The Irish banks have run into some serious problems. The core of these problems are quite simple. But eight months forward from the official emergence of the crisis, there is no sign of an answer. There is serious criticism of the possible solutions that are coming up.Everyone is afraid that we will end up with a bunch of zombie banks, and that the people who caused the problem, property developers and bank officials, will end up being rescued from their sorry situation by the taxpayer.
Most of the objections are still tactical, rather than strategic. Zombie banks or a few rescues aren’t the biggest problem. The real problem is that we are going to end up with a zombie banking system, and that the government will end up as its political guardian.
So the problem is simple: the banks’ net assets are less than zero. The loans they have given out, for which they borrowed money from depositors and other lenders, are no longer considered likely to be repaid in full, or anything near it.
Solving the problem is far from simple. The following issues arise.
Financial: how do you re-shape the banks, so that the banks become viable again? The trick here is that you can’t just give the banks more money which they have to pay back later, nor does simply buying assets from the banks to free up cash help. All these things do nothing to improve the state of the bank. It’s just moving deck chairs around on the deck of the titanic.
Economic: what you do has to result in a banking system that actually supports the economic needs of the country. We are already running into trouble in Ireland on this score. The banking system we have is not fit for purpose. Even if our banks were to miraculously recover in the morning, it really has to be asked whether we really need so many small local banks. More signficantly, we have no bank with a growth plan that will see it through the consolidation of European banks that will inevitably be at the end of this.
Entepreneurial: This is the least-considered part. Banking is an entrepreneurial activity, just like opening a restaurant or developing a new product. You need entrepreneurial energy and risk capital to get the banks going again. There is no entrepreneurial plan (private or state) whatsoever for Irish banks.
Political: You have to actually get the job done. You have to bring all the various political players along with you to fulfill the plan. This is the politicians’ job. They would be good at getting something done, if they knew what to do. But really, the reality is they have no idea what to do. I wonder whether there is the basic understanding of the mechanics of a bank balance sheet at the government table. But it isn’t their job to come up with the plan, they just have to find it and implement it.
Legal: When you come up with some solution, there is going to inevitably be a loser, be it bondholders (people who lent money to the bank), shareholders (people who own the bank), depositors (people with money on deposit) and the government. You need to be sure that whatever you do is actually legal. Now this shouldn’t necessarily be a problem. There is a lot of law and a lot of precedent covering debt, the sale of debt, and so on.
So as I was saying – we are getting absolutely nowhere. The guy who is supposed to be in charge, of actually operating and running the rescue package, Michael Somers, seems to be concerned about the details of how the plan will be implemented. Presumably he knows more than anyone else about what the plan actually is. We have been told in very broad general terms what the plan is (buy bad loans off banks) but we don’t know the detail (what price will be paid, how will this actually effect the balance sheets of the banks, how the loans are to be collected from).
So why can’t we sort this out?
It’s because, under our system, people don’t work together. We have all these groups working in parallel silos. It’s great for coming up with observations and views, but it’s not much good for coming up with solutions.
To make this work, we have to bring all these different groups together. We need interdisciplinary thinking.
I recently read this op-ed about the lack of interdisciplinary work to solve real-world problems in universities. Mark C. Taylor argues that academics are getting every more specialized and isolated. But to actually solve real problems in the real world, all these thoughts have to be brought together.
It isn’t just academics who have this problem. Government departments and even colleagues in government don’t work together. They don’t have a shared vision.
Politicians or economists or bankers cannot resolve this problem alone in their silos. They have to work with others. Until that happens, we won’t be able to fully understand the intricacies of the problems we face with our banking system and our economy, and we certainly won’t be able to solve them.
Note: someone asked me if this meant we should have a national government, with all the parties in it, or else some sort of one-party government. I do not think we should do this.
The problem is a problem of leadership, but it is not a political one. If all the people in the actual government we have and in the various parts of Irish life worked together, we would probably be OK. It’s the technical and creative job of coming up with a resolution that is causing the trouble.