Free Market Economics - Allowing banks to fail

free-man

Much of the 'consequences' of allowing the banks to fail seem to be focussed on what would happen if they failed within the timespan of the guarantee.

I would like to tease out an alternative and get your feedback on the following:

Step 1: Delay anything until the guarantee expires
Step 2: Use the money ( <= €60 billion) to setup a new clean bank.
Or announce subsides available to any bank that can prove their loan book is clean
Step 3: Advise the public they may want to transfer to the newer "Safe Bank"

The pros:

1. The risk is minimized to the taxpayer
2. The banks that failed to act prudently will fail
3. The banking mess will be cleaned up in max 2 years instead of 30
4. Credit can start to flow to businesses within months
5. Our international reputation vastly improves as investors are confident of no further corruption.

The con:

1. The banks fail.

As another poster rightly said, "we need banks, just not these banks"

I imagine most taxpayers would opt for 1-2 years of pain than 30.

SkepticOne

How much protection would depositors have under this scheme? Would they be automatically transferred to the new bank?

amacca

SkepticOne wrote: »

How much protection would depositors have under this scheme? Would they be automatically transferred to the new bank?

Good question! Thats what I would like to know too, how much protection is there for ordinary depositors whose life savings are in these banks if we let them go to the wall. In the event of the guarantee being called upon by both AIB and BOI depositors at the same time surely the state couldn't pay up at all.

nesf

SkepticOne wrote: »

How much protection would depositors have under this scheme? Would they be automatically transferred to the new bank?

This is the crucial question, so long as we offer deposit insurance we cannot have a fully free market for banking in this country. The issue being that the social cost of not offering said insurance is quite high. Without deposit insurance a bank failing will bring down unrelated companies that just happened to bank with them, destroy the life savings of ordinary people, destroy deposits carefully saved over many years with the hope of buying a home etc.

On paper free market banking looks decent but the social and moral implications of it are very much non-trivial. Personally I view deposit insurance the same way I view dole payments, a necessary evil.

free-man

SkepticOne wrote: »

How much protection would depositors have under this scheme? Would they be automatically transferred to the new bank?

It would certainly be easier to force an automatic transfer however i think it's a question of timing and could be anti-competitive if the regular banks are able to prove themselves solvent.

ei.sdraob

its sort of along the line of what i was thinking here

http://www.boards.ie/vbulletin/showthread.php?t=2055665589

synd

Im a Marxist, far from a free marketeer but I completely agree that the banks should be allowed to collapse. From the perspective that ordinary people should not be robbed to pay for the crimes of the rich. However I would point out that it was the initial de-regulation of the financial market that caused this crisis to begin with. Free market economics is not the solution - rather the cause of the problem.

Indebted capitalists should be declared bankrupt, their debt liquidated and their property placed under public ownership. There exists a problem with homelessness and people stuck on residency lists in this country while large housing estates remain vacant. Perfectly useful factories and machinery lie unused while unemployment rises due to the fact that production would not be ''sufficiently profitable''. So long as maintenance costs and expenditure with regards wages can be covered there is absolutely no reason not to put abandoned capital/labor back to work. There are many social projects that could be undertaken.

A social bank should be set up to provide credit for useful projects. Large companies should be taken under public ownership and a cap put on how much people can earn.

I also think our natural resources should be taken back under public ownership and those responsible for there transfer to shell be brought to justice on charges of expropriating/stealing public property without the consent of the people. Of course the current laws stand in favor of the criminals so the liberal courts would need to be de-constructed and replaced with social courts. Additionally members of the judiciary who where responsible for jailing/sentencing shell protesters - fishermen ect should be charged.

The argument against this of course is that if society decides not to pay off upper class debt - restore the banks to good health, and takes matters into its own hands - capitalists will not invest. I however think that if we perused this radical course of action countless millions of people across Europe would support us and act in a likewise fashion.

SkepticOne

There's no perfect answer and no matter what way you cut it there will be a loss to those that wanted no part in the problem. The principle, however, should be that those who took risks should be held to the consequences of those risks to the greatest extent possible - after all they would feel entitled to the rewards of those risks had they paid off. Those that sought no risk, on the other hand, should be protected from the failures of others to the greatest extent possible.

The problem with a pure free market approach of allowing the banks to fail is that depositors, those that chose not to get into debt in the recent mania, will get wiped out. If you are going to simply transfer them into a state institution then you are not merely allowing the banks to fail, but are actively bringing about their collapse. To avoid that, you could further recapitalise the banks, but how much would that cost, and wouldn't that be defeating the purpose of allowing the banks to fail?

This is why I would go with the temporary nationalisation option with the timescale set out in advance. I would also stipulate that the asset management agency set up to handle the disposal of impaired assets is given a specific short timespan with which to sell the assets in order to prevent distorting the market as the country waits for things to "pick up".

But there needs to be proper debate in public on this before anything goes ahead. This is what has been lacking. By the time anyone had heard about NAMA, the basic philosophy behind it had been fixed, websites had been set up and PR campaigns launched. This should not be the case with something as expensive and potentially disastrous as NAMA.

dresden8

Anybody know how much money is held on deposit in the banks?

P. Breathnach

SkepticOne wrote: »

... This is why I would go with the temporary nationalisation option with the timescale set out in advance. I would also stipulate that the asset management agency set up to handle the disposal of impaired assets is given a specific short timespan with which to sell the assets in order to prevent distorting the market as the country waits for things to "pick up"...

You want short-term measures with dates set at the beginning? Do that, and every speculator will be in a state of high arousal.

nesf

dresden8 wrote: »

Anybody know how much money is held on deposit in the banks?

Define deposit and someone may be able to answer that for you. Do you mean only personal deposit accounts? Personal deposit accounts and business deposit accounts? Or those two plus money the banks have deposited with each other?

silverharp

nesf wrote: »

This is the crucial question, so long as we offer deposit insurance we cannot have a fully free market for banking in this country. The issue being that the social cost of not offering said insurance is quite high. Without deposit insurance a bank failing will bring down unrelated companies that just happened to bank with them, destroy the life savings of ordinary people, destroy deposits carefully saved over many years with the hope of buying a home etc.

On paper free market banking looks decent but the social and moral implications of it are very much non-trivial. Personally I view deposit insurance the same way I view dole payments, a necessary evil.

at some stage risk should be priced in, the idea that the most conservative banks had to compete with the Anglos of the world without the risk being priced in was dangerous. Wasnt it the EBS that got into developer loans because they were losing depositors.

dresden8

nesf wrote: »

Define deposit and someone may be able to answer that for you. Do you mean only personal deposit accounts? Personal deposit accounts and business deposit accounts? Or those two plus money the banks have deposited with each other?

Each of them.

SkepticOne

P. Breathnach wrote: »

You want short-term measures with dates set at the beginning? Do that, and every speculator will be in a state of high arousal.

Let them speculate and take the consequences if they fail. Personally I wouldn't want to touch a lot of the stuff that I'm forced to take on as a taxpayer, however if some international speculator disagrees, let them come forward and pay up.

nesf

silverharp wrote: »

at some stage risk should be priced in, the idea that the most conservative banks had to compete with the Anglos of the world without the risk being priced in was dangerous. Wasnt it the EBS that got into developer loans because they were losing depositors.

I'd be more inclined to split the industry in two, one heavily regulated and guaranteed sector for deposit banking of all sorts and one less regulated and wholly unguaranteed sector for investment banking.

Though this not solve the problem, there most likely will be times where leaving an investment bank fail does more harm than good and so on.

ei.sdraob

Lets assume business and personal current and deposit accounts

business dont usually keep savings accounts as any money is invested in the same business or stocks

business dont keep high current account as having money lying around and not being used to grow is "bad"

some people like me have alot in savings, theres no denying that, but thats a very small minority as most of the country are up to their necks in debt

most people dont keep much in current account as its pointless



i really dont believe that there is much money in current accounts and savings in this country,


so that leaves banks lending money to each other, well thats not our problem, if anglo irish etc want to move millions around to make the books balance well then good for them, they shouldn't have been nationalized in first place

what remains are investors, the very nature of investing carries risk, i dont see why i should be paying taxes to investors get away with having no risk that they know exist

nesf

SkepticOne wrote: »

Let them speculate and take the consequences if they fail. Personally I wouldn't want to touch a lot of the stuff that I'm forced to take on as a taxpayer, however if some international speculator disagrees, let them come forward and pay up.

Setting a date at the beginning though does expose the taxpayer to a huge amount of risk. What happens if the market is in even worse shape when this date comes and the taxpayer would make a loss selling the bank back to the market? If nationalisation is done the taxpayer will take on a large amount of risk no matter what system you put in place.

nesf

ei.sdraob wrote: »

Lets assume business and personal current and deposit accounts

business dont usually keep savings accounts as any money is invested in the same business or stocks

business dont keep high current account as having money lying around and not being used to grow is "bad"

some people like me have alot in savings, theres no denying that, but thats a very small minority as most of the country are up to their necks in debt

most people dont keep much in current account as its pointless



i really dont believe that there is much money in current accounts and savings in this country,


so that leaves banks lending money to each other, well thats not our problem, if anglo irish etc want to move millions around to make the books balance well then good for them, they shouldn't have been nationalized in first place

what remains are investors, the very nature of investing carries risk, i dont see why i should be paying taxes to investors get away with having no risk that they know exist

The problem is this: companies tend to have at deposit/current accounts (which are the same thing in this analysis) for two very important purposes: a) to hold money to be used to pay wages and b) to hold money to be used to pay off suppliers and the like. Either of these accounts suddenly disappearing (if they weren't guaranteed) would have profound impacts on the lives of ordinary people as they might not be able to be paid their wages if either account disappears (Company A not being able to pay Company B might put Company B in a position where it cannot pay workers their wages next month etc).

silverharp

synd wrote: »

Perfectly useful factories and machinery lie unused while unemployment rises due to the fact that production would not be ''sufficiently profitable''. So long as maintenance costs and expenditure with regards wages can be covered there is absolutely no reason not to put abandoned capital/labor back to work. There are many social projects that could be undertaken.

So what would you suggest to do with the Waterford Wedgewood plant? produce gassware that no one will pay for? Or globally shouldnt the GM's and Chryslers of the world be liquidated because they are not as good as Toyota or Honda instead of being propped up with taxpayer money.

Économiste Monétaire

dresden8 wrote: »

Each of them.

Unfortunately, it's quite difficult to get exact, up-to-date numbers for the value of deposits covered under the guarantee. Here's something of a breakdown: Numbers relate to the period end of June 2009.

For this group:

ACC Bank plc
AIB Mortgage Bank
Allied Irish Banks plc
Anglo Irish Mortgage Bank
Bank of Ireland Mortgage Bank
The Governor and Company of the Bank of Ireland
Bank of Scotland (Ireland) Limited
Danske Bank A/S
EBS Building Society
EBS Mortgage Finance
First Active plc
ICS Building Society
Irish Life & Permanent plc
Irish Nationwide Building Society
KBC Bank Ireland plc
KBC Mortgage Bank
Ulster Bank Ireland Limited

€315bn in deposits from other banks and monetary financial institutions (we have about 730 of these registered in Ireland). €135bn being Irish resident based, €19bn from the Euro Area and €161bn from the rest of the world.

€72bn from the Central Bank (due to Eurosystem operations).

€193bn from everyone else, and about €150bn that is classified as Irish resident (e.g. you and me).

P. Breathnach

nesf wrote: »

I'd be more inclined to split the industry in two, one heavily regulated and guaranteed sector for deposit banking of all sorts and one less regulated and wholly unguaranteed sector for investment banking...

You mean go back to something like how things used to be? That is probably the best model for the future.

You can make a persuasive case that a major contributor to our current problem was that banks with no tradition or expertise in the buccaneering side of things tried to play a game that was beyond their skill level, and with funds large enough to distort the game.

nesf

P. Breathnach wrote: »

You mean go back to something like how things used to be? That is probably the best model for the future.

You can make a persuasive case that a major contributor to our current problem was that banks with no tradition or expertise in the buccaneering side of things tried to play a game that was beyond their skill level, and with funds large enough to distort the game.

Well, essentially it was the Glass-Stegal Act system in the US. It has its own problems, and is definitely not a free-lunch to financial stability but the problem becomes one of "Do you want stagnation and less competition meaning a worse service for people or companies or would you prefer a better service but more risk attached to it". Neither is particularly nice as an option.

SkepticOne

nesf wrote: »

Setting a date at the beginning though does expose the taxpayer to a huge amount of risk. What happens if the market is in even worse shape when this date comes and the taxpayer would make a loss selling the bank back to the market? If nationalisation is done the taxpayer will take on a large amount of risk no matter what system you put in place.

Then the taxpayer takes the loss. But that loss may be less than the alternative of holding waiting for an upturn that possibly never comes. By selling early the taxpayer may be cutting its losses.

nesf

SkepticOne wrote: »

Then the taxpayer takes the loss. But that loss may be less than the alternative of holding waiting for an upturn that possibly never comes. By selling early the taxpayer may be cutting its losses.

Or may be taking a bigger loss than the NAMA approach. There's a ****load of uncertainty and anyone telling you for definite that one way is guaranteed to be cheaper for the taxpayer is just guessing.

That's why the situation is bloody annoying. Either approach, nationalising the banks or NAMA exposes the tax payer to very large risks and it's extremely debatable over which is the worst option. I'd lean very slightly towards NAMA because I think nationalising banks is an awful option but even then I dislike NAMA a lot and honestly don't think there's a lot to choose between them.

SkepticOne

nesf wrote: »

Or may be taking a bigger loss than the NAMA approach. There's a ****load of uncertainty and anyone telling you for definite that one way is guaranteed to be cheaper for the taxpayer is just guessing.

That's why the situation is bloody annoying. Either approach, nationalising the banks or NAMA exposes the tax payer to very large risks and it's extremely debatable over which is the worst option. I'd lean very slightly towards NAMA because I think nationalising banks is an awful option but even then I dislike NAMA a lot and honestly don't think there's a lot to choose between them.

No one is saying there's no risk. What I would argue against is that the concept of holding assets for an indefinate period in the expectation that things pick up actually exposes the taxpayer to more risk than selling early. The only problem - and this is a political one which is probably why it is not being chosen - is that if there is to be a loss to the tax payer, it is taken up front rather than down the line when the current set of politicians are out of the picture.

The problem with NAMA in addition to taking risky positions in the developer loans and property markets for indefinite periods of time, is that the taxpayers alone take the hit for the banks mistakes.

I expect an overall loss to the taxpayer no matter what is chosen. But get the money off the those who gambled and lost first.

synd

silverharp wrote: »

So what would you suggest to do with the Waterford Wedgewood plant? produce gassware that no one will pay for? Or globally shouldnt the GM's and Chryslers of the world be liquidated because they are not as good as Toyota or Honda instead of being propped up with taxpayer money.

First, companies do not re-locate to areas of lower expenditure because there no longer exists demand for their produce, or even due to decreased profits - they move because they face a decline on the rate of profit. I suggest companies seeking re-location should be forced to open their account books - and when observed to be making continuing profits - taken under public ownership. Waterford Cry did not go out of business, they outsourced to Eastern Europe after expropriating 23 million in surplus over the last five years. They are also set up in Indonesia and Brazil.

nesf

SkepticOne wrote: »

No one is saying there's no risk. What I would argue against is that the concept of holding assets for an indefinate period in the expectation that things pick up actually exposes the taxpayer to more risk than selling early. The only problem - and this is a political one which is probably why it is not being chosen - is that if there is to be a loss to the tax payer, it is taken up front rather than down the line when the current set of politicians are out of the picture.

The problem with NAMA in addition to taking risky positions in the developer loans and property markets for indefinite periods of time, is that the taxpayers alone take the hit for the banks mistakes.

I expect an overall loss to the taxpayer no matter what is chosen. But get the money off the those who gambled and lost first.

Yeah but there's more negative points to nationalising banks than merely the size of the loss the taxpayer potentially makes.

asdasd

Waterford Cry did not go out of business, they outsourced to Eastern Europe after expropriating 23 million in surplus over the last five years. They are also set up in Indonesia and Brazil.

Unless you are positing an Irish Marxism, then if the rest of the world did this the Irish republic will have a GDP of about £1000 per capita as the US nationalises Google, APple, Dell and Intel, global finance leaves Ireland, and everybody with any bank reserves pushes then out of the country.

Sorry did I say £1000, may £10 per capita. Possibly £1.

SkepticOne

nesf wrote: »

Yeah but there's more negative points to nationalising banks than merely the size of the loss the taxpayer potentially makes.

Which is why I was arguing that it should be on a strictly temporary basis.

nesf

SkepticOne wrote: »

Which is why I was arguing that it should be on a strictly temporary basis.

Which massively increases the risk faced by taxpayers because they can't delay offloading banks because of market conditions because this would be too easy a way to work around the strict temporary basis. It's fraught with complications and doesn't appear to be much better than NAMA in my honest opinion. We're caught between a rock and a hard place here.

Économiste Monétaire

Économiste Monétaire wrote: »

Unfortunately, it's quite difficult to get exact, up-to-date numbers for the value of deposits covered under the guarantee. Here's something of a breakdown: Numbers relate to the period end of June 2009.

For this group:

ACC Bank plc
AIB Mortgage Bank
Allied Irish Banks plc
Anglo Irish Mortgage Bank
Bank of Ireland Mortgage Bank
The Governor and Company of the Bank of Ireland
Bank of Scotland (Ireland) Limited
Danske Bank A/S
EBS Building Society
EBS Mortgage Finance
First Active plc
ICS Building Society
Irish Life & Permanent plc
Irish Nationwide Building Society
KBC Bank Ireland plc
KBC Mortgage Bank
Ulster Bank Ireland Limited

€315bn in deposits from other banks and monetary financial institutions (we have about 730 of these registered in Ireland). €135bn being Irish resident based, €19bn from the Euro Area and €161bn from the rest of the world.

€72bn from the Central Bank (due to Eurosystem operations).

€193bn from everyone else, and about €150bn that is classified as Irish resident (e.g. you and me).

Great information, do you have a link for the 135bn irish resident based ?

Économiste Monétaire

Deleted User wrote: »

Great information, do you have a link for the 135bn irish resident based ?

Sure, it's from the latest CBFSAI Monthly Statistics, Table C.7 (page 23)—the July numbers are released this coming Tuesday. If you look at liabilities 2, 3, 4 and 5 you'll see the breakdown of where these deposits are owed to. The composition of "Mortgage Lenders" (i.e. the list of banks I gave) is from the Quarterly Bulletin, Statistical Appendix, page 7.

Addendum: My original post might be slightly ambiguous on an important point: it's not intended to be a comprehensive collation of liabilities we've guaranteed. Not all of those banks are under the guarantee, which is why I listed them.

SkepticOne

nesf wrote: »

Which massively increases the risk faced by taxpayers because they can't delay offloading banks because of market conditions.

For the sake of argument let us assume that the decision has been made to nationalise the banks and this is going ahead. Since we can't predict the future, we can't choose the best time to privatise. A relatively short time is as good as any other time. The worst thing would be a prolonged period of nationalisation while we wait to make a profit, which there is no guarantee will happen.

Turn it around quickly then you are less exposed to movements in the market one way or the other.

Buy privatising within a relatively short time we minimise the risk while ensuring that risk takers pay their fair share and minimising the loss (and no matter what you do there will be losses) to innocent parties.

The problem i see with this is mainly political. We would know what the damage is to the taxpayer within a short space of time and this, I believe, is why options like this are not going ahead.

nesf

SkepticOne wrote: »

A relatively short time is as good as any other time.

It isn't. A long window of potential nationalisation allows for a much greater chance for that window to contain a time period where market conditions favour selling the market back. A mandatory short period is much riskier because of the opposite problem. Basically we want the economy to start recovering before selling the banks back to the market to ensure minimal loss or potential profit. A fixed short period is essentially a very large bet on this happening within that time period.

silverharp

nesf wrote: »

I'd be more inclined to split the industry in two, one heavily regulated and guaranteed sector for deposit banking of all sorts and one less regulated and wholly unguaranteed sector for investment banking.

Though this not solve the problem, there most likely will be times where leaving an investment bank fail does more harm than good and so on.

I'd agree with that, i'd even question if the taxpayer should be standing behind AIB's prop trading. On the regulated side would you forsee formal lending restrictions based on salary multiples , rental yields, max LTV ?

We seem to be in an odd situation at the moment that there maybe a incentive to try to maintain artificially high property prices. For instance will newly built empty office blocks be rented out at any price to get some money in or will there be pressure to keep them empty to maintain an artifical floor. Maybe we'll see an Irish version of "cash for buildings (clunkers)"

SkepticOne

nesf wrote: »

It isn't. A long window of potential nationalisation allows for a much greater chance for that window to contain a time period where market conditions favour selling the market back.

I would not be in favour of that. The risk is that there would be a long drawn out period where the market deteriorates or stagnates. The taxpayer loses in such situations. If there's going to be nationalisation it has to be for a limited short period of time, imo. Minimise exposure to the market. Let whoever buys the banks take the risks. Otherwise I would prefer some of the other options proposed.

Économiste Monétaire

Économiste Monétaire wrote: »

Sure, it's from the latest CBFSAI Monthly Statistics, Table C.7 (page 23)—the July numbers are released this coming Tuesday. If you look at liabilities 2, 3, 4 and 5 you'll see the breakdown of where these deposits are owed to. The composition of "Mortgage Lenders" (i.e. the list of banks I gave) is from the Quarterly Bulletin, Statistical Appendix, page 7.

Addendum: My original post might be slightly ambiguous on an important point: it's not intended to be a comprehensive collation of liabilities we've guaranteed. Not all of those banks are under the guarantee, which is why I listed them.

Thanks, amazing situation we find ourselves in. Damned if we do damned if we dont.

Whatever route we take we its essential for the future that all those responsible for this are brought to book somehow.
Im beginning to think that thoughts of a default are as bad anymore. Simply because the other options continue to get worse and worse.

Chorcai

No Irish bank will fall, the EU says so or should I say, wont so !

Yixian

Pfft, let the banks fail? What do you think this is, a capitalist society?!

This is a strictly corporatist world.