Icelanders can't afford Big Macs anymore

McDonald's is to close its business in Iceland because the country's financial crisis has made it too expensive to operate its franchise. The fast food giant said its three outlets in the country would shut - and that it had no plans to return.

Besides the economy, McDonald's blamed the "unique operational complexity" of doing business in an isolated nation with a population of just 300,000. Iceland's first McDonald's restaurant opened in 1993. The franchises are run by a firm called Lyst, with owner Jon Gardar Ogmundsson saying the decision was "not taken lightly". He said that the restaurants imported the goods from Germany, but that costs had almost doubled, with the falling krona making imports prohibitively expensive.

Mr Ogmundsson said the restaurants had "never been this busy before... but at the same time profits have never been lower". "It just makes no sense. For a kilo of onion, imported from Germany, I'm paying the equivalent of a bottle of good whisky," he added. He now plans to run the restaurants under another name so that he is able to buy cheaper Icelandic products.

Iceland's banks collapsed at the height of the global credit crisis - wrecking the country's economy and forcing it to rely on an $10bn (£6.1bn) international aid package.

David McWilliams discusses the pullout here.

Stupid bankers!

Q: What's the question most bankers are asking these days?
A: "Do you want fries with that?"

Q: What's the difference between a bank manager and a pigeon?
A: A pigeon can still put a deposit on a Ferrari.

Q: How do you get a banker out of a tree?
A: Cut the rope.

Q: What’s the definition of optimism?
A: A banker who irons five shirts on a Sunday evening.

A banker said he was going to concentrate on the big issues from now on. He sold me one in the street yesterday.

Q: What is the difference between a banker and a large pizza?
A; The pizza can still feed a family of four.

Q: What's the difference between a banker and a couch?
A: The couch can support a family of four.

Q: What do you call a banker without a girlfriend?
A: Homeless

WHAT IS... NAMA?

What is it?

NAMA stands for the National Assets Management Agency and its creation was first announced in the April 2009 Budget. It is to be run under the control of the National Treasury Management Agency. The Governmant line is that NAMA is firstly an asset management company dealing with assets transferred from banks. NAMA will not be a bank as it will not be taking deposits from the public and will not have a banking licence. The idea is that the NAMA will buy all of the land and property development loans of the six Irish banks of covered by the State guarantee. In May, the Government approved the appointment of Brendan McDonagh as interim managing director of NAMA.

Why was it created?
By taking problem property loans off the hands of the banks, the Government hopes to put those institutions in a position where they can resume lending with a clean bill of health, their balance sheets strengthened and uncertainty over their bad debts reduced. NAMA will probably become the biggest landowner in Ireland. Developers might not yet realise it - but every single land and investment property they own which has outstanding debt could end up in the new National Asset Management Agency.

So, the banks give over their bad debts. What do they get in return?
NAMA will give the banks government bonds, which it is hoped will result in a freeing up of credit within the economy. NAMA will then manage the bank’s bad loans over a considerable period of time.

How big will the transferred loans be?
The total potential value of the loans which will be taken on by NAMA will be between €80 billion and €90 billion. It is expected that the top 50 borrowers will account for some €40bn–€50bn of the expected total due to be taken over by the new state agency.

Even if the total debts are bought by Nama at two-thirds of their face value – the bill could be in the region of €60 billion. (Ireland’s national debt is currently €54 billion).

What is the time-scale for NAMA?
It could be 12 to 18 months before NAMA gets going properly - although it is expected to be legally rubber-stamped in the autumn. It may need to exist for another 10 to 15 years - it is definitely no short-term fix.

The Bank of England to start 'quantitative easing'?

The Bank of England is expected to reduce interest rates to yet another record low tomorrow lunchtime; but with their rate-cutting ammunition all but exhausted, they are expected to press the button on a much more drastic policy — quantitative easing. As the recession deepens, weakening wage growth, plunging oil prices and consumer demand are threatening to drag inflation well below the Bank's 2% target.

With interest rates already at a historic low of just 1%, the monetary policy committee (MPC) believes further cuts will not be enough to kick-start the economy. Quantitative easing is popularly known as "printing money," but it doesn't actually involve turning on the presses. It actually means that the Bank will buy billions of pounds of assets, usually government bonds, from cash-strapped banks, in the hope that they will push the money back out again in loans to the public. In recent years the tool has been used by Japan to stimulate their economy and to fight inflation. Much of the global economic crisis is caused by frozen credit markets. Many companies find themselves unable to secure loans necessary for day to day operations. The credit crunch has adversely affected the interbank market - meaning banks have been unwilling to lend to each other.

AIG bailed out... again

Stock markets around the world crashed yesterday as American International Group (AIG), the embattled US insurer, panicked investors by announcing a loss of $61.7 billion (£44 billion), the largest quarterly loss in corporate history. The FTSE 100 tumbled 204.26 points, or 5.3 per cent, to close at 3,625, its lowest level since April 2003.

The company could cost $250 billion (£178 billion) to repair, experts said yesterday as it received a further $30 billion from taxpayers via the US Government. The government has now made four separate efforts to save the company, totaling more than $170 billion. The White House dare not allow the company to fail because of the complex web of insurance and investment products that AIG sold to individuals and companies in 130 countries as it raced to become the world's largest insurer. AIG's collapse could affect 100 million Americans, according to government estimates. It is so big and sprawling, so intertwined with institutions around the globe, that its downfall could set off a vicious chain reaction. Upheaval on such a global scale would plunge the U.S. economy deeper into recession, drive up unemployment and stifle hopes for an economic rebound any time soon.

Pros and cons of nationalising banks

As you know, last week, the Government nationalised Anglo Irish. There is now considerable speculation that they may nationalise the other Irish commercial banks. The Irish Times had an excellent article yesterday examining the pros and cons of nationalising banks from a global perspective.

For
The Swedish example: the blueprint for successful handling of a financial crisis is provided by Sweden’s centre-right government in the early 1990s. It forced banks to write down their bad loans and then injected equity, nationalising the country’s two biggest banks. The banks were detoxified and later re-privatised, with taxpayers getting back much of the money they had contributed.

Bailouts and partial nationalisations don’t work, according to influential economics professor and FT blogger William Buiter. Partial state ownership and the threat of future state control incentivises banks to stop lending. Banks look to pay back government money “as soon as possible” to “get the government out of its hair”, causing them to “hoard liquidity”. This helps them avoid outright nationalisation but cripples the economy. German economics professor Hans-Werner Sinn agrees, saying that government proposals to cap corporate salaries mean most banks would prefer to cut back on business lending and stumble along, zombie-like, rather than accept government interference. AIB CEO Eugene Sheehy, who said in October that “we’d rather die than raise equity”, comes to mind.

The alternative to the “unfortunate halfway house” prevailing at the moment, Buiter says, is temporary nationalisation.There’s no point trying to nurse banks back to health – it’s a case of “dead men walking”. Nouriel Roubini estimates that US financials will ultimately suffer credit losses of $3.6 trillion. The US banking system, with capital of $1.4 trillion, is “effectively insolvent”. Roubini’s estimate is high, although losses in excess of $2 trillion are commonplace today. In Britain, RBS analysts Ian Smillie and Cormac Leech describe British banks as “technically insolvent” on the basis that they are suffering from a £36 billion shortfall and are facing an additional £143 billion in writedowns.

Opting for more sweetheart deals means throwing good money after bad. In November, the US government injected an amount into Citigroup than exceeded its entire market capitalisation. It also guaranteed the firm’s toxic assets to the tune of $306 billion. Despite that, it ended up with a mere 7.8 per cent equity stake while management was left in place. Recently, Bank of America received $20 billion of government money on top of the $25 billion it received months earlier. It was also given guarantees of $118 billion on potential losses.

It’s not just a waste of money, it’s a case of “moral hazard” – heads you win, tails I lose. Taxpayers are taking all of the risk but none of the reward. Hedge fund manager Whitney Tilson says that current US plans will lead to “the greatest heist in history”. Poor decision making is rewarded if shareholders and debt holders are not wiped out.

Markets are saying that nationalisation is inevitable anyway, as this week’s collapse in Irish and British bank share prices show. Banks cannot receive the monies they need from the private sector, as AIB and Bank of Ireland are finding out. Governments have been behind the curve throughout the crisis – they must grasp the nettle and listen to what the markets are telling them.

“Creeping nationalisation”, as it’s been called, has already set in. Better be done with it sooner rather than later. Ideological hang-ups mean too many see nationalisation as a last resort. In truth, the financial sector has been kept on life support though massive government intervention for over a year now. Recognising that fact through nationalisation and preparing the sector for eventual re-privatisation is a victory for pragmatism, not ideology.

Against:
The Swedish example is simplistic. It nationalised just two banks whereas more than 300 US institutions received TARP money, many of them healthy and solvent. Nationalising en masse is wrong. Also, the Swedish example was local in nature whereas today’s problem is global. Were Britain to nationalise RBS (or others) and follow the Swedish example of writing down assets to nuclear levels, the knock-on effect on other global financial players would be catastrophic.

Governments are not the best people to run banks. A couple of years of crisis in the financial sector does not negate the long-held idea that the private sector manages resources more efficiently. Former RBS chief executive Sir George Matheson said the government should instead guarantee the bank’s deposits and “let it trade out of difficulties”.

Fear of nationalisation has driven financial shares below their true value. For example, AIB is currently valued at around €500 million, even though its has stakes in US bank MT and Poland’s Bank Zachodni WBK valued at €800 million and €1.1 billion respectively. Falling share prices are being used to justify nationalisation, even though the fear of nationalisation has caused the falling share prices. Shareholders have the right to hold on for eventual recovery.

Recent UK measures should help enormously. Besides the £250 billion credit guarantee scheme, regulatory changes mean that banks are being given additional latitude in terms of their capital ratios, with regulators accepting core equity of 4 per cent and Tier 1 capital of 6-7 per cent.

The RBS analysts who said banks were “technically insolvent” added that this is not unusual “at this stage in the economic cycle”, which is why the regulators have given banks breathing space. As Goodbody’s Eamonn Hughes said, similar regulatory moves in Ireland would make nationalisation fears “overstated”.

The cost would be enormous. Despite share price falls, buying up the banks would not be cheap (JP Morgan alone is worth almost $85 billion). Also, the risk of individual states defaulting on their debt is hugely increased by increasing their exposure to the banking system via nationalisation.

The odds of a British debt default hit record levels after it took a 70 per cent stake in RBS. The UK is at risk of losing its AAA credit rating and markets estimate that it stands a one-in-10 chance of debt default in the next five years – something that hasn’t happened since the Middle Ages.

The cost of insuring Ireland’s debt against default also hit record highs in the wake of the Anglo nationalisation, soaring by over 100 basis points to 297bps in little over a week. That’s over twice the cost of insuring Tesco’s debt and more than five times that of Germany’s.

What’s wrong with the “creeping” nationalisation approach? “The good thing about creeping, as opposed to sprinting, is that it’s easier to stop and reverse course if obstacles are in the way,” as Financial Times city editor Andrew Hill put it.

The notion that nationalised banks could be quickly returned to private ownership is facile. Such a process would inevitably be drawn out, during which time all the disadvantages of public ownership would become obvious.

George Matheson said nationalisation would bring “pressure” to do things “according to government practice rather than commercial banking practice”. In particular, politicised lending. “The focus isn’t going to be on the needs of banks,” said Obama economic adviser Larry Summers. “It’s going to be on the needs of the economy for credit,” a point also hammered home by Gordon Brown. The last thing massively indebted societies need, however, is a return to the easy credit that triggered this crisis.

Government demands to increase mortgage lending, even though property values remain at historically elevated levels, are as misguided.

Original article

US banks insolvent?

New York University Professor Nouriel Roubini is someone we at Leavonomics take very seriously because 'Dr. Doom's' economic predictions tend to be very accurate. Yesterday he said US financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is "effectively insolvent". "I've found that credit losses could peak at a level of $3.6tn for US institutions, half of them by banks and broker dealers," Roubini said at a conference in Dubai yesterday. "If that's true, it means the US banking system is effectively insolvent because it starts with a capital of $1.4tn. This is a systemic banking crisis."

Losses and writedowns at financial companies worldwide have risen to more than $1tn since the US subprime mortgage market collapsed in 2007, according to data compiled by Bloomberg.

Oil prices will trade between $30 and $40 a barrel all year, Roubini predicted. "I see commodities falling overall another 15-20pc ," Roubini said. "This outlook for commodity prices is beneficial for oil importers, it's going to imply that economic recovery might occur faster, but for oil exporters this will be very negative."

Anglo Irish becomes fully nationalised

Following its plan to inject €1.5 billion into Anglo Irish Bank, and to take 75% of the voting rights in the process, before Christmas, the Government tonight went further and totally nationalised Anglo Irish Bank. It is the first nationalisation of its kind in the history of the state. Since reaching a peak above €17 in mid-2007, shares in Anglo Irish have plummeted, and closed at just 22 cent in Dublin today. It is my opinion that the Irish government took the unprecedented measure in part because of fears that the bank's collapse would have a major impact on the our wider economy. Had Anglo Irish gone out of business a number of sectors of the economy could have found themselves under threat - particularly health insurance. The majority of people here pay insurance to get access to the country's health service. The bank's collapse could possibly have had dire consequences for Sean Quinn, a major shareholder in Anglo Irish, who also has major interests in the insurance industry.

Anglo Irish recently lost top executives over a secret loans fiasco, which the government described as "unacceptable practices" which had played a part in the nationalisation. The bank's chairman , Sean Fitzpatrick, resigned in December after a 87m euros loan controversy where he admitted he had transferred millions of euros out of the Dublin-based bank's accounts. Chief executive David Drumm announced his resignation shortly afterwards. The state tonight took on the bank's liablities which lies probably between €6billion and €20billion.

Anglo-Irish Bank nationalised in all but name

The Government announced plans on Sunday to recapitalise the country's three biggest banks. A total of 5.5bn euro will be injected into the Allied Irish Bank, the Bank of Ireland and the Anglo Irish Bank in return for shares. Anglo Irish will receive 1.5bn euro in return for 75% shares with an annual fixed dividend to government of 10%. This means the bank is effectively being nationalised. The Government will give 2bn euro each to Bank of Ireland and Allied Irish Bank for an annual dividend of 8%. They will also receive 25% voting rights on their respective boards.

There have been widespread calls for the scheme to be dependent on changes to the management of the banks. However, Taoiseach Brian Cowen said that would not be a precondition.

Morgan Kelly, Professor of Economics, UCD, wrote an excellent critical appraisal of the government's recapitalisation of Anglo Irish in Tuesday's Irish Times. You can read it here.

On Tuesday evening, NUIG economist, Dr Alan Ahearne, was interviewed on RTE's Drivetime Show and he gave his view of the Anglo Irish recapitalisation. He asks if the markets think Anglo Irish is unsaveable why is our government putting money into it? You can listen to the 9 minute interview with Mary Wilson here.

Irish banks to be recapitalised

The Irish Government tonight announced support for a recapitalisation programme of up to €10 billion for credit institutions. The plan would see the Government support recapitalisation alongside private investors and existing shareholders. In a statement issued this evening, it said its objective was to ensure the long-term sustainability of the banking sector in Ireland. Minister for Finance Brian Lenihan confirmed that money from the National Pensions Reserve Fund will be used in the recapitalisation programme. State investment will take the form of preference and/or ordinary shares in the institutions receiving funds.

Mr Lenihan said State investment would be assessed on a case-by-case basis and all the institutions were being asked to submit their proposals by early next month. There is a growing acceptance among some banks of the need to accept fresh capital. Bank of Ireland is believed to have considered at one point holding a rights issue in the New Year, handled by Davy Stockbrokers and UBS in London. AIB is still insisting that it does not require an injection of state capital. As a proportion of its economy and banking sector compared to the UK, the Irish bailout represents a bigger capital injection than theirs.

Ryanair credit cards

Ryanair today launched Ireland’s first prepaid MasterCard service which will allow users to make purchases in shops, restaurants and online. Ryanair Prepay, which costs €85 and attracts a reduced stamp duty rate of just €10 (compared to €30 for traditional MasterCard and Credit card products), allows users to place credit on their MasterCard through An Post, online or via mobile phone. The card does not require credit checks or even a bank account and those who sign up will receive four free Ryanair flights as a well as a host of online discounts and cash back offers. The card is ideal for those who wish to have the flexibility and convenience of a credit card but don’t want, or can not access a traditional credit card.

McWilliams cautions Lenihan

David McWilliams is an economist, whose articles I usually enjoy reading. In this morning's Sunday Business Post, he again doesn't fail to deliver. 'Time to face up to reality' details what he feels the next steps in our banking crisis should be. The main points of the piece are:

• Caution needs to be exercised by Lenihan in putting money into recapitalising the banks now. While now might seem to be the perfect time to do so with their shares so low, the problem is that we still don't know what we are putting money into. The banks' bad debts are going to be far worse than they're admitting now. To demonstate this, the above graph shows how the US banks tried unsuccessfully to deal with their bad debts over the past year. It shows that banks are invariably always wrong when it comes to bad loans, because they underestimate the difficulties in their loan books. The difference between the banks’ forecasts and reality was enormous.
  

• Massive defaults on mortgages will occur over the coming 2-3 years due to the rising unemployment rate. We cannot tolerate thousands of young people (in many cases, young families) defaulting on their mortgages and being kicked out of their houses. Neither can we entertain the prospects of those people languishing in negative equity for a decade. McWilliams advocates that we reset the principal of these mortgages down to 50%, of their peak value. The banks’ shareholders would take on the lion’s share of this pain, with the state taking a proportion. As people move houses over their lifetimes and tend to trade up, the capital gain when the mortgage holder sells on the starter home to the next generation goes to the state. Therefore, the state is protected, the system is preserved, the banks take the hit and the mortgage holder keeps his house today at the price of significantly lower capital gain tomorrow. It is a bitter pill for the banks to swallow, but so be it. Better to have someone paying some interest on a smaller amount of principal than paying nothing on a big loan.

Full article

Endgame for Irish banks

Ireland's banks were given a clear message tonight that the Government regards consolidation of the country's six Irish banks as key to their long term stability due to the current banking crisis. The Minister for Finance, Brian Lenihan, is meeting with the country's senior bankers at Farmleigh House, in Co.Dublin. Speculation is now rife that we could end up with AIB and Bank of Ireland totally dominating the banking scene. Since the State's guarantee for banks the Finance Minister has the power to force mergers between financial institutions. Various mergers have already been touted such as Bank of Ireland taking over Anglo Irish and Irish Life & Permanent. AIB would take control of the EBS and Irish Nationwide.

The PriceWaterhouseCoopers report in to the banks, is understood to have recommended Bank of Ireland takeover Anglo Irish while AIB would assume control of Irish Life & Permanent, in what would be the biggest overhaul of the banking sector in nearly 50 years. The expectation is that a major wave of consolidation would also have to be linked with fresh capital for the banks. But there is still no clear picture of how a final deal would be put together or how long it will take.

When $700 billion just isn't enough

The US Treasury Dept is quickly running out of money to invest in troubled banks. A Time magazine study today shows that nearly one-third, or $216 billion, of the $700 billion that Congress approved to be spent just six weeks ago has already been spent or will soon be spent on just 67 banks. That's a small fraction of the up to 1800 financial firms that are expected to apply for government assistance. It seems very likely that the fund needs to double in size. While the Treasury still has about $480 billion to spend, it's not clear how much of what is left will be used for direct investments into banks.

Full article

UK credit card companies increase interest rates

UK banks have increased interest rates on credit and debit cards held by tens of millions of shoppers despite the cost of borrowing falling to its lowest level for more than 50 years, research for the London Independent reveals today. The Bank of England has almost halved its base rate from 5 to 3% since May, but during the same period the average annual percentage rate for credit cards has climbed from 17.2 to 17.6%. More than £200 billion is owed by Britons in unsecured borrowing, including personal loans, overdrafts and credit and store cards - almost one-fifth of total lending. While the banks have been heavily criticised for failing to pass on the Bank of England's interest rate cut to their customers, so far providers of "plastic" have escaped scrutiny for failing to do likewise with their credit cards. The credit card companies are probably attempting to recoup the cost of bad debts, rising levels of fraud and customers making use of 0% balance transfer discounts.

Permanent TSB offers paid breaks to employees!

In an unique initiative, Permanent TSB, one of the largest retail banks in the country, is offering its staff a paid career break in an effort to cut costs. The bank hopes the initiative helps it through a period where it expects less business volumes in the months and years ahead arising from the recession in the Irish economy. It is offering to pay employees up to €20,000 to take a two year 'career break' (€10,000 a year) or €35,000 for a three year break. Permanent TSB hopes the career break will appeal to younger employees who might take the opportunity to travel.

McWilliams savages Irish banks

In his Sunday Business Post article, this morning, David McWilliams, savagely attacks the Irish banks in a manner which I haven't seen in the Irish media for a while. Those who have been reading McWilliams of late will be aware, it is he who recommended the bank guarantee scheme a couple of weeks before it was announced by Lenihan. He said, soon after that, the next necessary stage was for the Irish banks to come clean about their bad debts following the collapse in construction here - but this isn't happening to any great extent. The brunt of his piece is that he believes management of Irish banks won't release the true extent of the bad debts on their books because that will affect their tier one capital ratio, which will mean credit rating agencies downgrading the banks, which will call into question the position of the bank's management. Basically, he's saying management of Irish banks are covering their own ass rather than doing what they can to get the country out of the mess we find ourselves in, and what's worse, they are damaging our economy even more in the process.

"...The problem is simple: if the bank admitted that the problems were as bad as they were, the management and board would have to resign because they would need new capital. New investors would not trust the same people who got the banks into this mess in the first place. So we are experiencing a game of cat-and-mouse between the market and management and, all the while, share prices keep falling. For the sake of clarity, let’s cut to the chase and do some little calculations. The reason Irish banks are in difficulty is because they are stuffed with Irish - and, to a lesser extent, British - property that nobody wants to buy. AIB has development loans in Ireland of just over €18 billion, as well as €5 billion of development loans in Britain. In all property crashes, development land falls further in value than house prices. Let’s take a conservative view: that house prices will fall by just 25 per cent (it is likely to be far greater, but let’s be positive). This means that the development loan book of AIB will have bad debts of at least 30 per cent and, given a total development loan book of €23 billion, that means bad debts of about €7.5 billion. To date, AIB has provided for €1 billion of bad debts. So it is hardly surprising that the share price has fallen again.

...Our bankers are petrified of the following scenario. If they admit how bad things are and make proper provisions, their tier one capital ratio will fall. The reason for this is that the more bad loans there are on the books, the more these eat into capital adequacy ratios. If their capital adequacy ratios fall to, say, 5 per cent, when similar British banks have a ratio of 9 per cent, the game is over for the management. This means the banks will be downgraded by the rating agencies. Some of the banks will have to look for state help to recapitalise and the positions of the management, chairman and board will be called into question. So it’s simple: all this prevarication is about self-preservation. The banks are hoping to spoof now and recover their tier one capital ratios by reducing lending. This is what we do not need, because our economy will seize up without credit and we may face the Japanese long recession scenario, which is precisely what the guarantee was designed to avoid. Ireland’s financial Know Nothings - the lads who blithely brought us to the abyss - are trying to save their own skins and, in the process, are risking the future of the economy. This is the worst of all worlds".

Full article

Unique banking initiative in Spain

The Spanish economy has slipped into recession and now has the highest unemployment rate in the European Union and its government today unveiled what is the first programme of its kind to allow out-of-work homeowners to defer mortgage payments. Under the mortgage-relief programme, unemployed homeowners and some retirees could postpone payment of half their monthly bill for two years starting in January — as long as the amount deferred each month was no more than €500. The offer would apply to mortgages of up to €170,000 and could affect about half a million people. It was not clear whether thousands of foreigners who own homes in Spain would also qualify. The Spanish government will underwrite the deferred payments, which may be spread over ten years. No details were given as to the ultimate cost to banks, or whether the government would help cover that. More details will be released this Friday.

Who was to blame for the credit crisis?

Sean O'Grady in the London Independent writes this morning on who's to blame for the catastrophic credit crunch which has developed over the past year. While he focuses on the UK, he also makes many arguments which we can also use from an Irish perspective. He believes there are three schools of thought on its cause:

The Macroeconomic School: This blames no one. Basically, much of the money that flowed into the western economies over the past decade came from export-driven emerging economies. That led to their large trade surpluses with us. In effect, we consumed more than we earned, and these emerging economies lent us the money to carry on doing so. With this money we created an asset bubble, an inflation in one particular type of investment. It happened, in Ireland, the US and the UK, to be housing, but it need not have been. The money could have gone into any kind of asset, as it has before. Before the Great Crash of 1929, it was shares, as it was before the dotcom crash of 2000. It could have been classic cars, or antiques, or fine wines. We will always have crashes, and it is foolish to suppose that we can prevent this sort of thing happening again. So, on this view, it is really no one's fault, except, perhaps, our own, because of our unquenchable desire for cheap DVD players, lovely homes and lack of fear about debt. However, people never look to blame themselves first. What is happening now is a reflection of that; we have to pay back our debts and cope with a transfer of wealth and income to China. The financial sector has to shrink and rationalise and we basically don't fancy making that historic adjustment.

Hence our second school of thought.

The Regulatory School: This is the one that holds most attraction for the politicians and public because the public are unwilling to accept simple explanations. They usually want to blame someone. Up to a point, they are right, though. It is difficult to argue that Ireland or the UK's arrangements were perfect on any count. The example of Spain is a powerful one. There, the Government discouraged the banks from joining in the American sub-prime party. Now, as the economy enters recession, we do need the money, and yet they won't lend. Even so, it is also fair to point out that Spain's real estate boom and crash has been almost as dramatic as ours.

The Banking School of Thought: Here, the blame lies with the banks. This is not because they were too greedy but because they were too stupid: they failed to maximise their profits. There is something in this, too. The banks are not some sort of force of nature that has to be tamed by governments and regulators — they are responsible for their own actions. They did not have to offer folks 'Ninja loans' (no income, no job and no assets). They did not have to create financial instruments that their senior managements didn't understand. They did not have to adopt the "originate and distribute" model of lending that converted bankers into dodgy salesmen and distributed risk arbitrarily. They did not have to have bonus systems that rewarded taking on too much risk and short-termism. And they don't have to rely on quite so much funding from the money markets – and often from abroad – as opposed to customer deposits. The growth of the banks' balance sheets over the past few years was impressive; but it was driven by a dangerous increase in leverage (they borrowed too much as well) and by making less and less prudent lending decisions. Should the Irish Financial Service Regulatory Authority or the Government have stopped them? They could have tried harder but the regulators can't make the bankers' commercial decisions for them, and it was those that were flawed.

Of course, these schools of thought are not completely mutually exclusive. In reality, it is more a question of where the balance of blame attaches.

The full article

Notice of TV programme, tonight, 7pm

Credit Crash Britain: HBOS - Breaking the Bank
BBC 2 Northern Ireland (Sky ch. 142)
Friday 31st October 2008
Time: 7:00pm to 8:00pm

Just before you go trick or treating for the night, you could catch this, the first part of a special five-part series from the excellent Money Programme examining different aspects of the credit crunch. Tonight, investigating the extraordinary fall of HBOS, they examine the seismic changes that swept through the UK's banking industry. They also examine the role short-selling has played and ask if regulators could have stepped in earlier to protect the bank. If the merger goes ahead, who will be the winners and losers after the creation of this UK mega-bank?