Now that everything is Guaranteed (bank deposit outlook)

ireland banking bailoutNow that countries are standing behind their national banks what will happen? Greece has backed deposits, Germany did the same. France, Britain, and Italy may follow. The leaders of these countries met earlier today to seek some resolution. The news is now unfolding fast enough that even industry experts are struggling to keep up with it. Alistair Darling is initiating a plan to buy shares from the banks.

Iceland is seeking to guarantee deposits and Fortis was taken over by BNP Paribas. The latest news is that the Fed cash auctions have been boosted to $900 billion. The current issue is that banks Paulson plan is trying to take the uncertainty out of the banks balance sheets by attempting to buy toxic assets, but will banks sell? It depends on what price is offered, lower prices need to be established and recognised because interestingly low interest rates mean that banks will keep these assets on the book because they are at least paying more than what is being earned on the interest rates.

Part of the issue is that foreign guarantees are stronger than those offered in Ireland because all things being equal, the wider the guarantee the weaker it is. A government who guarantee only deposits is less exposed than one (like our own) who tries to cover everything. And if you live and work in Ireland perhaps the wise route is to diversify your deposits into other countries so that you have a portfolio of economies with which to back your deposits, personally I favour the German economy over our own, it’s not treason, just a financial opinion.

hyporealestateAnother issue is this: If you are in a war and have a knife you are at a distinct advantage over the people who don’t, if you have a gun then you are at an advantage over the people who only hold knives. We have a guarantee now that gave some instant reprieve, but if every country does the same then it comes down to the second and third factors. Using the example above it would be the people who have a gun and a knife who are most likely to be victorious all other factors being equal.

There are now calls for increased regulation (which may actually choke the market it is intended to save) and to be fair, the nation can call for what it wants but the fundamental error remains: We gave a guarantee first and sought conditions secondly.

Think of that in a non ‘high finance’ way, think of that as the difference between going to a car dealership and paying for a car after you had a test drive and knew what it was about, or in advance with no concept of what the car looked like, the model, or colour. It’s easy to see that the latter seems a bit silly. Sadly, we just gave a €400 billion backing using that precise methodology.

vladimir putinFinance is in the trenches at the moment, I have watched several competitors close down in recent days, a good firm who were broker of the year in 2008 won’t win in 2009 because they now have ceased to exist. The scary thing is this: they were a good firm, a group of hard working innovative folks, if that can happen to them it can happen to anybody.

A point of frustration is that for all of the commentary there has been no panel of concerned citizens or financial advisers sought to give any guiding counsel, if the Department of Finance said ‘we have 50 seats for a group to meet and discuss ideas, the good ones go to the man himself’ then we would have a big wealth of alternatives, instead, much like the Titanic, we floated on confidently, until that fateful iceberg called the ‘Irish Banking System’ knocked on the door informing the state that they were about to go bang.

Here is some honest reportage: The markets will always go up and down, the poor people who most of the time don’t even invest in them get hit the most by a group who are generally richer and better educated – loop until the end of capitalism.

deflationOur recent move is an example of this – the average taxpayer – being asked to underwrite the average bank, the bank who did not publicise profits during the good times but they will share out losses readily. Banks didn’t set out to do this, but that’s the way it worked out and in any other example help would not be given.

Every commentator and Minster has said ‘it beats the alternatives’ but the fact of the matter is this: we will never know, because at the first sight of genuine turmoil we ran. That’s like a guy who retreats, and then other retreat with him, when everybody retreats they say ‘I’m glad I ran or we would have been butchered!’… truth is we’ll never know, now that we have opted to run away the only ongoing solution is to keep on running and fear comes at a price. I just don’t know if anybody (myself included) is ready for the cure.

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