Excellent RTE Radio 1 programme on the Bank Guarantee 10 years on

I have to say that I was not expecting much of this programme. I expected it to be a repeat of the same old stuff - The Shinners and other populist left wing politicians bemoaning "The way bailed out the banks and the big boys at the expense of the little people"

But it was the very opposite! Fair play to Philip Boucher-Hayes for challenging the conventional narrative. And for keeping the politicians off the programme. It was so refreshing.

It pointed out that this popular view is wrong and focussed on two ordinary people who were worried about losing their deposits. One had her retirement savings in the bank. The other had the proceeds of the sale of a house which they were using to build another house.

They would have both been wiped out without the guarantee.

Brendan

I have just listened to Part 2.

It made one assertion and asked a question.

The assertion was that there was almost universal agreement that the bank guarantee or some form of bank guarantee was necessary. There was consensus that it was just a liquidity problem and that the banks were solvent. According to the program, the first person to question the guarantee was a guy who called into Joe Duffy that morning.

Just read back on Irish Economy.ie to see that this is not correct

Morgan Kelly had argued for some time that the banks were hopelessly insolvent. I thought he was exaggerating and I thought that they were solvent because they had no investments in American sub-prime bonds. PwC (IIRC) did a study after the guarantee and confirmed that they were solvent.

Reuters reported in September 2008 that Irish Nationwide was in talks about its future solvency. The Irish Nationwide threatened legal action. Shane Ross wrote a damning piece about the irresponsible journalism of Reuters and what a fine bank Irish Nationwide was.

There has been idle chatter for months about one or two Irish banks going belly-up. Last week Reuters news agency jumped the gun. As Irish journalists competed to break the story of a bank biting the dust, Reuters went walkabout. It published a fable about the Irish Nationwide Building Society, suggesting that it was in talks with its bankers about closing down the shutters.

Reuters, once the blue blood of journalism, must have known the consequences of its story. If it was true there would be a run on the Nationwide. Happily for small savers, it was nonsense.

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I had said that while I thought that the banks were well capitalised, the deposit guarantee should not be raised from €20k. If banks are insolvent, they should be let fail. I argued that guarantees are risky and could be very expensive for the taxpayer.

I would think that the vast majority of informed economic commentary at the time opposed the guarantee as it was and said that only the systemic banks should be supported. The program made no distinction between the systemic banks and Anglo and Irish Nationwide.

And the Labour Party would be disappointed at the programme. Labour voted against the guarantee. Or so they claim.

The main proponent of the guarantee was David Mc Williams who said it wouldn't cost us anything. He had the ear of Brian Lenihan.


The question raised was whether it was a sweetheart deal to help out FF's friends in the banks

There was a widespread perception that this was the case. And they interviewed a punter who said that at the time. But they had some other guy who said that there was no corruption and I got the impression that the programme agreed that the sweetheart deal suggestion was wrong.

Brendan Burgess said:

Morgan Kelly had argued for some time that the banks were hopelessly insolvent

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Did he argue this before the guarantee though?

He had certainly claimed that house prices were overvalued, but that's not the same thing.

This is what he wrote in February 2007:

households have not consumed home equity through second mortgages. Similarly, the larger banks which dominate lending are well capitalized and the banking system has,
until recently at least, avoided the worst excesses of the sub-prime mortgage mar-
ket, although it is likely that many interest-only and 100 per cent mortgages could
go sour, especially given the ease with which delinquent borrowers can relocate to
England.

NoRegretsCoyote said:

Did he argue this before the guarantee though?

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Very good question. I must look back and see what he said.

That quote in Feb is very close to my views on the matter at the time. That Irish banks were well capitalised and had avoided the US sub-prime market.

Brendan

Hi NRC

I see I documented his record here.


He had not been saying it for some time.

But they key point is that he was clearly against the guarantee and so there was not general consensus on the issue.


"We need to keep our retail banks going. There are some non-retail banks which could have been let go. Nobody would have missed them.

Brendan Keenan: The Irish banks say that they are short of capital and just need capital to trade their way out of this

Kelly: No other bank in the world agrees with them - it's not liquidity - it's bad loans.

Brendan Keenan: We know what Irish banks' bad loans are going to be...They will be about 1% of their loan book

Kelly: No, that is complete nonsense . They have €25 billion in capital. All the ghost estates you see around the place. That is the capital of the Irish banks. They are going to make horrific losses

Kevin McConnell - Bloxhams: Quoting international banking commentators: "Ireland will be the template for other countries ... We have intervened very early

Kelly: Of course they love them. The Irish Government has written a blank cheque for them. I wish they did the same for me.

Keenan: If it's a Swedish type banking crisis, of course this solution won't work - I don't the figures that suggest to me that this is a Swedish situation

Kelly: I disagree entirely . We are looking at losses in the region of €10 billon to €20 billion unless something miraculous happens in the property market which won't happen.

Miriam O'Callaghan : "As Shane Ross says, why help banks who have behaved irresponsibly?"

It's hard to be right on magnitude and timing, and even getting one right is an achievement.


Kelly's most spectacular miss is nearing its tenth anniversary, and was that national debt would hit €250bn by 2014. It turned out to be an over-estimate of €50bn or so.

The numbers never made any sense at the time. You would only need to borrow that much extra if the economy had done even worse than planned, and if that was the case no one would lend to you without re-structuring (Greek-style) of existing debt.

I listened to the third programme and, after the excellent first programme, it was very disappointing.

It repeated the usual myth "we had terrible austerity because we bailed out the banks."

He made it clear in the first programme that we bailed out the depositors and not the banks.

But he also knew that the cost of the bailout was €40 billion.

Our national debt increased by €160 billion since then. That is some austerity! We spent €160 billion more than we took in revenue.

He interviewed a single mother who suffered from the cuts. As with all RTE programmes, he never asked her how much the father was contributing.

Then he interviewed a dentist who showed a photograph of a teenager with rotten teeth and he could only do two fillings a year because of austerity. But why should I be paying for this guy's teeth if he couldn't be bothered brushing them for the last 16 years?

And he interviewed some economist from UCD who said austerity was a mistake. We spend €160 billion more than we took in from tax , so there was no austerity. And if we had not done it, we would not have been able to borrow.

Brendan

Brendan Burgess said:

Then he interviewed a dentist who showed a photograph of a teenager with rotten teeth and he could only do two fillings a year because of austerity.

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If the dentist was that concerned why didn't he offer to fix them for free? He's already on a very high income, where's his sense of social responsibility? I love hearing doctors and dentists and people like that bemoaning lack of resources as the reason they "can't" do things. What they are really saying is that the State should take more money from people who earn less then them and give it to them so that they can do more work.

Brendan Burgess said:

We spend €160 billion more than we took in from tax , so there was no austerity. And if we had not done it, we would not have been able to borrow.

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I don't think RTE are allowed to say that. It doesn't fit the narrative.

Purple said:

If the dentist was that concerned why didn't he offer to fix them for free?

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I thought that Philip might ask him that question, but he didn't.

Or maybe he did, and edited it out.

I assumed it was a dentist in private practice. But maybe it was a dentist in a health centre and maybe they were they limited to two fillings a year?

Come to think of it, it's not an unreasonable limit.

Brendan