Bailing out banks, why ?

Abu Mariam

Would anybody explain to me:
Why should government bailout banks ?
I just find it hard to understand

Denzil2222

Abu Mariam wrote: »

Would anybody explain to me:
Why should government bailout banks ?
I just find it hard to understand

Do you have money in the bank ? How would you have felt back in september 2008 if you went to an ATM and your money (as well as everyone elses money) was gone?

Jibbs

Denzil2222 wrote: »

Do you have money in the bank ? How would you have felt back in september 2008 if you went to an ATM and your money (as well as everyone elses money) was gone?

Simple enough solution really. Guarantee all deposits, tell the bond holders "you gambled, you lost". I bet the total amount of deposits in Anglo and AIB is less than 50 billion.

senordingdong

The govt. and their mates have huge stakes in these banks which they don't want to lose.

Jibbs

senordingdong wrote: »

The govt. and their mates have huge stakes in these banks which they don't want to lose.

Well, the government now has huge stakes in these banks. Before the bailout it was just politicians and their pals that had stakes in them. Ahh, they were the days.

SkepticOne

There was a view (now discredited) that bond holders if they were burned with the banks would be reluctant to lend to the country.

It is easy to see why this is wrong. If you give me a sum of money for nothing (as the country did with the bond holders), then you do not become more credit worthy. If anything you become less credit worthy.

So why did the government act in the way they did? The fatal flaw was that they applied political thinking to a financial problem. In the world of politics favours are done for people and favours are expected in return. The government thought the same would be true of the bond markets.

Sadly, and predictably we are now paying and will continue to pay for that mistake.

ei.sdraob

I am surprised that some people few posts up are trying to peddle the same old myths of the banks running out of money . The whole banking system is theoretically always bankrupt they never have enough to payback all depositors in event of bank-run, even the healthiest banks (they just have bigger reserves).


Ive been on about this already, the banking system is all about confidence, the guarantee was designed to address confidence BUT for whatever crazy reason they gov decided to also guarantee bondholders etc

Actually what we needed and still need is not a govt guarantee but a EUrozone/ECB deposit guarantee and insurance scheme (they have the FDIC in US for example which has successfully dealt with over hundred bank closures in US this year alone) since they are the ones controlling the rates and printing presses. If the **** ever came to shove here in Ireland and a bankrun is expected, its the ECB who can quite literrary add zeros to certain accounts (they ended up doing this anyways sort of) if they were fearing a bank run, which could potentially spread outside of Ireland bringing the whole system down. We seen how the EU/ECB stepped in to deal with the Greek situation few months ago....


Ironically 2 years later things are now even more uncertain and dangerous than that September in 08, now the whole country is at risk of default (34% risk in next 5 years) since the country is now tied to its banks which are pouring water into a boat that already has other issues such as runaway expenses.



So was there a need to give so much money to the banks? imho no! not on this scale and to some of these "banks" like Anglo, we also should have been talking with EU leaders and ECB from day one trying to cookup an EU wide scheme for deposit insurance and other confidence building measures.

What baffles me most is why wasnt lets say 10 billion set aside to a completely new good bank bank (semi-state) from lets say the pensions reserve 2 years ago, and then do what banks do collect new deposits on top since saving is up and create new lending (banks do it up to 10x usually, so that's what 100 billion of credit potentially?) and tap into the ECB low rates, therefore getting credit into SMEs in this country not directly tied to construction (which is going down one way or another, was too big). Maybe that's too simplistic? i dunno

kippy

ei.sdraob wrote: »

I am surprised that some people few posts up are trying to peddle the same old myths of the banks running out of money . The whole banking system is theoretically always bankrupt they never have enough to payback all depositors in event of bank-run, even the healthiest banks (they just have bigger reserves).


Ive been on about this already, the banking system is all about confidence, the guarantee was designed to address confidence BUT for whatever crazy reason they gov decided to also guarantee bondholders etc

Actually what we needed and still need is not a govt guarantee but a EUrozone/ECB deposit guarantee and insurance scheme (they have the FDIC in US for example which has successfully dealt with over hundred bank closures in US this year alone) since they are the ones controlling the rates and printing presses. If the **** ever came to shove here in Ireland and a bankrun is expected, its the ECB who can quite literrary add zeros to certain accounts (they ended up doing this anyways sort of) if they were fearing a bank run, which could potentially spread outside of Ireland bringing the whole system down. We seen how the EU/ECB stepped in to deal with the Greek situation few months ago....


Ironically 2 years later things are now even more uncertain and dangerous than that September in 08, now the whole country is at risk of default (34% risk in next 5 years) since the country is now tied to its banks which are pouring water into a boat that already has other issues such as runaway expenses.


So was there a need to give so much money to the banks? imho no! not on this scale and to some of these "banks" like Anglo, we also should have been talking with EU leaders and ECB from day one trying to cookup an EU wide scheme for deposit insurance and other confidence building measures.

What baffles me most is why wasnt lets say 10 billion set aside to a completely new good bank bank (semi-state) from lets say the pensions reserve 2 years ago, and then do what banks do collect new deposits on top since saving is up and create new lending (banks do it up to 10x usually, so that's what 100 billion of credit potentially?) and tap into the ECB low rates, therefore getting credit into SMEs in this country not directly tied to construction (which is going down one way or another, was too big). Maybe that's too simplistic? i dunno

The simplest solutions are usually best.
I find little wrong with that solution in hindsight. The ONLY potential problem at the time may have been the time constraints the decisions had to be made in (or perhaps that was overhyped as well)
I agree totally with the third point by the way, time issues or not, this could and should have been done at any time in the past couple of years.

There was another post above talking about a political solution to a financial problem, in hindsight this is 100% correct. We sorted out the bondholders the dont care either way and theres jack sh1t we can do about it now.

There have been a few threads such as this over the few years and over time its becoming obvious that the bailout of the banks WAS required at some level, however it is plainly obvious that the level and implementation of the bailout were grossly wrong. Wrong to the point of being negligent.

jimmycrackcorm

Jibbs wrote: »

Simple enough solution really. Guarantee all deposits, tell the bond holders "you gambled, you lost". I bet the total amount of deposits in Anglo and AIB is less than 50 billion.

Can you explain if the total amount of deposits is sufficient to allow bank lending then why do the banks need to go to bondholders and other investors for funds?

amen

Can you explain if the total amount of deposits is sufficient to allow bank lending

ahh but it wasn't.

Made up figures:

Bank had desposits of 100.

Have to keep reserve of 5.0

Lends 95.00

Then there is a building boom and the bank wants to lend more.
So go to bond holders who gives the bank another 100 at 2% interest.
Bank lends this to a developer who want loans at 5% interest and the bank makes a profit on the 3% difference.

loan is secure do on the property.

Then bang property prices drop, loads of unemployed people and the developer cannot sell his property and cannot pay back the bank.

Bank cannot bondholder and thus the government steps in to support bank with public tax. Of course the bank is a commercial entity as are the bond holders so they should have been allowed to fail.

What about regular joe soap depositors who have their savings in the bank? Easy the government pays them using public funds (which is what most countries do) as these are just normal people and are not speculating.

Of course this is very simple view ignoring fractional lending, inter bank trading markets etc.