the irish and the banks

Was it for this the wild geese spread
The grey wing upon every tide;
For this that all that blood was shed,
For this Edward Fitzgerald died,
And Robert Emmet and Wolfe Tone,
All that delirium of the brave?
Romantic Ireland's dead and gone,
It's with O'Leary in the grave.
-- WB Yeats

If you took the the couple weeks in the build-up of the Irish crisis and transposed them onto a time-line this spring of the Greek "crisis", you'd get almost day by day similarity. Credit spreads widen, denial, talk of bailout, more denial, more bailout talk, admission of problem, then the bailout. But there's some important differences between the Irish troubles and the Greeks. The Irish government has no immediate need for money. And while the Greek problem was as much about bailing-out French and German banks as the Greek government, the Irish problem is very much about the Irish banks, though it's also very much about Portugal, Spain, and really the whole Eurozone. Funny enough, it's the FT that has the best piece on the whole affair stating:

Ireland’s basic problem is that it now has to choose between its own sovereign solvency and the solvency of its banks. Other European countries – in and out of the eurozone – may soon face the same choice. In such a world, keeping banks afloat with public capital risks sinking the sovereign – and with it, the whole banking system.

Dublin has cash to get by for another half a year. There is something absurd about pressuring Ireland to borrow money from Europe in order to calm markets enough to lower yields for Spain and Portugal, whose refinancing needs are more acute. If this were the only consideration, the sovereigns most immediately at risk should be told to tap the European financial stability facility.

But the most urgent problem is not the solvency of the Irish state; it is the solvency of the Irish banking system (though Dublin has spared no effort to assimilate the latter to the former). If Irish banks collapse – and if one falls it will not fall alone – it may well trigger bank failures across a continent that remains full of institutions whose earlier stress tests were remarkably stressless. Right now, this kind of contagion should scare Europe’s leaders even more than the spectre of sovereign defaults.

So, let's understand, nothing's been fixed in the banking system over the past couple years, and that goes double for the big banks in the United States. Yet, the idiocy of throwing more and more money at the banks, further indenturing the future is the only thing the effete and corrupt political classes of Europe and the US can think to do. The FT puts it very succinctly,

Saving the banking system, however, is not the same as bailing out extant institutions; nor should taxpayers give up even more of their blood to the walking dead. Yet this is what Ireland is being asked to do – borrow money from the EFSF to raise the banks’ equity. Doing so would be an insult to the Irish people (whose incomes will be mortgaged to pay the loan back) and a gratuitous one at that: it defies logic to claim that adding to Dublin’s debt will seduce markets back to Irish sovereign bonds.

Forcing the FT to the conclusion that was inevitable two years ago,

So Ireland – and Europe – must confront the prospect of an inevitable string of bank restructurings. Giving away more capital now will weaken states’ ability to deal with the problem when there is no more time to be bought.

Preparations must now be made for dealing with a run on banks by depositors or wholesale lenders. Countries that have yet to put in place special insolvency regimes – Ireland included – must do so without delay. They must allow states swiftly to take control of banks so as to keep operations going during a panic and quickly allocate losses by forcibly restructuring wholesale debt or converting it into equity. Paradoxically, Ireland’s reliance on wholesale funding may make it easier to force losses on creditors.

I'd say let the restructuring begin, but we're not quite there yet, after all Mr. Bernanke's just warming-up the money transistors. So, let's start thinking about destroying the bad debt and breaking up the big banks. When that's done, we can actually start thinking about an effective monetary and fiscal policy, but to do that we'll need to think a little harder about what a 21st century economy looks like. It doesn't much resemble the last three decades of the 20th.

It would be nice to see the Irish force the issue here and if they need any encouragement, they should contemplate those nice English offer to help with a few more billion pounds of debt. I hear they're a little nostalgic for Eire.