No Bailouts, no free lunches

law of the jungleIf you were to describe the world of finance or investment as a ‘jungle’ then it would be a fair comparison to say that the first rule of the jungle, the core principle of it, and that which must remain as a central tenet is this: Investors who take a risk should always lose if that risk doesn’t pay off, equally they should always reap the reward if it does.

Seems simple right? Wrong, we are seeing the build up for a bail out in the press on a near constant basis, the majority of which is pointing towards the construction sector or the financial sector. This is all totally wrong, and it goes against any right thinking concept of capitalism or free markets.

Banks in particular don’t like regulation and press constantly for free market principles, so they of all firms should get zero help from the government if one of them goes bang. Further, they didn’t freely share their profits with Joe Public when things were good so why should Joe Public have to share their misery on the way down?

financial crisisThere is a serious moral hazard brewing in the Irish economy when we start to feel that saving a bank would be acceptable. The issue is that it basically rewards an institution for haphazard management, it’s like the prodigal son coming home to a forgiving dad, it might make for a good biblical story about forgiveness but in economics it should be read more like a story of the economy being Superman and a bailout is Kryptonite.

The CIF is lobbying the government to take action that would ‘kickstart’ the property market, again, this would amount to government interference where it doesn’t belong, and further, where it would only cause more trouble than it would fix. The government has shown too many times in the past that its moves to ‘help’ the consumer has actually had the opposite effect, and indeed the main beneficiaries of any of their moves thus far have been the construction and financial sectors.

CIF want no evilThey have also asked the NTMA (National Treasury Management Agency) to tap into the states pension funds in order to orchestrate a bailout for Irish Banks! Tom Parlon, I am asking you honestly, are you totally insane? I sincerely hope that he fails in this effort, it is not a solution and I will be out with my own ‘anti-this stupid idea’ placard should it ever get any serious reception.

So perhaps we’ll have to launch a ‘hands off’ lobby group which asks the government to let private firms receive the fate they earned, and where we ensure that the public doesn’t have to bail out a bank. I hear you ask ‘how will the public have to save a bank?’. Simple, there is €526 million in the deposit guarantee scheme, not even 1/20th of the amount that the smaller banks would have on deposit (and of the big banks its less than1/100th).

irish central bankIf a bank goes bust then that money will quickly dissolve, depositors will lose out and the remainder – if a bailout is engineered – will come from the government coffers, and where do they get their money? From the taxpayer, or by issuing bonds which fall liable on the government and thus ultimately the tax payer, so all roads lead to Rome. A bailout will spell bigger disaster for society than it will for the people who entered into risk knowingly. By that I mean the investors who stand to lose the most.

The Central Bank are not blameless in where we find the financial industry today, they never changed requirements on the amount of money banks had to keep on reserve in hard cash, they never increased the percentages that had to be paid into the Deposit Guarantee Scheme, and further, they never made the Deposit scheme increase with inflation.

finance bail out is a lost causeOne argument is that they no longer have control over the ECB rate movements, which is true, but it’s only one part of a more complex puzzle, if the Central Bank had asked the banking industry to increase their reserves then they would have had to obtain and maintain more liquidity on their books, that would have actually benefited the sector over the last year that history will refer to as ‘The Credit Crunch’. If they had taken this simple step then it would have cooled lending and thus property prices, there is a direct and consistent correlation between property prices and interest rates, one that even the low level management in the Central Bank are aware of, they have failed the people of Ireland in their inability to take appropriate action in a timely manner.

irish coffers are emptyWe are now at a point in time where the fiscal wallet is empty and this will bring with it its own ills. Where is the money going to come from? Again, it will be ultimately heaped on everybody, the method is either higher taxes or bond issuance which will one day need to be repaid (with interest!).

This paints a fairly depressing picture to be sure, but it is vital that people know something – this crisis is not down to ‘the Americans’ or ‘banks’ we have not seen adequate leadership from the highest levels in this nation and that also needs to be accounted for.

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