Alternative Solution to banking crises

The problems we have with the banks is a complicated one. The fact we need any solution is harebrained, the fact we are here is bleenin' harebrained, but here we are! The headline issues for the banks are:

- lots of bad loans
- just too many loans

issues for the government (should be) are:

- avoid, as far as possible, moral hazard
- bank reform without such convulsion as to cause excess damage to good businesses
- solve the problem in a way which does not overly impoverish the country, and do it a way which does not make people feel like they are bearing the brunt of it (I know, they will/are, but feelings are important!)

I don't think its a good idea to have a generation saddled with silly mortgages. Sure they made a stupid mistake, but so did the guy who gave the money to the bank, and the bank who gave it to him/her. It will ensure that these people never take risks for the rest of their lives, probably never setup businesses and instead of spending their money in the general economy will be consigned to a life of slavery. I think the current order of who is being bailed out is arse about face, and for selfish economic reasons, not some nice touchy feely reasons.

My personal bent on this is I will not be surprised when this mess costs us between €20k and €50k a head. It's not a small amount of money, it's being borrowed on my behalf, hand it over.

I agree with most of Sands points, particularly about he banking culture which need to be addressed.

So, heres the rub. It would have been much much simpler to have an honest banking system, an honest political / planning system, a regulator will balls. We didn't. No matter how complicated (which I don't agree with) or harebrained you think it, it is better than our present alternative.

Allowing those who got us into this mess to fix it, *WILL* cost us all more money that it otherwise should. Even if the alternative is difficult and complicated.

Just to address the implementation issue, run it like an election, but using PPS numbers. Run it over 7 days, give people 6 months notice. You must turn up a specified location with your PPS number. As each person turns up, an account is created for them. Small teams go to each hospital / old folks home etc. to gather their information. Refine the general principle to make it more secure / cater for special needs. Why am I thinking that if we were in Germany we would just get on with it and it would be done?

First lets address the implementation issue. The rules are simple.

- You must have a PPS number
- You must be Irish
- You must turn up at a bank in a 4 week window

The department of Social Welfare / Finance have a database with every PPS number and the nationality of the person associated with that PPS number. From this database, extract all the PPS numbers associated with Irish nationals along with the name and date of birth and put this into a new database. How hard is that? One query. Shouldn't take more than a day, lets make it a week to do.

Now, create a web front end on the database. We will update only four pieces of information, account setup y/n, banking institution, account number and NSC. Again, this should take no more than a couple of days, but hell, there are 4m records which is not excessive, but I'll give 4 weeks to put together the 3 web pages required.

As the banks are being sorted, I'll say that adults must turn up at a bank of their choosing. They bring their PPS number and some photo ID. Not dissimilar to setting up a new account. The teller checks the person is who they say they are by photo ID and verification of the date of birth with the PPS database. The teller creates the account, the PPS number is updated on the database with the account details, and the PPS number is flagged as having an account. You obviously cannot setup another account with this PPS number. If your PPS number is not on the database, no comeback, bad luck.

For children to get their accounts, the parents give the childs PPS number to the bank, the date of birth is verified and the process above is followed.

During the 4 weeks, teams visit each hospital / old folks homes with laptops and 3G cards for internet access and follow the process above.

Setup time? Lets double the 5 weeks above, and give it 10 weeks. This is not technical pioneering, 1 database, 1 table, 3 webpages with restricted access to the banks (VPN between banks and dept of finance, banks are generally good at security). Run time, 4 weeks.

The machanics of the system take no more than 3 months in total and the government ends up with a database with all the institutions, account numbers and NSCs. To put the money into the accounts a thing called an EFT file is generated from the database and the money moves from the government to the people.

I accept Sands assertion that when the banks write down the loans, this creates a hole in the balance sheet which only the goverment can fill, and also that this money is gone, forever. Nothing can be done about that.

Write all the loans down and you still do not have a functioning banking system. Not until loans (currently €370bn) and deposits (currently €80bn) come to within 20% of each other will the banks stop being zombie banks.

JC

My bad, from here:

http://www.centralbank.ie/data/MonthStatFiles/01-January%202010.pdf

Page 5
Non government Deposits - €170bn
Non government Loans - €368bn

NAMA takes €77bn reducing loans to €291bn. International norms of loan to deposit is 110% with 120% considered high. In this case 120% of €170bn is €204bn. That leaves a gap of €87bn. The obvious solution is for the banks to sell the performing loans, but that hasn't happened, and you would have to ask why?

JC