So the government is going to buy all the banks’ toxic assets, is it? €90 billion to be precise.
Let me think my way through this now, slowly.
What’s a toxic asset?
Well, it seems to be something for which the banks lent somebody money to buy, but which isn’t worth what was paid for it. And it seems the banks didn’t examine the deal carefully enough before handing over the money.
So. The banks paid out too much money to buy these assets, which are mostly buildings and land, and in the process, destabilised our economy.
The problem, as the government sees it, is that the banks have too much bad debt on their books and therefore they can’t do their normal business of lending to ordinary customers.
Therefore, the government is going to purchase the bad loans from the banks for less than they’re worth, and then they’ll try to get the money back from the developers who borrowed it in the first place. It isn’t clear how much they’ll be able to recover from these developers who have salted away their profits in the Cayman Islands and Zurich. (Incidentally, these developers are not all remote figures living in some luxurious, unreachable quarter of South Dublin. Many are ordinary enough guys that you might bump into at a match, or in your local pub. Ordinary guys who just happen to have defaulted on a €30 million loan).
This, according to the theory, will free up the banks to get back to lending money to you and me.
Now, we have also contributed €7 billion to the two main banks and we have nationalised the First Bank of Crookery, Anglo-Irish. In addition, we have guaranteed up to €450 billion in bank liabilities. This was all so that the banks wouldn’t fail. Not bad for a tiny little country like Ireland with only four million of us to contribute.
But let me just ask you a different question, and I apologise in advance if my ignorance is showing, but I’m not a trained economist or anything like that. Still, let me ask you anyway.
If the only problem was liquidity — the ability of the banks to lend money — why couldn’t the government have set up one or two new banks and just let the old ones fail under the weight of their stupid decisions about lending too much money for things that weren’t worth it?
Who would suffer if those banks failed? As far as I can see, it would only have been the shareholders, but they were gambling anyway in the world’s biggest bookie shop, and when you place a bet, you have to assume that you might lose your shirt. Who else would have suffered? The new banks would have needed experienced middle-level officials to run the day-to-day business, and could probably have employed most of the workers from the defunct banks.
I don’t understand it. Instead of doing this, the government is going to use your money to buy billions of euros of bad debt.
Why not just let these banks fail under the weight of their own greed and start again from scratch?
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