The Dubliner Magazine: Arise, ye bankers from your slumber!

So the gratin of Irish economics(ed-shurely shome mishtake?), some of whom have been drinking from the bitter teat of Milton Friedman throughout their entire careers, now wants to nationalise the entire banking system. See today's Irish Times for their mea culpa-free screed.

They're right, of course, and nationalisation will happen eventually, but you could have read it here first, over six months ago:

October 10, 2008

Nationalise The Banks

says Max McGuinness.

While the government's reckless decision last week to guarantee all bank deposits has since been replicated by those hitherto famously good sports -- the Germans -- it has nonetheless exposed the country to a serious risk of long-term national insolvency and was guided by Fianna Fáil's traditional something for nothing hucksterism.

By contrast, the British government's policy of a proposed part nationalisation of their banking system is a costly but courageous move, whose wisdom, I believe, will become increasingly apparent in years to come, though it may well need to be extended to full public ownership.

Rather than pay the real price of a collapse in banking confidence -- i.e nationalisation -- Cowen and Lenihan thought they had hit upon yet another ingenious wheeze. They would guarantee deposits, staving off a looming bank run at a stroke. And, they reasoned, the ploy would not cost the exchequer a penny since the guarantee would never actually be tested.

In the process, the government has assumed responsibility for liabilities totalling some two and a half times GNP. That's almost €100,000 for every man, woman, and child in this country.

The logic behind this move worryingly resembles that underlying the creation of sub-prime mortgages, which sparked off this whole crisis in the first place. The banks thought that they could get away with lending to people who would not be able to pay back their loans because, if they came close to default, the ongoing rise in property prices would allow them to "refinance" -- i.e take on more debt -- and so on ad infinitum. If they didn't refinance, the bank would be happy to seize their property since it would by now be worth significantly more than the value of the mortgage taken out on it. Thus did it appear that everybody in the western world could get richer and richer simply by buying and selling houses to each other for all time. Big mistake.

The government similarly thinks they have hit upon a win-win approach. Confidence in Irish banks is restored and people around Europe rush to deposit their cash in the secure vaults of BOI, AIB, Anglo-Irish, and even the British Post Office, whose current account service is owned by BOI. Sure, we pissed off everybody else in Europe, particularly the Brits (that's half the fun, isn't it?). But soon enough even the Krauts were shamelessly imitating this Made in Ireland piece of economic policy. Next year's John Bates Clark Medal awaits you Mr. Lenihan!

Yet the fundamental problem of Irish banking is unaltered -- this is our banks' vast overexposure to a plummeting property market with a majority of assets (around 63 percent) made up of either secured loans to property developers or homeowner mortgages in the UK and Ireland. All of these are rapidly decreasing in value and will most likely continue to do so for at least another year and probably longer.

As more and more customers default, the banks' losses will mount and their cash flow, already stretched to the limit by inadequate capital reserves (NCB stockbrokers say the big four Irish banks need up to €14 billion in additional capital to weather the crisis), will dry up further, raising the possibility that the banks might not be able to service regular liabilities. At that point, the government guarantee would come into play since the international money markets are paralysed. And there lies the rub. For the guarantee is the equivalent of a nuclear bomb -- it only offers security if it is never actually used. If a bank run occurs despite the government's guarantee, it will be proved to be meaningless since the government cannot possibly afford to finance it.

The real problem in Irish banking is thus basically one of solvency. The only way to make insolvent banks solvent is by investing a dollop of real, hard cash in exchange for shares.

This is what Gordon Brown and Alistair Darling did this week. At the moment, no bank has actually jumped at their offer of £25 billion in investment in return but once they have exhausted efforts to find the money on the global markets, they will clearly come running.

Brown and Darling seem fairly determined to ensure that the money is not frittered away on paying incompetent staff excessive bonuses. Contrary to the establishment view in Ireland, this is not mere "tokenism". Last year, £8.5 billion in bonuses was paid out in London's City -- over a third of the proposed capital injection and a large percentage of the banking sector's current market capitalisation.

Today's dramatic 381 point fall on the FTSE and the continuing high level of the LIBOR (which shows that banks are still extremely reluctant to lend to each other, let alone anyone else) suggests that even this may not be enough. Nor will further interest rate cuts -- this week's co-ordinated half point cut seems to have had zero impact on confidence.

Full public ownership and management could become inevitable if the plunge continues. Gordon Brown has made it clear that he is willing to do "whatever is necessary" to stave off economic crisis, which is code for keeping this option open. That would force banks to lend to each other, instantly alleviating the credit crunch. It would also allow more radical measures to be taken. For instance, government-run banks could offer extensive relief to mortgage holders, particularly at the lower end of the market.

The idea that banks should be run by the government used to be ridiculed as the height of retrograde Stalinism. The situation, to put it mildly, is not ideal. But this now seems to be the least worst option. Free market banks, it seems, just cannot be trusted.

If British banks are completely nationalised, it will be because Brown has been forced into it; the Labour prime minister is in fact pathologically averse to the socialist connotations which go with the measure. Still, this week shows he is prepared to do so. We should consider the same. Given a historically low level of national debt, we can well afford it, Stability and Growth Pact be damned (

Brussels' rules on borrowing are made to be broken, says today's Lex column in the FT). Otherwise, given our foolish blanket guarantee, the whole country runs the risk of going belly up.

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