How a financial collapse starts

by on November 15, 2010 at 11:06 am in Current Affairs, Economics | Permalink

As I've been saying, with a bank run:

Corporate clients have pulled deposits from lenders including the country’s biggest, Bank of Ireland Plc.

With its lenders frozen out of Europe’s money markets and with their deposits shrinking, the Irish government may be forced to seek the bailout ministers have so far resisted.

The EU is pressuring Ireland to accept a bailout and Ireland does not (yet) want it; this should give pause to those who think that "no bailout" policies are time consistent.  More generally, the simplest model is that the EU could take care of Ireland and Greece fairly easily, but the spectre of Spanish default lurks in the background.  Spain is a much larger economy and the Germans cannot simply pay up to save it.  All pronouncements and policies about Ireland (or for that matter Portugal) should be viewed in light of this larger "game."  If Spain were fixed essentially the trouble could be paid off to go away, for now at least.  But Spain is not fixed.

The longer-run question is why there should be any Irish or Greek banks at all.

Millian November 15, 2010 at 7:13 am

The reason why there are Irish banks is because they were hugely overvalued when they were a buying prospect, and hugely indebted now. No-one wants them in either. Yes, in the long run, they will probably be under someone else's ownership.

Another reason why there are Irish banks is that Dublin is, after all, a centre of European finance. Small open economies still have to do something with their capital, don't they?

Of course, our finance minister believes the reason why we have banks is because we are an island and so a bank run is impossible.

Brock November 15, 2010 at 7:52 am

"Tyler, what are your thoughts on the debate about expediency vs. principles?"

I'm not Tyler, but my thought is that my principles are expedient, and they are not always what I say they are.

Doc Merlin November 15, 2010 at 8:06 am

"The longer-run question is why there should be any Irish or Greek banks at all."

Because Basel II gives preferred risk and regulatory status to governmental debt, this is why they exist.

Floccina November 15, 2010 at 8:17 am

Boy centralization always seems risky so why did they create the Euro in the first place?

Eli November 15, 2010 at 10:47 am

Not only should there not be Irish or Greek banks, there should not be American banks.

Tom Grey November 15, 2010 at 11:20 am

Banks, or airlines, are nation-state vanity projects, not so unlike a national football (soccer) team.

But if it's supposed to make money in market competition, it can't make huge speculator/ investor mistakes.

Ireland could use a big dose of foreign immigrants (especially with money) to help increase demand and prices for their overbuilt real estate.

But I thought the Germans already got their money out of the Irish banks, so if the banks go belly up, it will be OK.

Right now, if the depositors have insurance, it would probably be better to let the banks die, have the gov't (insurance) pay off the depositors, and become the sole owners of the loan re-payment stream.

Slovakia is being asked to contribute to a bail out. My advice would be that Slovakia should start a new, Slovak-Irish bank, with Slovak money, but looking to put up undervalued assets at a fire sale discount.

I think the Irish gov't should also print 0% coupon 1-yr bonds, and use these to pay off gov't debts and salaries, while accepting them at 100% par value for taxes.

Dan Karreman November 15, 2010 at 1:04 pm

Admit it, what we really are looking forward to is the inevitable Michael Lewis piece where it is explained that some combination of bullshit representative anecdote and lots of national stereotypification is really to blame for the Irish mess. Really. And it can never be fixed. No.

Bill November 15, 2010 at 5:08 pm

The issue should be: who should bear the losses: creditors and shareholders of the bank and real estate developers who are given a lifeline by the lender, or the taxpayers of Ireland.

How about some money, not just for the ECB, but from the banks bondholders and creditors and shareholders. Why just the Irish state.

It seems that they are just passing the hat to the government for their contribution and assumption of risk, and not those who purchased the stock or were the bondholders of institutions that are probably insolvent.

Mark D. November 15, 2010 at 9:06 pm

We have the example of our current banks who have all done the right thing despite governments, the spectacular success of free market banks….

There is nothing "free market" about a bank with a government guarantee.

J Thomas November 16, 2010 at 9:35 am

We have the example of our current banks who have all done the right thing despite governments, the spectacular success of free market banks….

There is nothing "free market" about a bank with a government guarantee.

Yes? So, would you advocate free-market unregulated banks?

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