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It was Tim Geithner - always there when banking interests are to take precedence over...
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Saturday, May 7, 2011, 10:30 AM ETIt was Tim Geithner - always there when banking interests are to take precedence over citizens - who nixed an IMF plan to allow Ireland to impose haircuts on bank bondholders, writes Morgan Kelly, who says the current terms of the "rescue" are sure to lead to a catastrophic bankruptcy. "National survival requires that Ireland walk away from the bailout."
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"Rescue" is but another word for rewarding the criminal and the profligate elite at the expense of the lawful and prudent privately employed middle class...Another way to concentrate wealth and power; to grow the parasitic economy at the tangible and catastrophic expense of the productive economy.
"Rescue" is what enables the Regimes of the West turn polities that were once republics or participative democracies into soviets.
Always??? Give me a break...
If banks fail and become owned by the government in a democracy that is a direct shift of all their assets and liabilities to the taxpayer. So the taxpayer borrows the money and defaults and the default is shifted to other taxpayers. No free lunch overall.
My understanding of Ireland is that their real estate market fell and this is causing a lot of their problems. Whatever the case they are having a hard time working out of this problem and being a bit player in the EC they don't have a lot of flexibility. I cannot comment any further on their problem as I have not looked at it that deep. The USA is in a unique position that these other countries do not enjoy but we can end up in the same place some day.
Superbly stated. And, contrary to all the populist demagoguery, an accurate description of the implications of national bankruptcy --and that's what this is when the country's guarantee is repudiated; it's not the banks that go bankrupt, it's Ireland.
Even if one wished to make a case for risking that fate, it would be inextricably coupled to having Ireland leave the euro. That's because the only way that post-bankruptcy countries can attract new capital is to make their own currency so appealing (i.e., cheap), as a value relative to their neighbors, that money flows there, irrespective of the recent past. This strategy could never work if Ireland were still tied to the euro.
So, the demarcation is stark and simple: work through the debt or bankruptcy and departure from the euro -- A or B.
TBTF should not be allowed to exist, and taxpayers should not have bear the burden of banker's bets gone wrong.
Yes the banks needed to be backstopped to avoid a total breakdown of the system, but afterwards (now) measures should be taken to prevent future breakdowns,
Simply put bankers won't worry about risk if they don't share in the consequences of their actions.
It will take years and years of undue suffering to work off the losses from the financial crisis, and right now the Irish population is bearing an undue burden which is ruining their day to day lives.
Who cares about the Euro and Eurozone ? Like Iceland, Ireland should go off the Euro, devalue, and stimulate its real economy so ordinary people can live their lives.
I'm not a banking expert, but banking should serve the real economy, rather than be allowed to siphon off the entirety of Ireland's national lifeblood.
Nothing terrible will happen if bond holders lose money. They will lick their wounds and come back another day. They will demand more for their money for a while, then greed will take over again.
All capital takes risk. Bondholders included. They are less risky only in that they are higher in the pecking order when it comes time to liquidate. They invest in the same businesses as shareholder and assume all the risks of the business. So why in the world shouldn't bondholders that lent money to private institutions - which then lent way too much money to people who couldn't pay it back - lose some money???
Its the continuation of this idea that bondholders can't lose that will ultimately lead to another collapse. We've created this myth that any bank bondholders losing money will result in no capital being available - its hogwash (in scientific terms).
Look how many grand building investments have gone broke over the years.... lots of fancy skyscrapers, hotels, casinos, malls, etc, etc, etc, And the bondholders lose a lot of money! And yet we have no shortage of other people building new hotels, casinos, skyscrapers, etc, etc.
Men will never not want to be making money (at least until the government simply confiscates 100% but thats a different topic), and therefore capital will flow to ideas/businesses that have the potential to make them money.
Let the bondholders go after management for their investments - not the taxpayers!!!!
Thumbs up.
The bond losses are indeed an overblown fear used to further inveigle debts onto those who didn't create it.
The beauty of economic freedom (I prefer the word anarchy) is that it allows creative chaos to work itself into system. Losers lose and winners win. No bailouts for losers. No punitive confiscation from winners. Everyone is allowed to succeed or fail. And they can do that as many times as they want. And sometimes people in the 'fail' column will get changed over into the 'win' column and viceversa.
This is what makes me want to continue living. Creating zombies, bailouts and pinning it on the taxpayer makes me not feel alive, suffocated.
Freedom is the fuel for growth. And private property rights and laws are the oil that keep the parts moving together. We can look no farther than Chile to see how Friedman's ideas pan out over time.
Yes someone needs to be regulating and somebody needs to not be so involved in the party they cannot see the risk. The fundamental belief that home prices could not go down should have been challenged by some sober thinking person immediately. Artifical rules are always broken at some point. Regulators should be skeptical and not cheerleaders and they really missed the boat on this one fatal assumption.
Also agree with your moral hazard point. Nobody in any walk of life worries about risk or consequences if the consequences are not their responsibility.
TBTF is a concept that really obscures what is going on. It is not the banks that are too big too fail but the country is too big to fail or does not want to fail. And in fact a lot of equity was wiped out in FI's like Wamu, Bear, Lehman, Indy Mac so they were not TBTF. Citibank is the best example most likely of TBTF as there was nobody that wanted them so the government had to invest capital and take equity in return along with payments.
But the larger point is that if 20% of all mortage loans are bad it does not matter if they are held in 1 bank or 200 banks. The size of the mortgage market swamps the overall capital of the banking system and puts it into insolvency. I suspect Ireland is in this position and does not have the size of the US to absorb the hit.
Interestingly enough mortgage loans was the market that all governments had the most involvement in and this is the market that exploded to the worst possible outcome. That should say something to everyone. The government should not be funneling so much capital to home ownership and housing and running banks off balance sheet in the form of Freddie and Fannie to fund home purchases and guarantee home loans. That is the recipe for moral hazard and a transfer of risk management from the private sector to the public sector. That did not work out very well.
Ultimately a lot of citizens received money from loans and spent it on homes and now the taxpayer is on the hook for those purchases as they unwind.
No a lot bad will happen. Capital will flow where risk and return are more certain, balanced and economic fundamentals are strong. It is a big world out there with great opportunities and capital is very fluid. Any new investments made will be by bottom feeders and have ornerous terms and a lot of covenants and will be tightly managed.
In the meantime economic activity will contract and the citizens will have less jobs, money, opportunity and high taxes to deal with the contracting economy. This will drive rates even higher and terms even tighter.
Capital flow in any form helps an economy grow. Capital contraction does the reverse. If an economy is in tough shape pulling more capital out whether it is debt or equity only accelerates the slide downward.
Now if you are talking about clipping bondholders then by default you have already wiped out the equity holders so the only thing left is government investment. If Ireland does not have the ability to invest then the whole banking system fails and it falls on the EC. We also don't know who all these bondholders are because it could include government entities, the EC Central Bank and who knows who else?
Tim G is probably looking at a domino effect that could be pretty scary. Makes me think a little deeper about what might happen next week.
In normal times I don't have much problem with your logic of letting failure happen. But keep in mind the bondholders are investing after the equity holders so all those investments you mentioned have somebody putting up real capital before the bondholders get involved. Nobody is doing 100% financing.
Ireland did well helping its banks. Now it has to default.
This line of reasoning supporting banks above all other institutions in the economy has led to socializing losses and privatizing profits in a way that is more harmful to the economy than any of the alternatives.
If you want to see how they government would run a bank look at the GSE's. We are now $259 Billion in the hole on these companies. Keep in mind that the Fed Gov only got involved in home lending in a big way and that is where we have all the problems.
Regulation needs to be enforced and done much better.
Exactly.
The Government would operate the banks as patronage operations to purchase votes, exactly as they did with the subprime CRA debacle.
The GSE's were just repositories for the insane policy propagated by Dodd/Frank to mandate --under penalty of law-- that banks make loans to poor credit risks without reasonable hope of being repaid and without adequate downpayments, which, of course, this undercapitalized voter set, that Mssrs. Dodd/Frank wished to influence (i.e., buy), didn't have.
The banks tried to protect themselves, or thought they were mitigating their risks, by syndicating these loans in RMBS, which the investment bankers and bond raters foisted off on them as being able to be rated AAA and offering protection by offloading the risks to new investors.
Of course, all of this proved to be folly, which the bond raters probably knew, but were seduced by investment-banking fees, and the investment banks certainly knew, as they were shorting the paper as they were selling it to investors.
So, yes, it was a huge scam, amplified by incompetence, but the chief architects of the scam were the Government and the investment banks, with the commercial banks mere conduits and ultimately the suckers in the game, losing hundreds of billions.
It may be appropriate to suggest that the failure in due diligence extended to them - they didn't do a good job of it either - but the fact is the GSEs were profitable and growing entities prior to having all the crap from the banks offloaded onto them.
You are trying to rewrite history and tell us that subprime was the only failure of the home loan and refinance shenanigans.
I couldn't believe what the mortgage brokers were telling me just before the implosion, folks just out of bankruptcy getting stated loans - not subprime. The failure was pervasive, and you can't make this is a failure of gov't or the GSEs no matter how you spin it.
Agreed, but TBTF banks exist while their burdensome losses were shifted onto the shoulders of taxpayers as a result and at the behest of the Federal government.
This is not the problem or the responsibility of the banks it is a problem with our government
"That which you tolerate you encourage"
The GSE's were not the only factor in the failure of the housing market but they definitely were poorly run and they had a massive impact on the housing market over the decades and eventually made a mess of it. Most banks got out of the mortgage market with any level of seriousness because the GSE's standardized the underwriting process for everyone and leveled the playing field so no bank could gain a competetive advantage. It was a price war and race to the bottom.
Were the poorly run? Well they were restating earnings before the 2008 credit crisis hit as their internal controls were so poor they did not know what they had on the books. They were working on true financial statements for years and it just kept going. Or perhaps they were flat out fibbing. I did not see the results of that investigation. Do you need any more evidence of being poorly run?
OK so in addition during the crisis the CEO's of one of the GSE's stated that he had to continue to buy more mortgages because their mission was to expand home ownership as they were a quasi public entity. He was basically just adding losses to the portfolio every day and he knew it as well as Congress but they did not know what to do as their charter is so dysfunctional they could not make a decision.
Also the federal government was guranteeing a greater percentage of the mortgages over time through the GSE's which was shifting liability and risk on to the taxpayer to the degree that some political leaders wanted to cut them back to lower the risk. But they were ignored.
I bet health care is going to look like the mortgage market in 10 to 20 years if the Feds take it over.
bloomberg.com/news...
Any thoughts on what the Greeks are going to put up as collateral? I hear Mykonos is popular with German tourists. ;)
Now, go buy some real estate, there are islands for sale too, go buy some, I'm sure Greeks wouldn't mind some new wealthy foreign neighbors bringing capital into the economy.
No and no and no. Bankers are on average paid far below government workers..........at least the federal scale. That would break us in half.
Actually, I'd rather let banks sink or swim just as all honest businesses have to. Let the market decide which banks survive and which fail. The same should also be applied to car manufacturers, mortgage lenders, etc. etc. etc.
The weak peripherals will leave the eurozone soon, and impose their own debt restructuring, if the EU is unwilling to do that within the eurozone -- it's inevitable. The EU will be able to do nothing about it. In five years, the eurozone will shrink down to the strong(er) core countries. It was always a mistake to cajole the peripherals in as members, and the banks will ultimately pay for it, not taxpayers.
The benefits of being in the EU should be clearly understood in the future and economic goals(in this case in re to debt) should be tied to continued membership. Think of it like an HOA. You don't pay your dues, you're SOL. And EU membership wouldn't have to be rigid. Every few decades, there's a blowout. Greece gets kicked to the curb. They're out. But Turkey, they're now in. So is the Ukraine. Good behavior gets rewarded over time as it strengthens the common currency.
There's no way hard workers should continue bailing out the bad ones. America suffers from the same thing in many regards, but Lincoln proved the point of federal power by dramatically murdering hundreds of thousands of Americans all for the sake of 'preserving the union'. That may or may not be your take(I'm neutral on the view myself), and many will still hold to the romantic view of the eradication of slavery as the main motivation behind the "civil" war, but really it was about putting the states into a subservient position underneath the new alpha authority of federal might. Let's keep in mind, the EU has an infantile constitution, unlike ours, but at least it does lay out its provisions, rights and policies. I guess that's a start, but it is no way as binding as ours, especially considering that its barely in its adolescence.
I don't see any Abraham Lincolns in the EU's immediate future. Just a bunch of bobbleheads behind burled walnut & oak desks. It will not be a war that unites the euro, bringing them together. It will be an assimilation of some new bureaucracy led by a do-gooder here and a do-gooder there, a smothering bunch of nannies who will descend upon the old world and teach them all about the fine necessities of using manners, aplomb and Robert's Rules of decorum, which in a way, is a thousand times worse than war ever would be.
Ireland is simply another country that has been sold out by its political "leaders". I'm not sure why they seek favor in Brussels but they do. In essence they chose "acceptance" at the table of the Eurocrats over representing the interests of their own citizens.... in my book its called treason.
The solution the gentleman puts forth is about the best the Irish can hope for at this stage. They should renounce all support of the banks, announce they are BK and let the ECB liquidate the assets. They could guarantee their citizens first 100,000 euros and let it all go.
It should be of no surprise that Geithner would support the bankers. He sold out 300+ million Americans to save a few thousand millionaires and billionaires with political clout. Whats a few million more Irishmen.
People are getting bailed out every day through loan restructuring, walking away from homes, not paying, etc.
Fannie and Freddie which are taking a lot of these losses have dropped $259 Billion of losses on the Fed Gov as a result.