The bank bailouts made very little sense, the biggest toxic bank, Anglo Irish Bank, was not a retail bank. They specialised in property financing. Letting them go under would not have resulted in the Irish Government having to cover huge amounts of deposits. The current majority party (Fianna Fail) has a history of connections to property developers and this connection is what a lot of people though spurred the saving of Anglo. Now more information is bubbling up about the exposure of European banks to Anglo and the other Irish banks. Europe (especially Germany) wants this mess cleaned up because if the Irish Government drops the guarantee then their own banks will have a huge hole in their finances. These were essentially risky investments made by foreign banks that the Irish taxpayer is now being forced to pay back.
Bank of Ireland and Allied Irish Bank were profitable (extremely so in the context of the Irish economy) and if kept in government hands would eventually make back their losses. Anglo made it's profits on the back of the property bubble, not something that will be repeated any time soon.
I'm in Berlin now and it appears the Germans feel these so called bailouts are rescuing countries that don't have their affairs in order. I think these bailouts are mostly to prop up German and French banks. Banks in Europe and the U.S. have finally figured a way to socialize their losses and privatize their gains. Big bonuses are still the norm at American banks even though it was their bad bets that led the U.S. to its current economic mess.
"Big bonuses are still the norm at American banks even though it was their bad bets that led the U.S. to its current economic mess."
I agree wholeheartedly, but there are _so_ many people who readily (and hastily) blame "dumb and poor" people who shouldn't have gotten mortgages, Fannie and Freddie (US loan guarantors) who backed those mortgages, and one rogue liberal US representative (Barney Frank) who somehow bullied the entire 500-member legislative branch and then President Bush into allowing more mortgages to be handed out to poor people, thus causing the worldwide financial crisis.
Seriously, that's what people actually believe. What can be done to convince them that it's way, WAY more complicated than that?
Barney Frank and a large cohort of liberal representatives fought tooth and nail against Bush's efforts to more strongly regulate Fannie/Freddie, but that's a separate matter. All Bush wanted was more strict regulations of their risks, mainly interest rate risk. All mainstream politicians were (and still are) in favor of inflating the bubble by subsidizing home ownership.
Yeah, it's hard to convince people that the CRA was not responsible for the real estate collapse. There were property bubbles in Spain, Ireland, Britain, etc. The CRA was responsible for those, obviously.
It's easy and natural for one to want to collapse a complicated issue into something manageable and understandable. Even if there is no evidence for it.
Holding interest rates artificially low, and very favorable tax treatment for real estate investments and gains, clearly added a lot of air to the bubble.
That was my general perspective too.. ie. that Anglo was the biggest source of the problem. So I was surprised to read this line:
"In October 2008, the Irish Independent published a list of the five biggest real-estate deals in each of the past three years. A.I.B. lent the money for 6 of the 15, Anglo Irish for just 1, as a co-lender with A.I.B."
Clearly the bank guarantee was a disastrous decision, and in hindsight could have been handled very differently. But at the time, as Lehman and AIG and Fannie and Freddie were in chaos, it didn't seem all that outrageous.
Anger is certainly an appropriate reaction in circumstances like this, but I find articles like this really gloss over the nature of the shared responsibility for what happened.
Yes, banks and governments (including the US! - we just haven't felt the full brunt of it yet) engaged in many unsustainable and downright fraudulent practices. Asset bubbles are breeding grounds for such things. On the other hand, no one forced homebuyers to take on loans they knew they could not afford, or spend borrowed money at unpayable rates.
Now, everyone wants a bailout. Neither banks nor consumers should get them. Iceland actually did the right thing by taking its banks into receivership and breaking them up. The banks screamed bloody murder and threatened national chaos, and the Icelandic economy did grind to a halt for almost a year. Now, they seem to be on a road to sustainable recovery. This is not true in either the rest of Europe or the US, where the bailouts came fast and generous. Look at today's job report. Is that the sign of economic growth?
While the decisions were justifiable at the time, TARP, TALF, and the like need to be admitted as mistakes and corrected. If this means recognizing all of our largest institutions as insolvent, so be it! The nation requires a banking system, but not any individual bank. It will hurt badly, just as it hurt in Iceland, but the alternative is Ireland and Greece.
On the other hand... for the equivalent square feet in Tucson, my rent went up 50% over a decade for the same square footage. When you see your rent go up so drastically, while everyone is getting low interest rate mortgages, you start to question your "fiscal responsibility." If I had bought in 2006, I couldn't have sold my property today. However, we didn't know where the "new normal" would even out.
People took on these home loans, in most cases, because of the fear of rent increasing past their ability to pay. If you buy, you may not be able to afford it now, but eventually inflation will bring the numbers into line, especially not knowing where the "new normal" would be.
People took on these home loans, in most cases, because of the fear of rent increasing past their ability to pay.
This is one of the most retarded ideas I've ever heard.
Renting: a small, liquid, short duration, unleveraged short position.
Owning: a large, illiquid, long duration, highly leveraged long position.
So basically, to follow a short term trend, people decided to tie up a large chunk of their life savings in dangerous, long term leveraged bets. Financial literacy FAIL.
I guess it's fine to put a lot of blame on people who bought houses they ended up not being able to afford. However, there were fraudulant practices by mortgage companies.
Banks have more responsibility for the mess because they are the experts (allegedly) at assessing risk. They are the ones that got ratings agencies to give high scores to the mortgage backed securities. They are the ones in a position to wreck the economy by collective failure. They are the ones who got a bailout and clamored for one.
An individual homeowner who makes a bad bet doesn't ruin the economy. Too big to fail banks who make millions of bad bets do ruin the economy. They socialized their losses and continue their extremely high pay and bonuses.
The anger should mostly be aimed at the banks. Especially in light of their dubious foreclosure practices. People are mostly financially illiterate. People don't understand percentages and compound interest. People are not rational (most of the time). A regulatory apparatus that isn't beholden to the banks is what is needed.
They are the ones that got ratings agencies to give high scores to the mortgage backed securities.
And that's an issue between them and the people/institutions they sold those securities to. It does not in any way absolve individuals for making dumb bets, particularly when those individuals often lied on their loan applications.
The housing bubble simply could not have occurred without financially illiterate people making bets they didn't understand in the hopes of getting rich quick. I agree with you that any individual bank had a more harmful effect than any individual real estate speculator, but that's just a matter of size. Collectively, real estate speculators are just as guilty as banks.
I don't disagree with you at all concerning bailouts. We should end "too big to fail".
But on the other hand, try to remember that real estate speculators also received massive subsidies (frannie, mortgage deduction) even before the crisis. The banks, excluding GM, have more or less paid back their portion of the bailout (this even includes the AIG portion). Real estate speculators have not paid back their subsidies.
The anger should mostly be aimed at the banks. Especially in light of their dubious foreclosure practices.
Many loan originators did shoddy paperwork to save a buck, and didn't transfer the lien's to the right party. Real estate speculators are now exploiting the legal problems caused by this shoddy paperwork to break their contracts and squat in homes they don't own. The loan originators absolutely deserve to be sued by the bond purchasers over their negligence.
But the real state speculators are also culpable for exploiting legal quirks to steal homes from their rightful owners [1]. We may not be 100% sure whether BankAm Loan Issuing Corp, BankAm Loan Servicing Corporation or the MBS corporation is the rightful owner of a home - but we are quite sure that the squatters currently occupying it stopped paying their mortgage and therefore do not have any right to it. The squatters deserve to be foreclosed upon, and then the loan issuer, servicer and bondholders can fight over who really owns the home.
Banks are a convenient political target. But real estate speculators are just as guilty as the banks.
[1] Obviously, not all real estate speculators are doing this, but I have read quite a few media accounts of this.
The whole "Fraudclosure" thing is a bit of a red herring. Yes, banks should be made to pay for their negligence in complying with basic mortgage laws, but does their negligence change the fact that the occupants of those homes have not and cannot pay their mortgages? The mortgages are delinquent, no matter who the actual owner of the note is. All the controversy has done is slow down a process that will eventually happen either way.
TBTF needs to go. Many banks, including big boys like JP Morgan and Bank of America, probably need to be recognized as insolvent despite the bailout money they took. The foreclosure mess in its own way probably only slows this down by continuing the cloud the status of the properties in question.
"The housing bubble simply could not have occurred without financially illiterate people making bets they didn't understand in the hopes of getting rich quick."
A financially illiterate person who makes a bad bet does so with someone lending them money. In the case of the mortgage market it is a financially literate person giving them money. It's not mere convenience to place greater blame with (investment) banks.
Historically, a person put 20% down on their property as a down payment. The interest rates were high, at least 8%, sometimes over 10%. Take the house in 1970s tucson that was $30,000. Interest rate was about 10%, the down payment was 6,000, so the payment was about $250 a month.
Now, drop the down payment requirement, and drop the interest rates to 5%. that same $30,000 dollar property suddenly costs about $175. But, there are plenty of people who can afford $250. So, they value (perhaps erroneously, but follow me here) the object not as its purchase price, but rather as a comparison to what they pay as rent.
Suddenly, people are valuing the property as $45,000. But more importantly, people who don't have savings but have income are looking and saying, "I can afford a house!" Thus, demand rises along with the perceived value of the property. Then, the people with rental property look at increasing mortgages and adjust their rental properties' prices accordingly. Investors look at increasing prices and create a follower effect. Demand increases.
Rent increases. The bubble has renters facing higher costs looking at property not as an investment, but as a hedge against increasing rent costs. This isn't necessarily a bad decision: consider if you are buying in 1999. You can barely afford the property, but you are averaging 3% raises. That $35,000 salary in 1999 is $48,000 in 2010, but the housing cost is the same.
I forgot to follow this with: The problem with 2006 is not only that the property value is diminished, making a property sale impossible, but it is combined with a recession. If you could afford it before, you can't after you lose your job, at least not past your savings. (I know people out of work for over 9 months.)
The total domestic residential mortgage book kicks in around 750,000 contracts for a total of 100bn EUR in the Republic. 3% of that is according to a Goldman Sachs report a pessimistic default rate. 3bn EUR sounds to us like pocket change these days.
The responsibility is not shared as evenly across Ireland as is commonly thought.
Most of these are high street banks (equivalent to S+L) that were making housing loans. You want to tell pensioners that their life savings are gone and the government is not going to do anything?
It might work - but it also means people will stop putting their money into banks, which means no credit cards, no business loans, no mortgages, no saving, no insurance.
So everybody will only deal in cash which means no taxes.
Admittedly ireland is probably closer to a 12th century barter economy than the rest of europe - but I don't think it really wants to go there.
I live in Ireland, and it was quite disheartening when the last budget cuts appeared. Taxes were increased across the board. If you were earning 25,000 Euros a year, you would pay an extra 1000 Euros in tax (and surprisingly enough, this low earner class was the worst beaten income group by hike in tax in percentage terms - 4+% more tax!).
Since its general consensus that banks, govt. etc are at fault (to which I agree), I want to say something which generally is ignored, just a theory. The Celtic Tiger years, due to low Corporation Tax rates, have had the similar impact on the economy as Resource Curse (http://en.wikipedia.org/wiki/Resource_curse). Ireland got rich so fast with all the incoming money that lots of careless spending by government as well as people was ignored. The property prices went up crazy, things became awful expensive etc etc. When nobody cared about how much govt spent or how much banks are landing real estate developers, this was bound to happen IMHO. If Ireland had gotten rich slowly and on its own (by increasing exports, productivity etc), such rackless spending bubble economy would probably never have manifested itself.
As someone currently living in Ireland, I found the subtitle of this article particularly appropriate: "Where's the rage?". The Irish government bankrupted the country many times over by putting the debts of the banks on the backs of the people. But, unlike France, for example, where people have taken to the streets and brought the country to a halt to be heard, in Ireland there is nothing like the level of activism that one would expect given the depth of the economic quagmire.
I find it quite sad to see how a country that was once such a hotbed of political unrest has become so passified by the recent wealth that it experienced. My guess is it has to do with people having the feeling that they are stakeholders in the system now, with mortgages and fungible assets, and so they are less willing to want to subvert the system itself rather than muddle along even with unsatisfactory political solutions.
You're advocating unrest? The government has disbanded and elections have been called. They're in for a kicking, which although short of full-on political reform, is something several hundred people had to die for in Egypt.
Would it satisfy you if we burned a few cars? Where do you live? I'll meet up with you later and we can tear your street to shreds if you like.
Not much of a comparison between Ireland and Egypt obviously. That's why the comparison to France is more appropriate: where the people were actually unwilling to take it lying down - as they are doing in Ireland. It doesn't matter that a general election has been called. With the poverty of leadership in Irish politics at the moment, Ireland is in for more of the same incompetence that led to the current disaster from whatever regime takes over. With activist unrest earlier on, it might have been possible to make it clear that the decision to bailout the banks was unacceptable and needed to be reversed. So, yes, sometimes you have to burn a few cars if you want to be heard. Instead the passivity of the Irish people has doomed the economy for generations.
I wonder about that. I view our (lack of) reaction as mature, not passive. People died in Greece and they burned all kinds of things. They still have a huge debt to pay back. We're taking it like grown ups and having an election.
If you have to choose between a mature reaction that keeps you in debt and an immature reaction that leads to reversing the bad decisions that have been made at the citizens' expense, I would take the latter. But most Irish seem too concerned about their precious "international reputation" to do that - I hear this refrain all the time. Many people seem more concerned with the effect of the crisis on Ireland's reputation abroad than with the impact on current and future generations. "Taking it like a grown up", as you put it, is not the highest aspiration one can have in this situation - you could simply refuse to accept the situation and create such a stink that nothing can happen in the country until some of these devastating economic decisions have been reversed. If Iceland can get away with it, Ireland can too.
My argument is that violent protests would do very little to help. We're having an election that will throw the ruling party out. The next government are campaigning on the basis that they'll get a better deal. I doubt they will succeed, but rioting on the assumption that the problems can be decided away won't make it any more likely.
Ireland is the old sow that eats her farrow. It's no new thing for the old cronies to eat, in advance, the productivity of the younger generation. They'll sell off the country's future to protect what they have today. The only way around it is to leave; there will be no tolerance of a revolution.
In a nutshell, that's it. People have a sense of resignation on the whole thing. There is very little prospect of things improving any time soon. The choices would appear to be a) adjust to a lower standard of living, or b) get out.
Also Ireland vs. Iceland. Both got massively screwed over not by the government, but by mismanaged banks. Ireland's stuck its own taxpayers with the debts of its profligate banks, and done the "austerity" thing to pay for it. Iceland let the banks go broke, and let the banks' overseas debtors take the hit. And even though the Icelandic banks screwed up worse than anybody's, Iceland's doing as well as Ireland in total output (better than the Baltics), and a lot better in unemployment, which is kinda relevant if you're an Icelander.
Ireland and Greece are COMPLETELY different. Greece's government budget is wildly fraudulent. Ireland's government was responsible, but decided to encumber taxpayers with private banking losses. Irish voters, like those in Iceland, may yet reject this deal.
I know I would. The international banking cabal has captured the "democratic" processes across most of the West and is using those governments to plunder their people.
"Ireland's government was responsible...." absolutely untrue.
"As a small, open economy, Ireland was always going to be vulnerable to global swings," says Ray Kinsella, an economist at University College Dublin. "But this is predominantly a self-inflicted crisis."
There was an expensive, taxpayer-funded study done (can't seem to find it atm, but if you Google around you may find it) which basically concurs with the above statement - our crisis was largely our own making. The international credit crisis may have accelerated it slightly, but it would have happened eventually anyway.
I attended a great presentation by a guy called Ed Walshe, who is the former president of one of Ireland's biggest colleges (http://en.wikipedia.org/wiki/Edward_M_Walsh) where he laid out in black and white all the idiotic stuff the government got up too when times were good. Things like massively increasing the numbers of civil servants - not in front line services like doctors, nurses and teachers; but useless bureaucrats in offices in Dublin, massively increased civil servant pay - way ahead of inflation (this effectively bought them popularity for the next election), cutting income taxes across the board, 'throwing gasoline on the fire' by giving extra tax breaks to property developers (section 23 and section 50 tax breaks) when things were extremely overheated and the brakes should have been applied etc. etc. I can dig up a copy of the presentation on my hard drive if you are especially interested.
Also adding to the problem was non-existent regulation of the banks and construction industry in general. The head of the construction federation was a guy who was former Fianna Fail (the main party in government). The head of the banking lobby was a former member of a party that was in power with Fianna Fail. Basically at the highest levels in Ireland the whole scene operated like a gigantic old boys' network that would put things to shame in most other parts of the world.
One of the few positive things to have come out of the financial crisis of 2008 is that it has probably killed any prospect of Scotland becoming independent - we used to be promised that we could share in the same kinds of success as Ireland and Iceland if only we had the courage to go it alone!
I doubt if many people have the appetite for being stuck in a small country with a financial monster like RBS or HBOS.
Whenever I hear about people wanting to break away like that I'm always reminded "There's strength in numbers". As the world economy starts to flatten out, we're all learning that it comes down to a population game. I wonder if we'll see a point where two countries vote to merge together to create a stronger economy.
Yeah but I think many of the states in the European Union are coming to realize that shared currency is fatal if they can't control economic legislation.
To that degree I meant a real merging of two countries, currencies, legislation, politics, everything.
Yes, the EU has those advantages, but it's bloated, unwieldy, mainly tries to serve the interests of Germany (biggest economy) and is ill-structured to deal with the type of problems currently affiliating the 'peripherals' (or 'PIGS': Portugal, Ireland, Greece, Spain). The features of a common monetary policy are great when times are good, but allows the problems of one nation to spread like a virus when times are bad. So it's a double-edged sword.
I find that statement a bit weird. Germany are on the hook for something like 120 billion in this bailout. That's €1500 for every man, woman and child in the country.
And that's after essentially funding the EU for the past 20 years. Though things have levelled a bit of late, they used to have net contributions about 3x higher than the next one (the UK).
But which is actually worse off right now? If the currency markets are anything to go by, the GBP has sunk from 1.5 to 1.2 Euros, and that's after the beating the Euro has taken in recent months.
"Independence in Europe" has been a policy of the SNP for a long time. Interestingly enough the relevant page on their site still has:
"The SNP believes that Independence in Europe is the logical next step for Scotland to take on its road to becoming a normal, democratic, European nation, just like Denmark, Ireland or Luxembourg."
From what I heard here in Scotland the general impression was that his conviction was probably unsound and that he would probably have been released on appeal anyway - almost certainly exposing a lot of poor investigation and legal work during the original case.
To save embarrassment there was probably a deal done where he dropped his appeal and he got returned home:
"Which way entire nations jumped when the money was made freely available to them obviously told you a lot about them: their desires, their constraints, their secret sense of themselves. How they reacted when the money was taken away was equally revealing."
Wow, great to see Michael Lewis, one of my favorite authors, coming to little ol' Ireland and do such an in-depth piece on us. I had no idea that the insane decision to bail out Anglo Irish was so directly linked to Merrill Lynch's 'advice'.
Interesting fact: I was sitting less than 50m away from the heroic egg-thrower when he went for the kill. Wasn't in the same room unfortunately. We were warned to hide our bank ID badges that day going in and out of work :-)
One fundamental problem we have in Ireland is the way in which we elect our Dáil (parliament).
There's a 4 minute section in this video (43m45s onwards ) http://www.rte.ie/player/#v=1090239 which explains better than I can, but here goes:
In short:
1. There are multiple seats (often with a few candidates running from the same party) per constituency.
2. It doesn't take many votes to get elected (Any more than 8,000 votes got you elected in my constituency of 86,000 people).
Politicians don't compete on the differences between their parties because they're also competing against another locally running party member. Instead, they wage very local personality based campaigns. Since they only need a few thousand votes, they can and do call door-to-door to chat with everyone they can. Pothole need filling? Let your local candidates know and by god it'll be fixed immediately.
This means that the people who end up making important decisions on whether or not to take on 100s of billions of euros worth of debt are the people who came across best on a few thousand house calls.
this seem similar to the system we had in italy up to some years ago. It was changed so that the party decides who is running, and people cannot vote on the person.
The result is, of course, that people who would be ineligible because of obvious incapacity (or any other reason) still get elected when people vote for the color instead of the person, and the parliament is full of lackeys who don't dare to disagree with the leaders for fear of not being put on the safe list the next time around.
Be careful when you wish for a better system, you may end up with a worse one :)
There's a great book written by a civil servant in Ireland's foreign ministry in the 80s.
He said he had two maps on his wall, one of the eastern bloc enemy and a bigger one of his minister's constituency - a crisis (eg a pothole) in the constituency was the priority.
Ha! That doesn't surprise me at all. What's the book called?
There is an appetite to reform this stuff now, but it's hard to imagine the winners of the game when played by those rules deciding to change it dramatically.
Australia also has had a long, rolling property boom, with bank lending behind it all.
It didn't pop when expected because our economy was propped up by mineral/metal prices, due to China's demand and surprisingly little supply from other countries. Both may change.
the underlying demand is far different though, the demand for the new housing being built is high. The rental market is also very expensive and has almost zero vacancy. Whereas Ireland sounds like they were struggling to fill the housing being built in Australia the demand for new housing is higher than the rate at which they can be supplied. Maybe at some point things will go backwards but things still look very good in the short to medium term.
Crossed my mind to ask if anyone saw any parallels with Australia. Glad to see someone mention it.
My rough interpretation of the article is that cheap labour from Poland distorted the Irish economy, and the banking contagion resulted in loans to the Polish who couldn't afford the loans, and subsequently disappeared, especially once the whole economy went sour.
An important difference to Ireland's story is that the people who make up Australia's cheap imported labour face greater restrictions in entering the country as they are, with the exception of New Zealanders who are have the same living standards as Australians, international students (and possibly people on working holiday visas) who, to my understanding, are required to demonstrate sufficient funds to get by. Staying on after graduation of whatever course is not guaranteed and has become more difficult post a recent policy change. Australia runs a points system in issuing residency visas and has just cut the number occupations/courses which receive points.
My feeling is that the same expectations fueled bubble has arisen here (I'm in Melb) but has been sustained by the resilient resources dependent economy as well as the capital inflows from those who see Australia as an attractive place to invest and/or also live/have a holiday home.
"real-estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than expectations."
Although the factors driving the housing bubble in Australia are different from those in Ireland, if we concede there is a bubble in Australia, and we listen to economics professor Morgan Kelly, we're due for a crash.
A couple counterpoints to the above: China's demand for resources will probably span another two or three decades, and also Australia's financial lending practices are not and haven't been as lax as those of Ireland or the US.
Banking seems a lot like a gambling except that it's heads you win and tails they lose.
Lend big into a property bubble and you'll be rewarded with colossal bonuses.
The bubble bursts, loans go bad and the share price collapses.
However the main banks banks are considered too big to fail and the taxpayer has to bail them out.
Bonuses (smaller ones) for exceptional performance continue to be the norm, rolling heads the exception.
Why don't the shareholders get rid of their employees, the bankers who have overseen the collapse of their asset?
The shareholders are Pension funds who, while they ostensibly have the little peoples'interests to preserve, are actually run by people from the same gene pool as the bankers themselves.
These people sit on one anothers remuneration committees.
"Too big to fail" is a classic perverse incentive, and a mockery of the idea that the financial industry can somehow self-regulate.
Unfortunately, if you remove deposit insurance (or any of its variants), people's savings once again become subject to the self-fulfilling whims of insolvency or the unfounded rumour of insolvency.
Bank of Ireland and Allied Irish Bank were profitable (extremely so in the context of the Irish economy) and if kept in government hands would eventually make back their losses. Anglo made it's profits on the back of the property bubble, not something that will be repeated any time soon.
This is the perspective of an Irish economist on the debacle: http://www.ronanlyons.com/2011/01/18/the-irish-bank-sandwich...