Tag Archives: banks

The collapse of the Irish Tiger

Doug Saunders writes in the Globe and Mail that the government in Ireland has collapsed.

The party oversaw an escalating series of austerity bills during the past three years that failed to alleviate a crisis driven by over-leveraged private banks. It sealed Ireland’s fate with a 2008 bill that used state funds to bail out the banks, turning a single-industry crisis in a country with an otherwise well-run economy and government into a state-wide fiscal emergency.

As a result, Fianna Fail’s poll ranking has plummeted from 42 per cent in 2007 to a historic low of 8 per cent this weekend.

The opposition Labour Party had promised to table a non-confidence bill on Wednesday, and with the Greens now part of the opposition it would certainly pass, leading to an immediate election and to a likely fiscal emergency if it caused the bailout funds to be cut off.

He wrote this about Ireland in 2010 and it explains how Fianna Fail went from 42% to 8%

Ireland’s experience this week was much like what people saw in Nigeria in 1989 or Britain in 1976: First, the country discovers that international bond markets, frightened by its unstable economy, will no longer lend it money at a price it can afford. So the IMF team from Washington checks into the expensive hotel across from the finance ministry, pores over the books and then delivers a Structural Adjustment Program – drastic reform that turns the country’s whole economy into a debt-repayment machine.

Government is gutted. Taxes rise; subsidies and grants vanish; social programs are pared back; state companies are sold; wages are slashed. Ideally, debt drops and investors regain confidence. But the poor and middle classes pay the price for mistakes made by governments and bankers. Cue rioting and electoral defeats.

Some IMF bailouts – economists call it conditional lending – do help to turn countries around. Brazil and Turkey (which this year ended 50 years of IMF stewardship) have built economies with real social benefits, though the process has often been calamitous.

What Good is Wall Street?

John Cassidy has an article about the social value of what Wall Street and investment banking.

Lord Adair Turner, the chairman of Britain’s top financial watchdog, the Financial Services Authority, has described much of what happens on Wall Street and in other financial centers as "socially useless activity" — a comment that suggests it could be eliminated without doing any damage to the economy. In a recent article titled "What Do Banks Do?," which appeared in a collection of essays devoted to the future of finance, Turner pointed out that although certain financial activities were genuinely valuable, others generated revenues and profits without delivering anything of real worth — payments that economists refer to as rents. "It is possible for financial activity to extract rents from the real economy rather than to deliver economic value," Turner wrote. "Financial innovation…may in some ways and under some circumstances foster economic value creation, but that needs to be illustrated at the level of specific effects: it cannot be asserted a priori."

Turner’s viewpoint caused consternation in the City of London, the world’s largest financial market. A clear implication of his argument is that many people in the City and on Wall Street are the financial equivalent of slumlords or toll collectors in pin-striped suits. If they retired to their beach houses en masse, the rest of the economy would be fine, or perhaps even healthier.

Is banking a utility?

Most people on Wall Street, not surprisingly, believe that they earn their keep, but at least one influential financier vehemently disagrees: Paul Woolley, a seventy-one-year-old Englishman who has set up an institute at the London School of Economics called the Woolley Centre for the Study of Capital Market Dysfunctionality. "Why on earth should finance be the biggest and most highly paid industry when it’s just a utility, like sewage or gas?" Woolley said to me when I met with him in London. "It is like a cancer that is growing to infinite size, until it takes over the entire body."

The Micro-Loan Credit Crisis

Is it just me or are bankers incapable of policing themselves and learning from their mistakes.  Even with microloans they are idiots.

Nipping at SKS’s heels were other microcreditors, also based in Hyderabad, which helped make Andhra Pradesh India’s microcredit hotbed. Villagers experienced the arrival of 2, 3, 4, even 8 or 10 microcreditors within the last few years, all eager to press loans into the hands of women. Loan officers learned that they could line up customers more quickly in villages where their competitors already operated, for there the women would have been educated in the mechanics of microcredit—and might want new loans to service old ones. So loans were heaped on top of loans.

Even Vijay Mahajan, the president of the microfinance industry association, has been bluntly critical:

In their quest to grow, they kept piling on more loans in the same geographies…That led to more indebtedness, and in some cases it led to suicides.

Unfortunately, while loan disbursement became irrationally exuberant, loan collection remained insistent. Microcredit is about mass-producing low-quality services in order to keep costs in line with the small amounts transacted. For the machine to run efficiently, clients must keep up on their payments. Microlenders also pounce on delinquency to prevent it from snowballing, so that women will not ask, “Why should I pay if she is not?” Loan officers now stand widely accused of harassing borrowers, yelling at them outside their homes, even threatening violence. The pressure has been blamed for at least 54 suicides. While the allegations are individually dubious, arising as they do in a politically charged, media-scrutinized environment, the link to suicide is plausible. Microcredit is the least flexible, least forgiving form of credit available to the poor of Andhra Pradesh, thus most likely to push them over the edge.

One Good Example, One Bad Example

There's no way like the American way

Newsweek is pointing to Canada as an example to follow in terms of banking regulation.

The legendary editor of The New Republic, Michael Kinsley, once held a "Boring Headline Contest" and decided that the winner was "Worthwhile Canadian Initiative." Twenty-two years later, the magazine was rescued from its economic troubles by a Canadian media company, which should have taught us Americans to be a bit more humble. Now there is even more striking evidence of Canada‘s virtues. Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors. Yup, it’s Canada. In 2008, the World Economic Forum ranked Canada’s banking system the healthiest in the world. America’s ranked 40th, Britain’s 44th.

The must read link however is Michael Lewis’ feature in Vanity Fair about how Iceland basically destroyed their economy beyond recognition for generations to come.

Iceland instantly became the only nation on earth that Americans could point to and say, “Well, at least we didn’t do that.” In the end, Icelanders amassed debts amounting to 850 percent of their G.D.P. (The debt-drowned United States has reached just 350 percent.) As absurdly big and important as Wall Street became in the U.S. economy, it never grew so large that the rest of the population could not, in a pinch, bail it out. Any one of the three Icelandic banks suffered losses too large for the nation to bear; taken together they were so ridiculously out of proportion that, within weeks of the collapse, a third of the population told pollsters that they were considering emigration.