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« September 30th Evening: The Recession Diaries | Main | October 7th: Time for a Break in the Recession Diaries »

October 01, 2008

Comments

Graham

Interesting idea from Professor Kelly with respect to the purpose of central banking. "Keeping an eye" on the banks is one way of describing what they do, which is basically to manage the government's monopoly on the money supply - printing money and fixing interest rates in accordance with the government's objectives.

The really interesting question here is why banks all seem to make similar mistakes around the same time. Most people would admit that the banks are usually pretty good at making commercial decisions, but there is something about the business cycle which drives nearly all of them to commit the same types of errors.

The explanation I find most satisfying is that provided by the Austrian school: that the errors are explained by the false signals given to entrepreneurs in an environment of fixed low interest rates and easy credit. These errors are eventually revealed and that is when we experience the bust.

Since the boom has typically involved a great deal of leverage, the failed business projects force massive and widespread deleveraging. The banking system is built on a foundation of only fractional reserves, so it becomes seriously threatened as asset prices drop and debts go bad.

Central banks are faced with the dilemma of choosing between doing nothing and allowing a short-term catastrophe as the economy radically readjusts to the new conditions, or printing enough money to keep as many businesses in operation as they can, risking destruction of the currency through hyperinflation.

The literature on this subject is really excellent and present-day proponents of the theory have devised some hugely successful investment strategies.

Niall

First of all within the Eurozone, Governments have no control over printing money. The current French Govt. would love that power but thanks to our good friends in the ECB, they don't.

Banks throughout Europe have not made the same mistakes throughout Europe, let alone Europe. The problems of Ireland & the smaller regional banks of Spain are not repeated anywhere else in Europe, e.g Santander or the Basque Banks inside Spain. Indeed if you look at the problems created to date in Germany, there is a common link, Ireland.

I don't notice a queue developing outside Italian or French Banks and even the problems of the Benelux states are different.

Irish personal debt is the highest in the Eurozone and considerably higher than the US. If that was not bad enough, we then had every second taxi driver imagining himself as an East European property tycoon.

The reason is simple, Italian personal debt is perhaps 30% of personal debt here.

Generally the product of a shotgun marriage takes at least 18 years before he or she leaves the nest. This deal of Lenihan's will see us paying not for our own sins but the sins of others for a lot longer.

It was time to let Anglo Irish & INBS to go under. Time to see Seán Quinn back drawing sand and Bernard McNamara ploughing the rocks of bawn.

Conor McCabe

CEO of Irish Life and Permanent, Denis Casey, actually had the jockey bollicks neck of a nerve to go on RTE this morning and say that what is going on at the moment is simply part of an "economic cycle" and the normal losses that occur under this "economic cycle" the banks are more than able to cover. No risk to the taxpayer.
This crisis is to an "economic cycle" what getting fucked with a broken snooker cue is to making love.

What an absolute prick.

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