No guarantee,No bailout,No NAMA.Why not?

supremenovice

I know its too late now and it was probably explained two years ago when this all kicked off, but why did the government not let the banks sink?
We are pumping billions into the banks to keep them afloat but whos getting those billions?
What would have happened if the Government deciced to keep their noses out of the private financial sector and just let it sink or swim organically like the American banks did?

Lots of questions I know but I cant figure out why the bank bailout was necessary to begin with.

Thanks

Sand

Essentially theres a couple of reasons "something" had to be done

1 - The ECB "ordered" the government that they were not allowed to let any banks fail. The ECB has no authority to do this, and EU banks have been allowed to fail.

2 - Fear of contagion: The financial world is interlinked and loans are made on the basis of future ability to repay, not current. If one bank failed, all the other banks that had lent it money would be forced to recognise losses on those loans. They then are in trouble, and may fail themselves with a ripple effect ocurring, with one bank failure leading to otherwise "healthy" banks themselves failing.

I say otherwise "healthy" banks because if a bank is healthy only if its assumed loans to basket case casino banks are considered to be risk free than theyre not healthy.

3 - Impact of depositor losses on wider economy. I know this might be tricky, but imagine you go to the ATM and no cash comes out? Or you go to your bank branch and you cant get money from the cashier? What if your employer cant get cash to pay you at the end of the month? How are you going to get money to eat? Let alone put fuel in your car? Unthinkable isnt it?

Modern banking is essentially a massive confidence trick, and it underlies the economy. If a bank fails, suddenly the money supply collapses, and with it spending and economic activity. Plus theres a massive blow to confidence in the banking system, which again impacts otherwise "healthy" banks with a ripple effect.

4 - Perhaps most importantly, all of the above would lead to a massive shift in economic and financial power. People who had once had a lot of money and invested it stupidly would be paupers, whereas smarter money would be able to engage in vulture capitalism, picking up assets cheaply and easily and becoming wealthy as a result.

This was unacceptable to the establishment - they and their forefathers had scrambled, crawled, fought and murdered their way to the top of the heap and they simply werent going to allow for the "creative destruction" of capitalism to kick them back to the bottom of the pile.

1, 2 and 3 are the excuses. All of them have merit, but are necessary to some degree to encourage good behaviour and punish bad behaviour, and their ill effects can be minimised by good policy. And at the end of the day, they lead to a short, sharp shock. People then adjust, new growth occurs and the establishment is overturned.

But 4 is the real reason. Quite simply, the establishment was at the top of the heap and there was no way in hell they were going to allow their position to be disturbed. Thats why Lenihan could say in all seriousness that he would not allow any Irish bank to fail "at any cost" to the tax payer. He literally said that - there is simply no cost at which Lenihan will consider his survival and that of his class at the top of the food chain to be poor value for the taxpayer.

ei.sdraob

Sand wrote: »

3 - Impact of depositor losses on wider economy. I know this might be tricky, but imagine you go to the ATM and no cash comes out? Or you go to your bank branch and you cant get money from the cashier? What if your employer cant get cash to pay you at the end of the month? How are you going to get money to eat? Let alone put fuel in your car? Unthinkable isnt it?

Modern banking is essentially a massive confidence trick, and it underlies the economy. If a bank fails, suddenly the money supply collapses, and with it spending and economic activity. Plus theres a massive blow to confidence in the banking system, which again impacts otherwise "healthy" banks with a ripple effect.

That was one of the reasons given, and I call bull**** on it, because:

* we no longer have gold standard, if push came to shove the central bank would have had to go printing money and/or creating few zeros on a screen (as they are doing now anyways)

* if push really came to shove then the ecb/eu could have used the "nuclear option" and create a large fund (As they had to do with Greece) to address confidence

xavidub

ei.sdraob wrote: »

That was one of the reasons given, and I call bull**** on it, because:

* we no longer have gold standard, if push came to shove the central bank would have had to go printing money and/or creating few zeros on a screen (as they are doing now anyways)

* if push really came to shove then the ecb/eu could have used the "nuclear option" and create a large fund (As they had to do with Greece) to address confidence

That causes hyper inflation if the ecb would allow it, which they wouldn't as it would make all europeans poorer by devaluing the euro. As much as we might like it why should German taxpayers get poorer because we couldn't watch our banks?

The main reason the Germans don't want to bail out the likes of us and Greec is that even though the cost is not significant to them they fear that Spain Italy and Poland and many of the recent accession states may go the same way

Stabshauptmann

supremenovice wrote: »

I know its too late now and it was probably explained two years ago when this all kicked off, but why did the government not let the banks sink?

We are pumping billions into the banks to keep them afloat but whos getting those billions?

The money is going to the banks to maintain the capital ratio required by law. The alternative is to liquidate the banks.

What would have happened if the Government deciced to keep their noses out of the private financial sector and just let it sink or swim organically

The entire Irish banking system would have collapsed the same way as it did in Iceland.

http://en.wikipedia.org/wiki/2008%E2%80%932010_Icelandic_financial_crisis#Effects

like the American banks did?

At the same time as we were announcing the Bank Guarantee the US was passing the TARP bill which was expected to cost $700bn

http://www.federalreserve.gov/bankinforeg/tarpinfo.htm

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Responses

Lots of questions I know but I cant figure out why the bank bailout was necessary to begin with.

Thanks

To form an opinion, I suggest you find out
A) The role played by banks in the economy
The way banks operate and are regulated
C) How similar crisis arose, and were responded to, in the past and elsewhere in the world

Stabshauptmann

ei.sdraob wrote: »

That was one of the reasons given, and I call bull**** on it, because:

* we no longer have gold standard, if push came to shove the central bank would have had to go printing money and/or creating few zeros on a screen (as they are doing now anyways)

* if push really came to shove then the ecb/eu could have used the "nuclear option" and create a large fund (As they had to do with Greece) to address confidence

http://economics.about.com/cs/money/a/print_money.htm

Liam Byrne

Stabshauptmann wrote: »

The entire Irish banking system would have collapsed the same way as it did in Iceland.

http://en.wikipedia.org/wiki/2008%E2%80%932010_Icelandic_financial_crisis#Effects

How is Iceland these days ? From what I've gleaned it's better off than us.

Stabshauptmann

Please do share what you've gleaned so, what Ive seen in the papers is a 9 fold increase in unemployment, 3 fold increase in emmigration, a deeply unpopular bailout from the IMF (because it included the conditions imposed re: interest rates and compensating UK and Dutch creditors) and extrememly severe budgets - though perhaps you didnt notice how severe they were because you didnt factor in that Iceland has a population of only 300k.