the system. True there would be a short term mess but believe me the world would continue - people would still need money, people with it will still provide it. The current situation where the few 'middle earners' bail out those with billions is just absurd.

    The British government should have steered well clear of the mess. Those banks and other institutions tied to closely with the Ireland banks should have either undone those ties or faced ruin themselves - I didn't ask the post office to put savings in Ireland - next time it might be more careful, and I will be more careful about who I trust to look after my money - all in all people will learn to be more careful.

    Let the lot crash and burn, its time, the banks in general only serve to shuffle profits from productive companies into unproductive peoples back pockets stiffling growth, stiffling innovation and generally getting in the way.

  • Comment number 55.

    50. The_Bongos_of_Doom wrote:

    "...why does the IMF not take over control of the government/sovereign bond market. That way they would control the rate at which governments borrowed"

    The problem with your analysis is that it is one-sided: you assume that if the IMF wishes to pay (say) 5% interest, that a lender is willing to receive 5%. I suspect the Irish governement would like to pay less than 8%, but nobody is willing to lend at that rate. The choice is simply pay the going rate or don't borrow. The "predatory investors" you talk about are, in the main, things like insurance companies (eg to meet their obligations on things like life policies or annuities), and pension schemes. The fact that relatively small players such as hedge funds may be able to shift the price of (say) Irish bonds just shows how few "normal" players are willing to buy the stuff right now. And if you look at my post at #52, you will understand why not holding it, or forcing up the yield, is rational.

  • Comment number 56.

    Now that Governments own large slabs of their banking industries they are by definition in an impossible conflict of interest - they regulate to protect against bank failures, but in doing so they risk devaluing the public equity in those banks and simply prompt demands from the banks for more state investment to fund the higher liquidity ratios required.

    Meanwhile the banks attempt to screw down their remaining customers even harder to make more return out of them whilst fending off risky new lending to prevent futher loses, so reducing the profitability of the private sector, choking off new investment and in doing so the whole thing comes full circle as government tax take and welfare costs go on rising as the economy stagnates or slips into recession, which in turn increases the risk of a complete meltdown as happened in Eire when the bottom fell out of the property market, making the banks insolvent and prompting government intervention to prevent them taking the entire financial system and economy with them.

    Standing in the seat of power the bank's "star managers" paid vast bonuses who simply hack slices off all this money flowing in and out of the bank to fund their bonuses and in the longer term they pump capital at huge risk into the speculative bubbles, only to go cap in hand to the treasury when the bubbles burst.

    This a a dusfunctional, unsustainable system that oscillates more and more wildy with every cycle of boom/bust. When as in Eire the State becomes the banking system through the erosion of private equity holdings being replaced by bail out funding, it's time for the fiction of private sector banking independence to be ended.

    It is then possible to run the banking system in the interests of the British people, lending to small businesses at reasonable rates, ditto house buyers and dispense with the foriegn speculative lending, the fat cat bonuses and the City culture of greed.

    It seems that state owned banking will happen anyway when the appetite for private investment in banking evaporates as their captial is wiped out, as has happened in Eire and is happening in the UK. We can simply wait for this to happen, or we can argue to intervene now and start redefining the role of banking in the 21st century - don't bother talking to the ConDems though - they'd probably take every last penny off the British people and throw it into the private banking system to prop it up because they are ideologically committed to the private sector at any cost.

    Indeed if they go on bailing out the banks at this rate, it won't be long until they have quite literally sold the family silver.....

  • Comment number 57.

    45. At 13:53pm on 24 Nov 2010, bmac1 wrote:
    ... we can compete with Asia in a business sense.

    No, devaluation is not the answer - although it will help. What we need to do instead is to invest in our own manufacturing.
    I approached several sources of funding to make some stuff in the UK - the only comment I received was 'you have to make it in China, we don't make stuff here'. Thats cobblers, and dangerous. True labour is cheap in China but most manufacturing uses very little of that in reality, the vast majority of manufacturing is done by machine. Energy is expensive here, but so is the cost of transporting stuff from China - both in numbers but also in opportunity cost when you can't supply local markets without a months delay for the ship.
    The biggest cost differences, and the most damaging, is in credit and taxes.
    You need to get investment to build plant and factories, time to repay that investment yet our banks - most government owned - have a massive markup on loans and huge costs for 'administration' linked to them. The reason banks aren't lendign is the ursurous charges and interest they levy here.
    We have so low an employment, such a generous

  • Comment number 58.

    52. At 14:40pm on 24 Nov 2010, JayPee wrote:

    "A survey this week says that 30%+ of people are struggling to pay the mortgage"

    Maybe that's the 30%+ of the population who work for the public sector and have already had their salaries reduced by 5% two years ago.

    Reduce salaries... increase mortgage defaults.... increase bank debts..... increase government debt..... raise taxes.... increase mortgage defaults..... ......

    What can we do next? I know: raise interest rates (as recommended by JfH).... increase mortgage defaults....

    Good plan!

  • Comment number 59.

    #32 AverageJoe:
    "The only obstacle [to monetary reform] is a lack of political will. The politicians continue pander to their chums in the banks."

    I watched a video about this on YouTube (The Secrets of Oz) and monetary reform (ie, the govt printing its own money rather than borrowing from the banks and paying interest) seems to be a much more sensible solution: why are tax-payers forced to pay interest on the money used to bail out the banks? And why does the govt pay interest on ANY of it? The government has the power to create its own money and has done at various times in the past. It just doesn't make sense.

    So is it really just a lack of political will or have I not understood the economics behind why we have such a seemingly mad money system?

    Or is it lack of information? For example, till I watched the video, I didn't realise that money was created from debt. And I doubt I'm the only one who was in the dark.

    And if it IS just laziness on the part of the politicians (or if they're lining their own pockets) and if there IS a viable solution through monetary reform, why aren't more people pressing for the change? Why don't we have RP blogging about it and media rottweilers like Paxman demanding answers?

  • Comment number 60.

    The answer is not to pile debt on top of already un-repayable debt!

    Ireland (and for that matter the rest of the world) needs sovereign money ie. a money supply owned and controlled by the people.

    What we have is a structure created specifically to transfer wealth up the pyramid from the wealth creators (those working real jobs, making real products) to those who have negotiated for themselves a role as the governors of global capital. National governments are higher up the pyramid than the workers but they're just an intermediate link, helping to feed the monster at the top.

    The power of the capital owners allows them to influence those who are the building blocks of the pyramid super-structure. All we hear about is a 'return to growth', 'recovery' etc. Its just an attempt to get us back on the hamster-wheel that keeps the flow of wealth moving from bottom to top.

    If you want more info on how it works look up 'Michael Hudson' or 'Damon Vrabel', read up, watch the videos, think about it!!!

    Governments are always banging on about education. Well, it is the answer, but not in the way they claim. We need to open our eyes; educate ourselves; find out for ourselves what is really happening, because we have spent the last 20 years sleep-walking into debt slavery.

    PS. A simple question for you all - why would a government issue £10bn of bonds at, say, 3.5% instead of just printing the same amount of money?

  • Comment number 61.

    59. At 15:08pm on 24 Nov 2010, Bob wrote:

    why are tax-payers forced to pay interest on the money used to bail out the banks?

    And why does the govt pay interest on ANY of it? The government has the power to create its own money and has done at various times in the past. It just doesn't make sense.

    So is it really just a lack of political will or have I not understood the economics behind why we have such a seemingly mad money system?

    Or is it lack of information? For example, till I watched the video, I didn't realise that money was created from debt. And I doubt I'm the only one who was in the dark.

    And if it IS just laziness on the part of the politicians (or if they're lining their own pockets) and if there IS a viable solution through monetary reform, why aren't more people pressing for the change? Why don't we have RP blogging about it and media rottweilers like Paxman demanding answers?

    ------

    BINGO - we have a winner!!!!

    I'm not sure whether the politicians and media are in on the whole scam or if they are just too dumb to see it. Either way, shame on them!

    We need to spead the word. The problem is we're all too busy watching "I've got the X-factor, get me out of here!"

  • Comment number 62.

    45. At 13:53pm on 24 Nov 2010, bmac1 wrote:
    ... we can compete with Asia in a business sense.

    No, devaluation is not the answer - although it will help. What we need to do instead is to invest in our own manufacturing.
    I approached several sources of funding to make some stuff in the UK - the only comment I received was 'you have to make it in China, we don't make stuff here'. Thats cobblers, and dangerous. True labour is cheap in China but most manufacturing uses very little of that in reality, the vast majority of manufacturing is done by machine. Energy is expensive here, but so is the cost of transporting stuff from China - both in numbers but also in opportunity cost when you can't supply local markets without a months delay for the ship.
    The biggest cost differences, and the most damaging, is in credit and taxes.
    You need to get investment to build plant and factories, time to repay that investment yet our banks - most government owned - have a massive markup on loans and huge costs for 'administration' linked to them. The reason banks aren't lendign is the ursurous charges and interest they levy here.
    We have so low an employment, such a generous benefits system and a massively bloated public sector that our taxes - and therefore wages, earnings and profits - have to be huge. Look at employment - of the WORKING AGE population - 30% aren't, another 20% are part time and 30% are public sector - that leaves only 20% of the working age population supporting everyone and everything in the UK! That is ludicrous. In China, India and Germany the employment rates are far higher, and the manufacturing employment (making goods == making money) is again far higher. Germany competes very well with China despite having far more expensive wages because it builds things, has people willing to invest in building things and believes in itself. We on the other hand have forgotten all of that. I dare say some illinformed idiot will pop up and tell me we can't build quality here and the Germans can - thats poppycock - we build the Mini here, the Germans love it, we built the Harrier and no one else has ever bettered it, we can and do know how to innovate and build quality products. Even the likes of the Morris Marina and such maligned '70's cars were actually no worse than most of their European counterparts - remember most of the Renaults, even BMW's and certainly Toyotas that became rusty wrecks just as quickly.

  • Comment number 63.

    To No.59. At 15:08pm on 24 Nov 2010, Bob

    In my view fractional reserve banking; creating money against a ‘promise to pay’ should work reasonably well, providing that the creator suffers the loss if the promise to pay is no good, because this naturally limits the amount of money that can be created.

    In short it controls the creation of money and therefore inflation.

    However we’ve allowed banks to create money against an awful lot of unsound promises to pay, and then ‘the people’ have been forced to take the debtors place when the promise to pay failed.

    So sensibly controlled fractional reserve banking is not an unreasonable way of allowing money to be created.

    However uncontrolled fractional reserve banking, where bad debts are passed to those who have not promised to pay (in the current case ‘the people’ in general), is to say the least, somewhat unfair.

    As regards why Governments borrow money as opposed to create their own:
    In my view, if you have both fractional reserve banking creating money from nothing and governments, you’re likely to have too much money created at any one time.

    In essence it depends on who you want to be in charge of creating money, Governments or Banks, and if it’s Banks, you don’t mind paying them interest for doing it.

    All that said, over the last 20+ years it is difficult to see how the Banks being in control of the creation of money has worked in the country’s best interest.

    In fact evidence suggests it’s done the absolute opposite, because we’ve ended up with unaffordable house prices and taking on the debt of those who’ve defaulted on their loans.

    To Average Joe: I'm curious, what prompted you to start looking into the creation of money as debt?

  • Comment number 64.

    #59 Bob

    It gets even better than that.

    On a TV programme a couple of weeks ago the presenter asked 8 randomly selected MP's if they could explain what the difference between to UK's debt and budget defecit was and how much each were.

    Not one of them had a clue!


    PS The German gov't used to create it's own money
    http://www.bbc.co.uk/blogs/newsnight/paulmason/2010/11/euro_big_wednesday.html



    The Irish people should tell the Gestapo IMF and ECB to go take a hike with THEIR austerity measures!

    Come on Ireland, where's your fighting spirit.....RISE UP AND DEMAND YOUR OWN SOVEREIGN ISSUED CURRENCY!

  • Comment number 65.

    61. At 15:32pm on 24 Nov 2010, Wardy29 wrote:
    59. At 15:08pm on 24 Nov 2010, Bob wrote:

    why are tax-payers forced to pay interest on the money used to bail out the banks?

    And why does the govt pay interest on ANY of it? The government has the power to create its own money and has done at various times in the past. It just doesn't make sense.

    So is it really just a lack of political will or have I not understood the economics behind why we have such a seemingly mad money system?

    Or is it lack of information? For example, till I watched the video, I didn't realise that money was created from debt. And I doubt I'm the only one who was in the dark.

    And if it IS just laziness on the part of the politicians (or if they're lining their own pockets) and if there IS a viable solution through monetary reform, why aren't more people pressing for the change? Why don't we have RP blogging about it and media rottweilers like Paxman demanding answers?
    ..................
    Well done, another one learns the truth about the pyramid scheme. Monetary reform is the solution to this, eg http://www.positivemoney.org.uk/

  • Comment number 66.

    59. At 15:08pm on 24 Nov 2010, Bob wrote:
    Spread the word Bob, the more that know the better.

  • Comment number 67.

    43. At 13:32pm on 24 Nov 2010, thomas_paine wrote:
    This is the best I've found and it's short.
    The video is by Mark Blyth, a Dundonian working at Brown Uni in the USA.
    http://www.youtube.com/watch?v=go2bVGi0ReE

    Good: here's another one:
    The meaning of ‘Austerity’ (link below)
    http://www.youtube.com/watch?v=jUmQbf1AyA8&feature=related
    If you're Irish take a look at it.





  • Comment number 68.

    Post 9 Iceland the facts point the other way re Ireland and Ulster. The Irish have been flocking across the borders to take advantage of the fact that sterling is trading low against the Euro and has been for a couple of years. If you shop in many large stores, M&S and Tesco's come to mind, often goods such as clothes are priced in both sterling and Euro's. In most cases the euro price is at an exchange rate of EUR 1.5 to GBP 1.

    There are many news stories to back this phenomenon up. The following is one of my favourites.

    http://news.bbc.co.uk/1/hi/northern_ireland/8069941.stm

  • Comment number 69.

    56. At 14:54pm on 24 Nov 2010, richard bunning wrote:
    Indeed if they go on bailing out the banks at this rate, it won't be long until they have quite literally sold the family silver.....

    ....I thought Thatcher did that already in the 80s

  • Comment number 70.

    I think the Irish government are kidding themselves if they think the public are going to take 17billion of cuts, to prop the banking system up. The Student protests in London today, may prove to be small potatoes in comparison to what you get in Ireland. Think I'll invest in some gold, and empty my RBS account.

  • Comment number 71.

    60. At 15:21pm on 24 Nov 2010, Wardy29 wrote:

    "PS. A simple question for you all - why would a government issue £10bn of bonds at, say, 3.5% instead of just printing the same amount of money?"

    The answer is Hyper-Inflation!

    Do you trust your government to only print £10 Billion?

    Would they print £10 Trillion?


  • Comment number 72.

    BAILOUT

    Remove water from otherwise sinking boat fast enough to keep it afloat.

    That's what we are doing. Thing is though, water does not get tired of pouring in through the holes. We get tired. When we get tired we get ratty and emotional and make ever worse decisions. The worse the decision the greater the chance that the following one will be worse still. The pace of degeneration increases as the weak give up and lose hope taking the law into their own hands, leaving fewer to do the ever increasing 'bailing'. A tipping point is reached. The restraints of comtempory morality break. We have entered true chaos.

    What will become of us then? More importantly what will we become?

    Anything is possible. Perhaps out of the chaos a miracle, a new nirvana, some never before seen type of peaceful utilitarianism. Probably not. More likely is the usual progeny of chaos: Rage, Fear, Terror and Hysteria as many of us become the most base and savage of animals to have ever walked the earth. A creatures so special that it can feel empathy while killing those that pose it no threat. A frenzied mob chopping its way through former friends and neighbours with machetes and farm implements until a million are dead. At least in Africa. Perhaps our style, sophistication and experience would suit a less effervescent journey back to equilibrium. A more European sollution to an entropy raised beyond our control. We could build factories of death to remove the surplus people. Who should go in the factories this time around I wonder. Bankers, definately but there is simply not enough of them even if we get rid of them all to bring us back to 'normality'. Economists for sure. Who else? politicians - well, be rude not to, financial analysts naturally. I am sure we must have space for a few Jews and asylum seekers.

    OR WE COULD THINK AGAIN. NOW. LET THE BANKS FAIL. THEN NATIONAL DEFAULTS.

    Why waste vital time and energy fighting the inevitable. Ireland will default anyway as will Greece and in the end others too. Lets set down the weight NOW that is killing us. Let gravity do its work.

    So what if the some nations do default?
    There has been over 200 sovereign defaults since 1800 and interestingly the UK has had its hand in over 100 of them.

    We can watch the default calmly and consciously with confidence and poise. Certain that the world will go on. Some might want to dress up for the occaison, others watch it on tv. A slice of default with a nice cup of Earl Grey please. Whatever. Bank failure and default it is.

    What will happen after that? Hard to say but some probable outcomes include:

    States takes control of banks.
    States that can pay do, those that cannot default.
    States that default negotiate arrangment or simply refuse to pay.
    States that refuse to pay can no longer borrow (which is the same place Ireland and Greece are already in except in default the resources remaining can be used for the benefit of the people)
    Violence and social disorder avoided.
    Millions default on mortgages
    Many lose their job.
    Many more default on mortgage.
    Property prices crash through floor.
    Bank (state) owns properties again.
    Defaulting owners become tenants and pay rent and avoid homelessness.
    Those in very big houses with less need who cannot afford the rent move to smaller home where rent is less.
    Existing landlords not removed by crash are taxed at very high level.
    Private enterprise continues.
    Banks banned from trading derivatives.
    Wealthy individuals pay very high tax if they wish to remain in UK.
    Existing government collapses peacefully and new leaders emerge.
    No bankers are hung from lamposts.
    No power cuts occur.
    Everybody who has work goes to work as usual.
    State invests in manufacturing, farming and retraining.
    A potato is still a potato
    A house is still a house.
    Nothing has been destroyed.

    No new poor are created
    Nobody is hungry, nobody dies.

    People talk to their neighbours again.
    People knock on the doors of the old and lonely again.
    People care again.
    More people are in love again.
    More people are happy again.

    Get my drift.






  • Comment number 73.

    "Mr Honohan admits that Ireland's banks have been hopeless at making adeqate provisions for expected losses on their poor loans or in keeping investors abreast of the risks they take. "

    But the ECB bank stress tests...conducted just 4(four) months ago found that the Irish banks had adequate tier 1 capitol and were perfectly fine!

    So who lied to whom... the Irish Banks to the ECB or the ECB to the rest of us?

    And if the stress test has proved so woefully inaccurate in regard to the Irish banks what credence does has it have for the results of Spanish, Italian or even UK banks? Care to investigate a little Mr Peston?

  • Comment number 74.

    This is not going to be addressed until the balance of world trade is sorted out , the banking sector has masked the issue by bring forward protits of the future and paying taxs now but pilling up the debt. untill this issue is address any fix will only be a sticking plasters. In the end it means sorting the trade situation with China and India.

  • Comment number 75.

    Robert,

    One more thought.

    What would be the impact if UK plc introduced a full reserve banking system?

    Our experience in this 'deprecession' is not positive. Bailouts needed all over the world, we nearly hit the wall, the merry-go-round has now left Greece and is entertaining Ireland et al. There remains one substantiated truth - simply put - currently any risk with Fractional Reserve Banking still - when tested or stressed - quantifies!

    So much for 'risk assessment'!

    Does this mean the current remedies used in this banking crisis are simply not correct?

  • Comment number 76.

    To SEER -Please note comment from bmac1 at 1151 !!! This idea is gathering momentum.

  • Comment number 77.

    Yet another panic stricken country being bought up by Brussels with cheap money from other panic stricken European members! This is the scam of the century!
    In 1953/4, the Bilderberg group had their dream of a United Europe with a single currency. Having elevated their chosen disciples into positions of power and provided the groundwork for the creation of the Euro they sold their dream to a gullible Europe.
    Decades later we are living the result of this incredible folly! Governments and financial institutions forgot about people and ran their countries as profit and loss sheets, as Brussels piled on their increasing demands. What we see now is a Europe devoid of all humanitarian feeling, driven by greed and totally lost now that the experiment has reached its only conclusion; failure! Hitler tried it with force of arms. Brussels tried it with financial weaponry! The results of both attempts are the same! Destruction of nations and lives, followed by a round of rebuilding and economic regeneration. Once those that are destined to fall have fallen, prosperity eventually returns and the cycle is complete! For God's sake, do we never learn that if you take the human element out of the equation the result will always arrive back at its negative starting point! Nobody has the right to play with the security of the people because they believe they know better. The result of this EU debacle is proof enough that there is no such thing as an expert! Better to believe in Santa!

  • Comment number 78.

    IMF now that organisation would make a good article...ratings agencies?

    'Moody's chief executive Raymond McDaniel admitted to the commission that his company "is certainly not satisfied" with the performance of the ratings it gave the mortgage-linked debt.
    He added that it was taking steps to improve its ratings process.
    However, he had earlier said in written testimony that investors should only use credit ratings as a guide, "not a buy, sell or hold recommendation".

    worthless then, other than as a tool to give 'legitimacy' to vampires

  • Comment number 79.

    The Irish are realising that the freedom from the tyranny (of monarchy) their forefathers fought and died for can so easily be lost to the forces of finance.
    My hope is that they will not put up with this latest tyranny.
    But then, the USA lost its last battle with the moneypower when the Fedral Reserve Act was sneeked through in 1913.
    Never underestimate the force of evil out there and I mean the real evil that is greed and monopoly.

  • Comment number 80.

    2. At 11:51am on 24 Nov 2010, bmac1 wrote:
    The Irish should just sit tight and not be the first to blink.

    Agreed. Iceland has the right idea. Time to hit the reset button.

    Finance, politics, big business, regulation. Greed and corruption. Game over.

  • Comment number 81.

    @32. At 12:57pm on 24 Nov 2010, Averagejoe wrote:
    "The only obstacle is a lack of political will."

    Do our esteemed, democratically-elected leaders actually understand FRB? Have they even heard of it? Surely George Osborne has. As Chancellor of the Exchequer I would expect a basic grasp of economics and arithmetic, possibly an accountancy background, to be a requirement for the role.
    Don't laugh...

  • Comment number 82.

    Thank you Robert. After 25 years in Irish journalism watching the Mail etc 'diss' Ireland (or Eire as they call it) Thank you for your kind and balanced view of the situation. (God I'm getting soft} Paul

  • Comment number 83.

    "Also there will be legislation to allow Ireland's sovereign wealth fund, the National Pensions Reserve Fund, which has just under 25bn euros of resources - a tidy sum - to "support the Exchequer's funding programme to the extent required"."

    Not sure how much more Ireland can scrape out of this particular piggy bank. Previously valued at 24.5 billion, already this year 15.7 billion has been used to bail out the Irish banks and a further 1 billion plus has been pumped into supporting local infrastructure and economic development projects. Whatever's left won't go far.

  • Comment number 84.

    Wow! That's some creative accounting. Way beyond me.

    I am confused about these toxic banks though. Is it a way of taking the bad loans off the balance sheet and putting them into a trash bin in the hope that in one hundred or two hundred years time they may regain their value and be written back into the balance sheet sometime in the never never future?

    Is the gap in the cash flow then just plugged by restructuring the loans to fill it for years and years to come?

    What an inheritance we leave to those who follow.

    We choose hyperinflation today or wish those of tomorrow a 'Lorro lorro luck'.

  • Comment number 85.

    Are you guys sure about this evil FRB?
    No UK bank seems to have a higher loan to deposit ratio than 140% and many are under 100%.
    Shirley its what they are doing with the deposits thats the problem i.e investment, casino banking, buying rubbish assets etc.

  • Comment number 86.

    #72 redhairedgirl -

    Wow that's even more optimistic than my 'BBC Breaking News' (which gets routinely nuked by the rather conservative moderators) but I think you missed at the end:

    - increase in infant mortality
    - rise in incidence of polio, rickets, TB
    - more people die younger (except the wealthy, naturally)

    among other things.


    The key point really is the wealthy don't get touched by any of this anymore than the W London set did in the 20's depression - my fmaily were never wealthy but you get an idea how well they lived if you watch granny's Cartier stuff et alia being valued on Antikews Roadshwo.

    Talking of Breaking News - aw, never mind. A three year old could figure out what's coming. Now where is my three-year old..?


    GC

  • Comment number 87.

    Bank of Ireland and Allied Irish Banks are empty shells. They have been emptied by the greatest bank robberies, by indisders and outsiders, in Irish history.

    Unelected and unaccountable rating agencies (not even Irish) are effectively setting boundaries and limits on sovereign states.

  • Comment number 88.

    1. People are uncertain about their future (pensions) so they invest disposable income into property.(People don't want to pay tax so govts. borrow instead)

    2. Cue property bubble and debt crisis and all disposable earnings/debts locked in old houses.

    3. Now further cuts in public services and no investment in infrastructure.
    No Pensions in future and pension age raised whilst (irony of ironys) we spend the forseeable future paying off endless debt.

    Lesson learned?

    Perhaps we should have just paid our taxes - seems more economical than having all of your future earnings locked in house valued at 10x more than it actually costs to build.

    Correct me if i'm wrong.

    The irish need a mass default.

  • Comment number 89.

    When will people realize that what is going on is merely business as usual.
    The bankers still go to work and they are busy getting on with their job.
    And their job is to make money. That is what they do.
    If in doing so people get disadvantaged - tough.
    And the really clever twist in the tale? We get the blame!
    Clever bankers.

  • Comment number 90.

    6. At 11:55am on 24 Nov 2010, torpare wrote:

    “Here's a proposal from Toby Baxendale, of the Cobden Centre, for dealing with the problem once and for all (the full article is on http://www.cobdencentre.org/?s=Kotlikoff
    sub-heading "The Emperor’s New Clothes: How to Pay off the National Debt & Give a 28.5% Tax Cut"

    1. Print cash and replace all the demand-deposits/IOUs that exist in the system with that cash. This means the government printing approx £850 billion in cash and injecting it directly into the vaults of the banks and into the accounts of individuals. Thus, if you deposited £100 once thinking it was “yours,” it now really exists in cash, with the bank acting as custodian of your money.
    2. Mandate all banks to hold your cash (100% reserved) on demand at all times.”

    Is this really a serious proposal?

    How much will it cost (and how long will it take) to print and deliver £850billion in cash?

    How much floor space will it take to store all this cash?

    What happens when I take cash from a cashpoint that isn’t my bank – does my bank have to send my money on?

    When I spend something electronically (debit card, money transfer) does that physical cash have to get moved to the recipients bank account? I assume so?

    Same question when related to paydays, dividend payments, tax payments etc etc?

    Does that have to happen as a nightly settlement? Are there thousands of security vans on the road every night shifting cash from bank to bank?

    What about the money spent electronically in Tesco. I assume they would have one central branch and each night thousands of vans turn up with millions of pounds? How many people are needed to count the money in and reconcile it?

    Does each branch have to maintain my cash reserve. If I buy something on ebay from someone in Lands End for £1.83 does that get moved from my branch to their branch?

    The branch idea seems impractical – so I assume banks have their own huge money storage depots. How many do we need? How much will these cost including security as these would seem to be terrorist target number 1?

    What happens if one burns down? Do the owners of the money lose it/have to wait until it is reprinted?

    How much do the banks have to charge to cover all these costs?

    "The Emperor’s New Clothes: How to Pay off the National Debt & Give a 28.5% Tax Cut"
    Usually if something seems too good to be true it is too good to be true

  • Comment number 91.

    How much capital do the banks need? As much as we're prepared to pour down their throats, obviously. What is now patently clear is that a significant door has been opened - banks now think themselves invulnerable and that if they begin to look shaky, national governments will plough eye-wateringly large amounts of money into them until they start to lend ebulliently.
    So why should they? Bleeding the nation dry is all gain and no risk, the bonuses can keep on mushrooming, the Bolly keeps on flowing and the good times continue to roll.

    Or, more briefly, we've opened up a bottomless pit.

  • Comment number 92.

    Just a thought, how does reducing the Irish minimum wage help? In all this mayhem this isn't going to flood the Irish excheque with billions of euros is it?
    Regards, etc.

  • Comment number 93.

  • Comment number 94.

    i cant believe that the dole money in ireland is 194 euros a week!!! have i got that right? and the min wage is near 10 euros a hour? ...no wonder the place is bankrupt.

  • Comment number 95.

    A lot of this debate over Ireland is irrelevant to be honest. The inevitible banking collapse will be next year when our attention turns to Spain. For Spain the ECB aint got enough dosh so the presses will roll and the end will be nigh.

    I've been of the opinon all along that central banks, governments, IMF et al are all clear on what is coming and they're trying every card in the pack to keep banks and states afloat, eventually they'll find the Joker.

    However I've finally been convinced the worst of this most serious decline is over - York City 2 Southend United 0 - no wonder the markets are rising :->

  • Comment number 96.

    5. At 11:52am on 24 Nov 2010, Dale_Lemma wrote:
    A quick question for my more knowledgeable co-commenters:

    Most up to date commentary I can find

    http://www.businessweek.com/news/2010-08-06/argentine-bond-yields-post-longest-decline-since-2009.html

    Just 9 years and they are heading in the right direction.

  • Comment number 97.

    95. At 18:52pm on 24 Nov 2010, NorthSeaHalibut wrote:

    "A lot of this debate over Ireland is irrelevant to be honest. The inevitible banking collapse will be next year when our attention turns to Spain. For Spain the ECB aint got enough dosh so the presses will roll and the end will be nigh.

    I've been of the opinon all along that central banks, governments, IMF et al are all clear on what is coming and they're trying every card in the pack to keep banks and states afloat, eventually they'll find the Joker.

    However I've finally been convinced the worst of this most serious decline is over - York City 2 Southend United 0 - no wonder the markets are rising :-> "

    NorthseaHalibut - I usually disagree with your viewpoint but generally your posts are quite well written and so I can't target inaccuracies. However you finally slipped up...
    York beat Southport not Southend




  • Comment number 98.

    @6

    And presumably watch the value of your new currency fall through the floor on international currency markets, making it impossible to export anything. Meanwhile, everyone knows there is no real value backing the new currency, leading to hyperinflation. And hey presto: Weimar Germany.

  • Comment number 99.


    Default? Never will those in power allow it.

    It is not just our wealth that will be destroyed, it will be there's as well.

    They will throw as many of us into the fire as it takes.

  • Comment number 100.

    12% equity capital now required for the Irish banks? Ho hum. Its not that long ago, in a time of more sane banking, that 30% capital was considered appropriate. The point here of course is that a well-run bank, leaving aside the legal requirement for a moment, doesn't require any capital to function, but a badly-run bank can never have enough. No prizes for guessing which category the Irish banks fall into...

 

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