Checks Without Banks: The Irish Banking Strike

December 17, 2010 7:42 AM

The Irish Banking Crisis: A Parable - What happened when the Irish stood up to the bankers in the 1970s? cf. Why Wall Street won't get shrunk & The Inequality That Matters

Maybe, just maybe, banks need people a lot more than people need banks. Perhaps that's true for the whole imperious, plodding gamut of yesterday's zombie institutions, from corporations, to newspapers, to governments. Perhaps people and societies are a tiny bit more adaptive, resilient, intelligent, and creative than yesterday's institutions assume. And perhaps failing to recognize that is what's really at the root of this great crisis.

BONUS
Too Big to Succeed - How is it possible that post-crisis legislation leaves large financial institutions still in control of our country's economic destiny? One answer is that they have even greater political influence than they had before the crisis. [By Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City]

Patterns versus rules - I'm increasingly sceptical that the fortunes of the richest Americans are overwhelmingly the result of their having created new wealth rather than an effect of the way the institutional rules of the game determine winners and losers.

Hangover theory and morality plays - But people do claim that in aggregate “we” deserve and must endure a period of recession because “we” overconsumed and invested poorly. The right response to that story is, “Who the fuck are this ‘we’ of which you speak, kemosabe?”

posted by kliuless (38 comments total)

According to Murphy, it was the small size of the Irish economy (the population of
Ireland was about 3 million at that time) and the high degree of personal contact that
allowed the system to function.

Somehow I doubt Whole Foods, Amazon, Con Edison, Time Warner Cable, and Netflix are going to be happy to accept my checks from closed banks.
posted by spicynuts at 7:45 AM on December 17, 2010

By that I mean to refute your excerpt. We are way to married to our bells and whistles as a society to go turn into the Amish at this point.
posted by spicynuts at 7:47 AM on December 17, 2010

it's a parable :P read just a little further down!
posted by kliuless at 7:49 AM on December 17, 2010 [1 favorite]

TLP; DR
posted by spicynuts at 7:57 AM on December 17, 2010

Somehow I doubt Whole Foods, Amazon, Con Edison, Time Warner Cable, and Netflix are going to be happy to accept my checks from closed banks.

Wouldn't happen here no matter what. Even if we'd been smart, and decided to let banks fail, the FDIC is very good indeed at maintaining operations. I'd be quite surprised if we'd had any impairment in checking and savings accounts at all. CDs and other financial instruments would have taken a long time to unstick and settle, but basic saving and checking activity would most likely have been completely unaffected.

The best 'bailout' plan I heard from was iTulip, which was to let the big players go belly up in most respects, maintaining the FDIC guarantees, and then flooding the small banks, and savings and loans, with cheap credit straight from the Fed. Get money into the hands of institutions that have shown skill in managing risk and know how to do local lending, to preserve the real economy, and let the Wall Street high finance sector sink or swim on its own merits.

Instead, we got a vast transfer of wealth from poor people to rich ones, with the explicit purpose of maintaining the stupid behavior that got us in trouble in the first place.
posted by Malor at 8:02 AM on December 17, 2010 [27 favorites]

Only thing I would say, Malor, is would these small banks continue to be able to handle the kind of corporate and business lending that is needed to keep manufacturing, r&d, paychecks, start-ups, etc going? How do you protect the rest of business?
posted by spicynuts at 8:17 AM on December 17, 2010

Only thing I would say, Malor, is would these small banks continue to be able to handle the kind of corporate and business lending that is needed to keep manufacturing, r&d, paychecks, start-ups, etc going? How do you protect the rest of business?


that's actually what small banks do already. you flood them with credit so they can do more of that.
Big banks aren't any better at that sort of thing.
posted by JPD at 8:20 AM on December 17, 2010 [3 favorites]

hoenig:

What can be done to remedy the situation? After the Great Depression and the passage of Glass-Steagall, the largest banks had to spin off certain risky activities, and this created smaller, safer banks. Taking similar actions today to reduce the scope and size of banks, combined with legislatively mandated debt-to-equity requirements, would restore the integrity of the financial system and enhance equity of access to credit for consumers and businesses. Studies show that most operational efficiencies are captured when financial firms are substantially smaller than the largest ones are today.

These firms reached their present size through the subsidies they received because they were too big to fail. Therefore, diminishing their size and scope, thereby reducing or removing this subsidy and the competitive advantage it provides, would restore competitive balance to our economic system.

To do this will require real political will. Those who control the largest banks will argue that such action would undermine financial firms’ ability to compete globally.

I am not persuaded by this argument. History suggests that financial strength follows economic strength. A competitive, accountable and successful domestic economic system, supported by many innovative financial firms, would restore the United States’ economic strength.

More financial firms — with none too big to fail — would mean less concentrated financial power, less concentrated risk and better access and service for American businesses and the public. Even if they were substantially smaller, the largest firms could continue to meet any global financial demand either directly or through syndication.

Wall Street drinks our milkshake - "I've long had the sense that folks in finance are getting spectacularly rich by somehow gaming the system... We can easily treat symptomatic inequality through progressive redistribution, but this won't cure our deeper institutional malady. The deeper problem is that Wall Street can and continues to drink our milkshake."
posted by kliuless at 8:32 AM on December 17, 2010

Really? I didn't realize small banks could do the kind of IPO lending or corporate lending that a large bank can. Hundreds of millions of dollars?
posted by spicynuts at 8:33 AM on December 17, 2010

Tens of billions of dollars, really. Though that would be a syndicate of large banks, not just one.

And if you get small banks doing big lending, doesn't that make them...well...big banks?
posted by Infinite Jest at 8:35 AM on December 17, 2010

Really? I didn't realize small banks could do the kind of IPO lending or corporate lending that a large bank can. Hundreds of millions of dollars?
posted by spicynuts at 8:33 AM on December 17 [+] [!]

True, but surely there's a middle ground between First Local Yokel Bank and Owning 60% of GDP that can handle the transactions you're talking about.
posted by r_nebblesworthII at 8:35 AM on December 17, 2010

Somehow I doubt Whole Foods,
............. are going to be happy to accept my checks from closed banks.



you'd need a bailout just to shop at whole foods.
posted by sgt.serenity at 8:35 AM on December 17, 2010

Thanks for this excellent post. Much to digest here.

spicynuts, this post has a bunch of articles from Fed members and lifelong finance people and The Economist, arguing that things are different now than they were 20 years ago, for the worse. Now, you can argue that this was all inevitable because God and/or Darwinism so decreed, or that government interference will anger the Market Fairy, or that they're wrong in their diagnoses, or whatever. But please don't fantasize that this is about "capitalism vs. Amishness."
posted by ibmcginty at 8:58 AM on December 17, 2010 [2 favorites]

Really? I didn't realize small banks could do the kind of IPO lending or corporate lending that a large bank can. Hundreds of millions of dollars?


An IPO isn't lending, it is underwriting. And not a commericial banking business. The ability to lend money to large corporates is a function of capital and credit, both of which the government could provide.
posted by JPD at 9:00 AM on December 17, 2010

And if you get small banks doing big lending, doesn't that make them...well...big banks?

I think that's the point. And you allow the risk takers in the old big banks to take their losses.
posted by JPD at 9:01 AM on December 17, 2010 [2 favorites]

Instead, we got a vast transfer of wealth from poor people to rich ones, with the explicit purpose of maintaining the stupid behavior that got us in trouble in the first place.

Normally, Malor and I are on opposite sides of the economic agenda, but not here -- the single biggest mistake that was made was not allowing the bad banks to fail, and it was a combination of the Bush and Obama administrations that made that mistake.

They talk about TBTF-but we've spent far more on them now than we would have if we'd just nationalized them, spun off the functional parts as new banks with new directors, and then done an RTC-like body to slowly get what we could out of the bad debt.

Big banks aren't any better at that sort of thing.

In fact, they're often worse at basic, day-to-day banking operations from the personal to to the corporate level. The only reason they can't handle the credit needs of a GM sized company is capital. Give them the capital to do so, and they'll almost certainly do a better job than megabanks who count on investment activity and M&A work to make money.
posted by eriko at 9:05 AM on December 17, 2010 [1 favorite]

But please don't fantasize that this is about "capitalism vs. Amishness."

That's not what I was arguing at all.
posted by spicynuts at 9:08 AM on December 17, 2010

> They talk about TBTF-but we've spent far more on them now than we would have if we'd just nationalized them,

What do people make of the $12 billion profit that the government (supposedly) made on Citigroup, then? It's a small fraction of the total $700+ billion, but it's a good development, right?
posted by Burhanistan at 9:09 AM on December 17, 2010

When people talk about Mega Banks, I think its helpful to think of them not just in terms of their size, but also the scope of their business. Hoening touched on this. The size of the bank is not nearly important as what the bank is doing with all its money. One of the great things about Glass-Steagal was that it put a barrier up between commercial banking and investment banking. This way, those "plain vanilla" functions of banking that a large commercial bank provide (funding for manufacturing, payroll, etc) were protected from the very large Risk inherent in investment banking. Once the Investment Banks & Commercial Banks began merging after Glass-Steagal was murdered in the face back in the 90's, this all changed.

At the bottom of the pile of crap that caused the economy to hit the shits is the fact that the investment banks used the money from their commercial side to take massive risks that blew up in their faces. We then bailed them out and effectively told them, 'Carry on, then."
posted by KingEdRa at 9:10 AM on December 17, 2010

the single biggest mistake that was made was not allowing the bad banks to fail, and it was a combination of the Bush and Obama administrations that made that mistake.

except they let Lehman Bros. fail and it had unpredictable consequences. The problem is bigger than just big banks, it's that the "shadow banking" system (built on mortgage-backed-securities) was too large and too interconnected with the real banking system.
posted by ennui.bz at 9:16 AM on December 17, 2010 [1 favorite]

They talk about TBTF-but we've spent far more on them now than we would have if we'd just nationalized them, spun off the functional parts as new banks with new directors,

The problem with this angle is it misses (forgets?) the panic of the moment (Sept-08 onward for maybe 6 months) where it wasn't just the American public that was wavering with regard to confidence in the "system", it was the whole world. To have let a whack of big banks outright fail could easily have fed all manner of simmering anxiety, panic etc and led to a financial apocalypse that would've truly rivaled 1929 ... or conceivably been much, much worse. Or maybe not.

Bottom line, the proverbial building was on fire and it was spreading rapidly. Emergency measures were enacted in the heat of the moment and second guess them all you want, there's no time travel device that allows us to undo them. Of course, what's missing for me in the aftermath (now that the fire is under control) are those steps (that political will) that would now allow for the deliberate dismantling of the offending institutions, and so on ... or as Malor put it ...

to let the big players go belly up in most respects, maintaining the FDIC guarantees, and then flooding the small banks, and savings and loans, with cheap credit straight from the Fed. Get money into the hands of institutions that have shown skill in managing risk and know how to do local lending, to preserve the real economy, and let the Wall Street high finance sector sink or swim on its own merits.
posted by philip-random at 9:23 AM on December 17, 2010

What do people make of the $12 billion profit that the government (supposedly) made on Citigroup, then? It's a small fraction of the total $700+ billion, but it's a good development, right?

The Treasury revised the cost of TARP down to $30 billion in October. The $700 billion figure was never reached, but of course that is the number that has stuck in the public consciousness.
posted by malocchio at 9:33 AM on December 17, 2010

In re: Inequality that Matters. My own sense is that the real downside with massive inequality comes in the form of power over decision-making: does money get invested in things that will be for the long-term public good (infrastructure, including legal infrastructure) or does it get invested in expanding the market share of Wal-Mart or marketing Viagra?
posted by outlandishmarxist at 9:35 AM on December 17, 2010 [1 favorite]

And if you get small banks doing big lending, doesn't that make them...well...big banks?

I think that's the point. And you allow the risk takers in the old big banks to take their losses.

Most of the problem is the PEOPLE in charge of large banks, and the fucked up incentives that they have to rape and pillage at will. To some extent, small banks that have resisted being eaten up by the BOAs and Citis of the world are staffed and run by people capable of maintaining sound lending practices and eschewing the latest fancy financial fraud product seeking short-term year over year gain.

The proper solution to the financial crisis was to put all the CRIMINALS at the big banks in jail, and let those toxic institutions and the culture of destruction they created fail. The thing to do was to promote sound managers in thier place. Instead we bent over and spread our cheeks, saying "thank you sirs, may I please have another?"

Now that there is literally zero responsibility in the system and everyone knows it, democracy and the rule of law are dead, maybe never to return. Kleptocracy and cronyism have won.
posted by T.D. Strange at 9:40 AM on December 17, 2010 [2 favorites]

Tyler Cowen's piece (The Inequality that Matters) is such an interesting read that I'm a bit disappointed it didn't rate its own post. It's not a fun read, and it doesn't pretend to have much in the way of solutions, or that any sort of easy solution is even at hand. But it does give a pretty convincing, non-axegrindy explanation of how we got to where we are, and what the most significant problems are.

Virtually all the problems radiate out from the financial industry, and the problems in the financial industry almost all are a result of inappropriate risk taking. Those risks are a result of perverse incentives, which allow upside profit without much in the way of downside risk.

That's the crux of everything, but it's a problem that lends itself to a lot of simple, obvious, and wrong solutions, because of how deeply ingrained the financial industry is with the rest of our civilization. The financial industry and 'real' industry have a symbiotic relationship, and just because the financial industry is sick doesn't mean it can simply be amputated or beaten into health.

My personal feeling is that the solution is going to take a lot of attention and monitoring over a long period -- decades, probably -- and there's little in the way of evidence suggesting that the American public has the attention span for it.
posted by Kadin2048 at 9:41 AM on December 17, 2010 [3 favorites]

To some extent, small banks that have resisted being eaten up by the BOAs and Citis of the world are staffed and run by people capable of maintaining sound lending practices and eschewing the latest fancy financial fraud product seeking short-term year over year gain.


Bullshit. Most people who run small banks are just as greedy and venal as the people who run big banks - they just haven't had the same opportunity set. (There are of course exceptions, just like there are good moral people at big banks). Any thing that gets done needs to be paired with a 10x increase in regulation. Otherwise you are just repeating and repeating and repeating the chain of behavior.
posted by JPD at 9:57 AM on December 17, 2010 [1 favorite]

From Marx to Goldman Sachs: The Fictions of Fictitious Capital
posted by lathrop at 10:00 AM on December 17, 2010 [2 favorites]

The Inequality that Matters completely misses the inequality that really matters, at least in terms of health (including mental health and happiness). That is, relative inequality. Primates are status-oriented creatures and even if your basic needs are met, the physiology of status remains.

Societies highest on happiness, highest on longevity and lowest on crime and violence and generally best all around in terms of education, etc. are lowest on inequality. They don't have a tiny elite with incredible wealth surrounded by a population that's barely scraping by. Doesn't matter if "barely scraping by" today would be living like a king 200 years ago— people don't compare themselves to 200 years ago, they compare themselves to the people they see around them. The physiology changes that come from having low status relate to being low status in terms of the others you are comparing yourself with—not to historical norms.

People are healthier in a world they see as fair— and trying to justify extreme inequality by saying well the poor today are wealthier than the rich a few centuries ago misses that point.
posted by Maias at 2:19 PM on December 17, 2010 [1 favorite]

This is an interesting post but I am not sure the poster has a full awareness of the historical context in 1970s Ireland. The banks in Ireland were not quite as powerful as they became by the late 2000s, because banks were for people who could afford them. The economy was less open to the vagaries of globalisation, certainly, but it was also more localised within Ireland itself. Hiding money in the house, under beds, in government bonds or in post office accounts, rather than saving it in a bank account, was seen as a safer, wiser option for people of a mature generation in the 1970s. In small Irish towns in the pre-Celtic Tiger period, the bank manager knew everyone in the same way the publicans did and reputations determined who got credit or not. Comparatively, people who are now in their middle age and younger were far more trusting and were also much happier to avail of credit from banks in the 2000s as they never had before, because for some of them it was being offered so easily in a way they had never even seen before.

There is a very strong credit union movement with a more liberal policy in offering small loans and hence it is, and was even during the Celtic Tiger, far more trusted than the banks.
posted by iamnotateenagegirl at 2:31 PM on December 17, 2010

Really? I didn't realize small banks could do the kind of IPO lending or corporate lending that a large bank can. Hundreds of millions of dollars?

That's an interesting question. Because I think it's symptomatic of assumptions we should actually be examining. Why do we assume that billions in single IPOs or bajillions in corporate lending are actually a healthy thing overall? Perhaps that's quite wrong? Perhaps showering enormous bags of cash on some dot com or financing a leveraged buyout for sums that make no economic sense in any kind of realistic scenario are exactly the problem? Perhaps it's not a bad thing to have smaller amounts of money available, because you are then not shoving 1.5 billion in compensation to some CEO just because you can, and which then drives inflation in executive compensation which is wholly disconnected from their performance or indeed the underlying economic reality? Perhaps the problem is that the liquidity available to such entities not merely distorts the economy, but is in fact disconnected from any economic reality. Sort of like the derivatives trades, which if they went wrong would have - on paper - required satisfying obligations that exceeded all the money available from all of the economies in the world times three. Having less money available means that a smaller bank has a better chance at actually studying the loan application and understanding it and can make a better economic decision. But if you suddenly need to invest hundreds of billions, you barely have enough time to sign the papers before the next "deal" comes along - you are flying blind. And you are distorting incentives in calamitous ways. Take a CEO who gets paid, say, $200 million a year. What actual incentive does he have to look out for the long term health of his company, when he can retire super rich in one year and never have to work another day in his life? And if a banker or trader or financier, stands to make $1 billion a year, s/he may be tempted to do so even at the cost of his entire company going bankrupt shortly after he's taken his paycheck home. When you have such enormous sums of money floating about, the risks grow exponentially. Incentives become distorted to the point of inversion. Smaller sometimes really is better.
posted by VikingSword at 3:15 PM on December 17, 2010 [1 favorite]

So what happened in Ireland after the bank strikes ended? What percentage of the checks written in the intervening time turned out to be unbacked? What percentage of people who wrote checks wrote far more than they could cover?
posted by Flunkie at 3:53 PM on December 17, 2010

The problem with this angle is it misses (forgets?) the panic of the moment (Sept-08 onward for maybe 6 months) where it wasn't just the American public that was wavering with regard to confidence in the "system", it was the whole world. To have let a whack of big banks outright fail could easily have fed all manner of simmering anxiety, panic etc and led to a financial apocalypse that would've truly rivaled 1929 ... or conceivably been much, much worse.

You have to understand, that's exactly what the amateur Marxists and ex-hippies on the internet want. With the unemployment rate at 40%, the world economy in a coma, and cities and states going bankrupt daily, THEN the people would rise up, the Glorious Revolution would occur, everyone who makes more than 100,000 a year would be lined up and shot, and then it would be tofu and birkenstocks for everyone!

Ever since the 60s counterculture failed to change the world, the Left has been pinning it's hopes for revolution on an apocalypse. When atomic war, famine, plague, or overpopulation in the 80s failed to cause the system to collapse, then only hope left was for a global economic collapse. And for one glorious moment it looked like they might get their wish in '08, right in time for the 21st century to be the Age of Aquarius. And then Bush RUINED EVERYTHING!

But don't give up hope hippies, there's still 2012 to look forward to!
posted by happyroach at 4:09 PM on December 17, 2010

You have to understand, that's exactly what the amateur Marxists and ex-hippies on the internet want.

Damn hippies, ex-hippies, Marxists and unwashed hipsters on the internet. It's all their fault! The respectable bankers and and upstanding laissez-faire lawmakers and objectivist ideologues were doing such an excellent job and things were going swimmingly until the ill-wishing vibes of the nefarious ex-hippies and current Marxists tripped them up right into a global economic crisis! It's the ill-wishers! Same thing back in 1929 and the Great Depression - also ex-hippies, it's "ex" see, because the hippies have been a bad force forever, all the way back to the original sin. If only we could waterboard all the ex-hippies, why, we would never be in a crisis in the first place!

Get a grip people - you are focusing on the wrong thing discussing regulations and economic structures and financial arrangements. It's the ex-hippies all along!!!ONE
posted by VikingSword at 5:05 PM on December 17, 2010 [1 favorite]

wow you've perfected trolling my mom happyroach.
posted by JPD at 5:07 PM on December 17, 2010

You have to understand, that's exactly what the amateur Marxists and ex-hippies on the internet want.

"Revolution is the opiate of the Intellectuals" -- graffiti seen scrawled on a wall in the movie O Lucky Man. I guess maybe we could update it to:

"Apocalypse is the opiate of the amateur Marxists and ex-hippies of the Internet."

Lacks the same smooth flow unfortunately.
posted by philip-random at 7:13 PM on December 17, 2010

This is an interesting post but I am not sure the poster has a full awareness of the historical context in 1970s Ireland.

Probably the most important of which is that the EC, or more accurately the Germans, were happy to ladle out a seemingly bottomless slush fund to member states. The Germans are, as I understand, getting rather tired of being the people who fund a bunch of basket cases.
posted by rodgerd at 10:29 PM on December 17, 2010

The Germans are, as I understand, getting rather tired of being the people who fund a bunch of basket cases.

still paying reparations for various 20th century shenanigans.
posted by philip-random at 11:15 PM on December 17, 2010

re: cowen, here're some responses...
Can vigilant creditors limit excess bank risk-taking?
Words of wisdom, from Kevin Drum
Bank Leverage Limits
more

also see...
Will Wilkinson Says That the Executive of the Modern State Is But a Committee for Managing the Affairs of the Ruling Class
A Convenient Myth
Symbols and Substance

oh and btw...
Beyond the Crash: Overcoming the First Crisis of Globalisation by Gordon Brown
Joseph Stiglitz on Gordon Brown
posted by kliuless at 9:06 PM on January 9, 2011