2 questions if you dont mind

wylo

Hi all,
Just wondering some things regarding the employment , the economy and banking. I dont know much about this so i figured heres a good place to ask.

1: Is the recession or whatever current state the economy is in now directly related to the banking crisis? And if so how? Why is unemployment so high? Does it all go back to the construction industry/property bubble or are there other factors involved as well.

2: When the government guaranteed the banks, what other options could have been available to them (in hindsight)? And in the more recent past, what could the government do other than bale out Anglo? Would it have been more expensive to pay off all customer deposits and shut the bank?

Thanks for your help.

liammur

wylo wrote: »

Hi all,
Just wondering some things regarding the employment , the economy and banking. I dont know much about this so i figured heres a good place to ask.

1: Is the recession or whatever current state the economy is in now directly related to the banking crisis? And if so how? Why is unemployment so high? Does it all go back to the construction industry/property bubble or are there other factors involved as well.

2: When the government guaranteed the banks, what other options could have been available to them (in hindsight)? And in the more recent past, what could the government do other than bale out Anglo? Would it have been more expensive to pay off all customer deposits and shut the bank?

Thanks for your help.

There are more than 2 questions there, lol!

wylo

lol, my subject title was to lure people under a false sense of security.

Liam Byrne

wylo wrote: »

lol, my subject title was to lure people under a false sense of security.

We don't fall for those anymore, Brian/Bertie/Brian !!!

liammur

wylo wrote: »

lol, my subject title was to lure people under a false sense of security.

You will find the answers to most of your questions on the various threads here.

allthedoyles

wylo wrote: »

lol, my subject title was to lure people under a false sense of security.

You got me there , !

but do remember this was actually caused by a false economy over quite a number of years .

johnnyskeleton

wylo wrote: »

Hi all,
Just wondering some things regarding the employment , the economy and banking. I dont know much about this so i figured heres a good place to ask.

1: Is the recession or whatever current state the economy is in now directly related to the banking crisis?

No. Like WWI it has multiple causes, the banking crisis is merely the flash point, much like the assassination of Archduke Frans Ferdinand.

Much of it had to do with the banks e.g. unsustainable lending practices which went unnoticed during the era of cheap credit, but when the banking crisis (i.e. credit crunch) hit, the banks model for lending broke down. They used to borrow short term funds at a cheap rate and loan it out long term at a more expensive (but still historically cheap) rate. Short term funding became harder to come by and this caused the banks to run out of cheap funding for their cheap loans.

Meanwhile, the economy was changing. It became harder and harder to make a profit at things like farming, manufacturing, computer programming etc due to international competition, and at the same time it became easier to make money selling houses, financial products or bling and tat high end retail. Essentially we became a FIRE/Consumer economy (i.e. based on finance, insurance and real estate we go out and buy lots of stuff we don't make and this creates a self sustaining cycle of consumption). This is of course a nonsensical way to run an economy but due to cheap credit many believed it was a "new paradigm" or that "ireland was different" and that we could in fact create an economic miracle by just buying more stuff.

At the same time, the government got in lots of extra taxes from a) the housing bubble and b) multinational companies putting their profits through our books. The multinationals also increased our GDP without really increasing our wealth, so we looked better off than we actually were. So the government believeing that the temporary increase in taxes were a long term trend, and that in any event our high GDP meant we were all a lot richer, set about spending on public sector wages, social welfare, quangoes and vanity projects like it was going to burn a hole in their pockets if they didn't. This of course further increased consumption which artificially raised taxes and the whole cycle reinforces itself (a positive feedback loop).

Imagine you are training to cycle tour de france. You initially think you can't do it, but you start traning and you notice that you get a bit better. Your friends start telling you are getting better and eventually you start to say it yourself and then start to believe it. When you tell you friends you believe it, they believe you even more and you train better. Then of course you enter the competition and get a short sharp dose of reality when you hit the first steep hill.

That's essentially what happened to Ireland. It has many causes that fed off each other.

wylo wrote: »

And if so how?

Well it's not the only cause, but the contribution that the banking crisis has caused is that it has exposed how out of balance our economy truly was. Without ever increasing amounts of credit being pumped into our economy, all the malinvestment in housing estates and crappy retail outlets ceased. Real businesses suffer as a consequence because their credit is taken away (although this aspect is seriously overplayed in the media, and a lot of credit starved businesses are not sustainable long term). People also lose confidence in the economy and, much as there was a positive feedback loop on the way up telling people to buy more and more, there is a positive feedback loop on the way down telling people to buy less and less.

But again, the banking crisis only exposed how precaious our economy had become.

wylo wrote: »

Why is unemployment so high?

We were employing a massive number of people in construction, retail and property related services. These jobs were unsustainable long term. Without the unsustainable consumption of houses the unsustainability of these jobs became apparent and businesses shut up shop.

People were leaving school to become builders and lauging at the fools getting degrees while they earned 30k easy money on the sites. Healty businesses were closing to get into "the property game" and banks were less willing to take a punt on a new start up and more inclined to invest in houses. So just as the bubble told a lot of people to work in the property area, the bust has taken those jobs away and hasn't given back the jobs they did before it.

wylo wrote: »

Does it all go back to the construction industry/property bubble or are there other factors involved as well.

As above but mostly due to the credit bubble yes.

wylo wrote: »

2: When the government guaranteed the banks, what other options could have been available to them (in hindsight)?

Lots of threads on this, not just in hindsight, but at the time. Letting the banks fail was one good option, as was a form of administration/examinership. Debt for equity swaps could have been used to minimise taxpayer exposure, or even do what other governments did - partial guarantee of some of the debts combined with a fixed pool of emergency funding available if needs be to cover short term liabilities.

Absolutely no reason to give such an extensive guarantee, they were like one of those idiots on american sitcoms who, not to be outdone in an auction bids a million dollars to a stunned silence and then they think they are really clever until they actually have to foot the bill.

If nothing else, they could have at least tried to gauge the ECB's views before taking such a disasterous road. We rightly pissed them off with that one and I suspect that when it comes time for an EU bailout of Ireland, they will not be as kind as they were to Greece.

wylo wrote: »

And in the more recent past, what could the government do other than bale out Anglo? Would it have been more expensive to pay off all customer deposits and shut the bank?

Do you mean after the guarantee? Prior to the guarantee the government were under no obligation to pay back customer deposits. The guarantee scheme was run from contributions given annually by the banks to the central bank. Then the government introduced the customer deposit scheme of 100k per depositor per institution then they guaranteed everything. If after the guarantee they wanted to close Anglo, they could do so by paying back all the money guaranteed but not recouped by the sale of Anglo's assets. But they could also renege on the guarantee. Even now they can say "look, we know we guaranteed those banks but it was a mistake, sorry". That would be considered an act of partial default and the bond markets wouldn't like it, but then again they don't like what we are doing now either.

wylo

Hi thanks for taking the time to answer , some good reading there. I guess an economic downturn was inevitable, but there was just too many eggs in the one basket (im sure all this has been said a million times over here lol) .
Thanks again.

Fr0g

Thats quite a good synopsis there johnny. Since the bubble has pushed wages up manufacturers have gone elsewhere for cheap labour so we cant go back to the original celtic tiger (the one based on strong fundamentals, manufacturing and exports). So what are we going to be left with? Will we go back to agriculture and tourism?

It breaks my heart that the one shot we had at real prosperity was dismantled almost from the day FF got into power in '97