Economy will never recover unless Nama fixes bank sector

[Dreaded_Estate]

Economy will never recover unless Nama fixes bank sector - The Irish Times - Sat, Sep 05, 2009

ALAN AHEARNE

OPINION : Funding is difficult and costly to attract because of concerns about loans on Irish banks’ balance sheets
AMID THE furious debate about Nama, people appear to have lost sight of the fundamental problem with Ireland’s banking system. Banks are rationing credit to businesses and households because they do not have enough funding to lend in a normal way.


The simple fact is that every euro lent by a bank to a customer must be drawn from deposits or borrowed by the bank from somewhere else. In the case of Irish banks, somewhere else mostly means financial institutions abroad. Data from the Central Bank shows that the net foreign liabilities of the Irish banking system peaked at nearly 60 per cent of GDP in 2007, compared with the roughly 10 per cent of GDP figure that prevailed for more than a decade until 2004.

[TradCat]

So we must take responsibility for their stupid lending so the same people can get back to lending. Only this time they'll know for sure that we'll pick up the tab if it all goes wrong. Sorry but that's not a good deal for the taxpayer.

[Kensington]

The simple fact is that every euro lent by a bank to a customer must be drawn from deposits or borrowed by the bank from somewhere else.

This is not true. It is amazing that this is how the vast majority of people, even those educated in economics, it actually works. If people don't understand how it works, they will not know how to sort it out.

In other words, people wrongly think that there exists some sort of automatic multiplier.

It does exist, there is a multiplier.

[cyberianpan]

So we must take responsibility for their stupid lending

That is what we did with the guarantee, at this stage I think Nama saves us money

Only this time they'll know for sure that we'll pick up the tab if it all goes wrong. Sorry but that's not a good deal for the taxpayer.

Which is why Nama is just emergency surgery ( consider the guarantee as roadside paramedic)

We need long term reform, especially of the nonsensical regulatory capital requirements - we need the promise of moral hazard, and we need it writ large

cYp

[TradCat]

We need long term reform, especially of the nonsensical regulatory capital requirements - we need the promise of moral hazard, and we need it writ large

That's why I'd be slightly more comfortable with the idea if we had a general election first. I am from the Fianna Fail culture and it's all about looking after people, seeing them right. I don't trust them to do anything honestly.

The only way NAMA will work is if world-wide inflation takes care of the debt and I think that's the real bet here. If instead deflation persists and we remain in the doldrums then NAMA will be a millstone around our necks. Of course the ECB's mandate is to stop inflation at all costs so what we need and what they do will once again collide.

My bet is that property will continue to fall in price.