Our story so far: Irish banks went hog tulip-wild, building out a huge residential and commercial boom. The construction was far beyond actual demand for the former Celtic tiger; it was essentially speculation run amuck.
Ireland had briefly found the pot-o-gold at the end of the rainbow: Everyone was making oodles of loot. Banks were lending money, investment firms were underwriting massive bond offerings, construction was booming, accountants and lawyers well well fed, all manner of jobs plentiful. It looked like Ireland had tapped into a massive wealth creation machine. In reality, it was halfway between a nation of greater fools and a Ponzi scheme.
And as these bubbles typically go, so long as the music is playing, all the fools danced the night away. Until the band suddenly stopped, and the reckoning was upon them.
For the first time in 15 years, emigration was greater than immigration. The Irish budget went from surplus to an highest deficit (by far) in the history of the Eurozone: 32% of GDP.
For reasons we have yet to fully learn, the Irish government decided to guarantee the banks’ recklessness. The 2009 bail out, plus the additional monies needed, will put the 4.5 million people in Ireland on the hook for €15,000 each — about $21,337.50 in dollars per person.
I normally am reluctant to offer up advice to sovereign nation as to how to conduct their affairs. But the new Irish government seems so very close to making a leap away from the rest of the bailout driven world and into the correct posture, that I had to add my two cents.
The bailouts in the US are instructive. Giving banks money to rescue themselves from their own actions does not lead to a long term healthy economy in a capitalistic system. Banks take advantage of the easy money, leverage themselves up all over again, and produce record profits.
But the banks are a negative, not positive, contributor to the economy post bailout. Capitalism isn’t a charity, and this was precisely what the US should have expected (and what a few people warned against). The risk reappears, no lessons are learned, moral hazard gets writ ever larger.
The alternative to the Japanese approach, adopted in part by the US, is the Swedish system. This is what the US FDIC does: Insolvent banks have their deposits guaranteed by the government, the banks are then liquidated, shareholders wiped out, senior management fired, assets than sold off to pay for the losses. Whatever is left over goes to the bondholders.
That is roughly what was done with General Motors. The GM prepackaged bankruptcy saved what was worth saving, reorganized the company, and allowed it to move forward.
This is what the US should have done with their own banks, but refused to. Both the Bush and Obama White Houses ceded their decision making on this issue to the former head of Goldman Sachs (Hank Paulson as Bush Treasury Secretary) and Citigroup Director and prior Co-Chairman of Goldman (Obama’s Economic advisor Robert Rubin).
The Irish politicians who made the bailout decision were tossed out. The new government has a window to not only show some backbone, but to take their country back from the bankers who bankrupted it.
Here’s hoping the Irish are smarter than the rest of the fools who now find themselves indentured servants to reckless bankers.
The Irish could surely use a modern day St. Patrick, to lead the snakes off the Emerald Isle . . .
Forget Nationalizing: An Irish Renege on Bailouts? (March 31st, 2011)
Merrill Lynch’s Horrific Irish Bank Adventures (February 6th, 2011)
Too Bad Banks Missed Out On the GM Treatment (November 18th, 2010)