An accountant of my acquaintance predicted months ago that continuing drops in property prices in 2009 would depress the value of bank mortgage assets so much that bank balance sheets would be wrecked to the point of insolvency risk.
He now says that recapitalising banks with new treasury share issues won't help maintain lending to Irish businesses. In the rapidly deteriorating economic environment,banks will selfishly prioritise their own survival by investing new funds in government bonds instead of lending to customers. They will be forced to do so as mortgages defaults force asset sales to support bank equity capital ratios,sales that will lead to a downward spiral in property values. At the same time, rising loan defaults will take from the cash the banks need to support existing levels of lending.
What to do? He says that the banks must be nationalised,an extraordinary opinion from a man with hard right wing views on economics.
When I suggested that in return for a government guarantee of a minimum 7 year rate of return on rights issue shares,the government could extract a promise from the banks to continue lending. He thinks it would be impossible to enforce. When I suggested that the government could set up independent committees throughout banks to rule on loan applications,he felt the committees wouldn't be close enough to customers to make good decisions. Still,the committees could decide what was a feasible level of lending at group level and then leave it up to bank officials to implement the lending targets.
Have P.ie readers seen evidence that banks have stopped lending to sound businesses?
As for the banking and financial crisis in Britain, this analyst argues that rapidly rising public sector liabilities could lead to hyperinflation Weimar Republic style http://seekingalpha.com/article/1084...ticle_sb_picks