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London and Dublin banking bailouts compared
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A couple of things are emerging today. First, it’s clear that the government had no contingency plan ready before last week for a banking crisis. If they did, it wouldn’t be taking this long to get the specifics of the banking system liability guarantee out. As it is, we have the original statement from Brian Lenihan, the legislation passed by the Dail, but no details of how the guarantee works and no prospect of such details anytime soon. Second, the UK has brought in its own guarantee today but it is much more restrictive. Chancellor of the Exchequer Alistair Darling has announced that the government will underwrite any new equity sales by UK-based banks and will guarantee any “eligible new debt” issued by them — not all their debt, as under the Irish guarantee. The total debt guarantee will still only be given on an ad hoc basis, as with the Bradford & Bingley and Northern Rock takeovers. Likewise the complete deposit insurance will be ad hoc, as with Icesave, a victim of the Icelandic debt crisis. It remains to be seen which country has the better policy, but so far the UK is showing better focus than Ireland.
I was looking at the pre-foreclosures on http://www.buymyhousebeforethebanktakesit.com and tried to tie our current events into historic events. I came across these famous old quotes;
This (Federal Reserve) Act establishes the most gigantic trust on earth. When the president signs this bill, the invisible government by the monetary power will be legalized. The people may not know it immediately but the day of reckoning is only a few years removed, the worst legislative crime of the ages perpetrated by this banking bill.” - Charles A. Lindbergh, R-MN
“We have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks. Some people think the Federal Reserve Banks are U.S. government institutions. They are private credit monopolies; domestic swindlers, rich and predatory money lenders which prey upon the people of the United States for the benefit of themselves and their foreign customers. The Federal Reserve banks are the agents of the foreign central banks. The truth is the Federal Reserve Board has usurped the Government of the United States by the arrogant credit monopoly which operates the Federal Reserve Board.” - Congressman Louis T. McFadden, Chairman of the House Banking and Currency Committee, addressed the House on June 10, 1932. 75 Congressional Record 12595-12603
“Capital must protect itself in every possible way, both by combination and legislation. Debts must be collected, mortgages foreclosed as rapidly as possible. When through the process of law the common people lose their homes, they will become more docile and more easily governed through the strong arm of government applied by a central power of wealth under leading financiers. These truths are well known among our principal men who are now engaged in forming an imperialism to govern the world. By dividing the voter through the political party system we can get them to expend their energies in fighting for questions of no importance. It is thus by discreet action we can secure for ourselves that which has been so well planned and so successfully accomplished.” - 1924 US Banker’s Association Magazine
“The UK is showing better focus than Ireland” - Yeah? The right solution for us is not going to be the same as the right solution for them, because their financial basket is a lot bigger than ours and has a different mix of eggs in it. The UK couldn’t do what we have done because of the scale of their financial sector. Far as I know, they employ one million people in the London financial services industry alone.
At the end of the day, this crisis will either bottom out and the market will begin to recover or it will degenerate to a stage where the world economy collapses. At which point it will really make no difference what kind of scheme any government has in place or how it compares with any other government’s scheme; there’ll be nothing left anyway.
It’s hard to predict this stuff obviously since virtually nobody saw the chain of events of the last month coming. However, I remain yet to be convinced that the Irish reaction is not still superior to the UK one. Why? Because guarantees only matter when called upon.
The Irish guaranteed, unformed as it was, immediately halted the CDS rate decline on Irish banks and any outflow of deposits. The financial outlay so far has been minor. Ireland has been handed a chance by its actions to implement its legislation in an urgent rather than crisis manner.
The UK and other EU partners, by waiting and acting in increments, have broken some of their financial institutions and costs are already accruing.
It is far far too early to say with any certainty which approach will work over the long term, but in the short term all the Irish banks are operational which is more than you can say for others. It is incumbent on Irish newspapers and other media to be absolutely sure of its ground and exercise SELF-control before breaking stories on banks and credit unions in Ireland during this time - free speech masking greed for circulation could do horrendous damage.
One further point. There is a reason why it is prudent for government to guarantee deposits at times of national crisis when it is not merely protecting the private interests (and errors) of the institutions concerned. This is because a cascade failure of banking institutions will bring down a bank which plays by the rules almost as quickly as the cowboy. Badly run banks will rarely kill others except where the financial market is undiversified (and reason to worry about the enforced mergers taking place in the US). A system gone bad with scope to shore it up, as in Iceland, can have catastrophic consequences for investors and managers behaving with the utmost prudence because of their necessary associations and interconnections.
We’ll know a lot more next week since by then the UK will have revealed the specifics of the plan to inject capital into banks. I think the Irish plan still looks appealing to a lot of people (not least some policymakers) because it is relatively simple to explain and comprehensive (although note the details of implementation do seem to be difficult). Clearly the policymakers have looked at the cost of banking failure, Lehman in particular, and decided it’s better to save a troubled bank and worry about the incentive problems later. I’d also love to be a fly on the wall at the Eurozone summit in Paris tomorrow. Are the others angry at Cowen, envious, or a bit of both?