Repay Bond holders in full (with mortgages)

You can’t hope for isolated solutions in world where everything is bound together, which is the foundation for taking a more pragmatic look at a solution for Irish Banks and households, because one inherently is reliant upon the other.

That our banks were underwritten by all of our citizens (minus any consent in that debt bondage process) is a given, however, it would be a mistake to think that there can only be a one way flow of funds or solutions between the two parties.

The conundrum thus far is that the ECB don’t want to see any bond holders ‘burned’, while at the same time this nation should not be guaranteeing any facet of the securities markets any more than we should have protected bank share holders; and then we have the third and fourth legs on this table of madness, the IMF who (counter to the ECB) want burden sharing and an overly indebted society incapable of paying back the money they borrowed.

Somehow within this morass we …

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The ‘big bad bank run’ is very quiet

bank run as defined by Barron’s dictionary of banking terminology as follows: ‘A series of unexpected cash withdrawals caused by a sudden decline of depositor confidence or the fear that a bank will be closed by the chartering agency. Today the ‘silent run’ is much more prevalent than bank runs in the past where customers lined up in front of the tellers window and demanded their cash. Today depositors simply transfer interest rate sensitive funds – called ‘hot money’ to other institutions, also called ‘a run on the bank’.

Several things have been happening in Ireland that feed into this, firstly is that some banks are leaving the country, that partly helps to make the €40bn that left in December make sense (the figure for all of 2010 is about €110bn). Then there are confidence issues with downgrades and the like.

One of the most common personal finance questions I get is about deposits being safe in the bank here, and on sums below €100,000 I hand on heart …

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What happens when you lynch bankers?

Every calamity in human history tends to have a corresponding scape goat. Often in financial busts it becomes xenophobic, race often plays a strong role, the US Civil war was as much about the dichotomy of the Northern and Souther economies as anything else, while slavery was front and centre it was the fundamental economic difference between a plantation system in the south and a rapidly industrialising economy in the north that helped to draw battle lines. In fact, your average southerner wasn’t a white slave owner, they were a poor white farmer who only made about enough to live on.

In the 1980’s Ireland blamed single mothers, I was still in Los Angles and there the popular blame was against Mexicans. The blame game is nothing new. In the early 1300’s during the Great European Famine they blamed bakers and millers, the Parisians went so far as to tie them up and publicly whip them, the real enemy in that instance was mother nature who delivered three summers of rainfall that caused crops to fail, but you can’t lash …

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The reason why mortgage rates don’t have to go as high as bond rates.

Dr. Peter Bacon made an interesting quote stating that he thought that

“The first is I think households are going to be more cautious about spending than is assumed in some forecasts. The second is I think the interest rate consequence of international certainty is going to be a deterrent to investment taking place.”

Earlier, Dr Bacon told the audience that Irish firms borrowing money would ultimately end up paying interest rates that were linked to the cost of Irish government borrowings.

“You can call it yourself as to where the risk premium on government bonds is going to go — where it goes there goes general interest rates for companies in Ireland. In the long term, the cost of finance will be 200 or 300 basis points above the cost of government borrowings.”

The difference between government borrowing and bank borrowing is that people don’t lodge money with the state at zero interest. We do pay taxes, and buy low interest state products via the post office, but on the whole, there …

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RTE 9 O’Clock News with Martina Fitzgerald, 22nd April 2010

Martina Fitzgerald of RTE 9 O’Clock news did a piece on the Government backed lender Home Choice Loan, critiquing the fact that they have only advanced 5 mortgages since their inception in autumn of 2008. Home Choice Loan was set up to alleviate the absence of lending in the Irish mortgage market but it has failed to do this which is evident in the numbers.

We believe that Home Choice Loan does have a very relevant and meaningful role in the mortgage market, but not in the guise of being another lender competing with the rest of the high street, rather in facilitating people in negative equity or arrears.

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Taxing Banks & Taxing Risk

In the first clip, James Galbraith (son of the famous JK), economics professor at University of Texas, discusses whether a new tax on big banks is justified. Ken Bentsen, of the Securities Industry & Financial Markets Association, and Mark Calabria, of the Cato Institute, share their insight as well.

In the second clip Mark Walsh, of ‘Left Jab,’ and Dan Mitchell, of the Cato Institute, discuss taxing banks based on their risk to the system.

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Who is really to blame for the crisis?

Today, buried on the inner page of the Independent Business section there was an article stating that an Oireachtas committee found that the responsibility for the financial crisis in Ireland was largely down to regulators and ratings agencies (the same agencies who down-graded Irish debt in 09′).

Sadly, it didn’t make massive headlines, nor will it… If you could get a picture of Sean Fitz, or some scandal element to tag on then it would be everywhere, but the humble work of one of the few independent studies done on the matter, lacking sex-appeal & scandal will be widely ignored by the public, meaning everybody will still only see ‘banks’ as the source of the problem rather than as the conduit, when in fact the source of the problem was the gatekeeper, the person with their hand on the tap of the conduit, who allowed credit to flow too quickly for too long.

I had coffee with a well known economist last April and we spoke about this matter, he felt that it was …

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Can Theory and Jargon destroy your net worth?

This is an interesting vlog on some simple monetary economics ideas, the classical definition of inflation is discussed in terms of ‘money supply’ but then it turns towards some of the other issues such ‘what is money supply?’ there is no set agreement on which count should generally be used (in USD it used to be M3 which is no longer published). That has an interesting implication in the fact that banks are ‘hoarding’ money, the fact is that they are holding huge amounts of capital which isn’t monetized, but it can be and that means a return to ‘credit flowing’ could actually cause some serious inflation as the money flows into the real economy minus any increase in real purchasing power.

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The credit crisis visualised

This is an interesting animated film on the origins of the crisis, it holds with the view that banks were only ever a part of the problem and not necessarily the sole cause. Central banks have a lot to answer for, as does all of society because when you stop saving and instead spend somebody else’s savings it means that eventually, when it comes time to repay your loans that not only is the money not there, but the productivity has likely suffered as well – income based on lending gives the artificial appearance of wealth but it is a mirage.

part 2

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