The crisis caused by bankers may take us to the edge of bankruptcy (Ireland)

[David Farber <dave () farber net>]

Begin forwarded message:

From: "Ronald J Riley \(RJR-com\)" <rjr () rjriley com>
Date: October 20, 2008 8:08:47 AM EDT
To: <dave () farber net>
Subject: The crisis caused by bankers may take us to the edge of  
bankruptcy (Ireland)

Dave,

Below is an article about the meltdown of banking from Ireland which  
may be of interest to IP readers.

Ronald J. Riley,


Speaking only on my own behalf.
Affiliations:
President - www.PIAUSA.org - RJR at PIAUSA.org
Executive Director - www.InventorEd.org - RJR at InvEd.org
Senior Fellow - www.patentPolicy.org
President - Alliance for American Innovation
Caretaker of Intellectual Property Creators on behalf of deceased  
founder Paul Heckel
Washington, DC
Direct (202) 318-1595 - 9 am to 9 pm EST.

http://www.independent.ie/business/world/the-crisis-caused-by-bankers-may-take-us-to-the-edge-of-bankruptcy-1499569.html

The economist's view

The crisis caused by bankers may take us to the edge of bankruptcy

By Paul Sweeney

Thursday October 16 2008

"Not only have individual financial institutions become less  
vulnerable to shocks from underlying risk factors, but also the  
financial system as a whole has become more resilient." -- Alan  
Greenspan in 2004

Alan Greenspan, the US financial regulator was known as "the oracle."  
He could do no wrong because so many powerful people were making so  
much money. Yet some economists were warning of the dangers of the  
lack of regulation. The ultimate impact of his repeated reassurances  
was to inflate the bubble even further and exacerbate the 2008 crash.

In April 2008, the Irish Congress of Trade Unions (ICTU) published an  
in-depth analysis of top executive pay, 'Narrowing the Pay Gap', and  
the manner in which it had lost all touch with reality.

We chose to open our publication with a rather different quote from  
Nobel economist Joe Stiglitz: "Anybody who believes the banks know  
what they're doing has to have their heads examined. Clearly,  
unfettered markets have led us to this downturn and to enormous social  
problems."

He was speaking over six months before Wall Street imploded. It is now  
clear that the financial crisis will fundamentally change politics. If  
we have learned anything in recent weeks, it is that markets are  
seldom "free", that they are man-made institutions and are most  
certainly not self-regulating. Just as the collapse of the Berlin Wall  
signalled the end of Communism, so the collapse of Wall Street (the  
Wall was actually removed in 1699) has signalled the collapse of neo- 
conservative economics.

It was obvious that a financial crisis was looming. On 30th November  
2007, ICTU, with other international unions, made presentations to the  
OECD at ambassador level, arguing that OECD governments must "address  
the lack of adequate regulation of global capital markets".

The Reagan/Thatcher ideology, as outlined by Milton Friedman and Fred  
von Hayek, advocated low taxes, small government, market  
liberalisation and a programme of deregulation and privatisation. It  
crashed to earth last month, brought down by its own internal  
contradictions.

State regulation

As Keynes argued 72 years ago, state regulation -- "interference" in  
the market -- is a prerequisite for any functioning and sustainable  
modern economy. The degree of that regulation is what politics is  
about. It is an irony that will not be lost on history that George  
Bush has nationalised more of the US economy than Lenin did of Russia's.

The free market has been stood on its head and a perverse form of  
"state socialism" has become the new ideology of the elites. Just as  
it was said that "taxes are for the little people", in the twilight of  
the era of unregulated business, the public sector bails out the banks  
and "the free market is for the little people".

The worrying fact is that it is clear that the authorities still do  
not know what to do. The Government has its fingers crossed. It hopes  
it will get away with the blanket bank guarantees and that they won't  
be called in. It is afraid to buy shares directly as it might look  
like socialism even though this may get a real return for taxpayers.  
It refuses to challenge the culprits. Regrettably, the current rescue  
package also ensures that the property developers are safeguarded at  
public expense.

The behaviour of central banks demonstrates a clear case of  
"regulatory capture" where the banks "captured" the regulators. This  
occurred because the myth of the free, self-regulating market had  
become so pervasive that even the regulators themselves doubted the  
necessity of their own roles. And so they slept! Ireland's Financial  
Regulator acted in stark contrast to the Spanish regulator which did  
not indulge Spanish banks -- with the result that they are now amongst  
the strongest in the EU.

In Europe, there is still is no financial regulator in the Single  
Market, or even in the euro zone, partly because the Commissioner in  
charge, Charlie McCreevy, is ideologically opposed to most regulation  
and still believes that markets are free.

The correct solution for Ireland would be to a) take shares in the  
banks; b) but only in viable banks -- let the weak ones fail; c) take  
on board representation for oversight; d) ensure, as a quid pro quo,  
that the executives, who brought us the chaos with frenzied property  
lending, resign; e) insist on curbs on excessive remuneration; f)  
disallow dividends for the period of state "interference"; and g) re- 
regulate the big accounting firms which vouched that the banks were  
sound.

For years, ICTU argued against inflating the property bubble -- which  
is at the root of the Irish financial crisis -- with huge taxpayers'  
subsidies. While a small number of other economists, some academics,  
the ESRI, and at least one government economic advisory body, were  
advising caution around the property market, parts of the media gave  
the financial sector economists, whose job it is to puff up the  
market, extraordinary access.

Products

These financial sector economists use media comment to market  
financial products, loans, "income protection" products and private  
pensions. They helped fuel the property bubble.

They are obsessed with public sector reform, but ignored the need for  
private sector reform, especially in their own houses. While there are  
areas of the public sector which are inefficient, these are nothing in  
comparison to the size of the crisis caused by the private sector  
bankers. It may yet lead this country to the edge of bankruptcy. The  
false paradigm that "private sector good; public sector bad" should be  
truly redundant now. This is underlined by the gross incompetence of  
the banking system which is the artery of the economy.

It is the public sector, the taxpayer, which has had to come to the  
rescue. The strong interdependence between the public and private  
sectors must be recognised, and be developed into a robust model of  
dynamism for the economy and society.

Private sector reform, which is being initiated with these bailouts,  
must result in private business which is less private, more  
transparent and more accountable, more responsible to employees, to  
the environment and to society. Yet in spite of the growing  
recognition of the need for more openness, the Government is planning  
to reduce financial disclosure by companies in Ireland, under a  
proposal currently with Tanaiste Mary Coughlan's department.

When the Government finally wakes up to what is to be done, we will  
need sceptical market economists to take over the Department of  
Finance, all state regulators, and in Government itself to deliver the  
new public/private paradigm.

At the EU level, a strong financial regulator must be established. In  
addition, a new system of market regulation, a new Bretton Woods-style  
agreement of global governance, should be implemented. We have had  
partial globalisation, of markets and profits, but not of taxation and  
regulation. We also need a small tax on financial transactions.

If our political leaders fail to comprehend the shift that has  
occurred in the economy and how it should change their politics, then  
we will have a prolonged recession and further crises.

- Paul Sweeney





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