A decade on from bank bailouts: Scars remain for those hardest hit

Ten years ago this month, the financial world was rocked by the collapse of a Wall Street giant. Lehman Brothers’ spectacular bankruptcy sparked a financial crisis in the US that ricocheted around the world. The collapse caused chaos in US financial markets: stock prices plummeted and markets feared that even larger financial institutions, from Morgan Stanley to Goldman Sachs and Citigroup, might fail.

It was an event that would have major implications for many countries, including Ireland. Within weeks, the global tsunami landed on our shores and the Irish Government was forced to bail out our failing financial institutions.

As our report today reveals, the bailout in Ireland was prompted by a phone message instruction from the then president of the European Central Bank, Jean-Claude Trichet, to our finance minister, Brian Lenihan, to “save the banks at all costs”.

It was also made clear to the minister that Ireland was on its own in doing this and would receive no assistance from the ECB. Ireland was the first EU member state to bail out its banks. It was also the first to go into recession.

Trichet, who served as the head of the ECB from 2003 to 2011, issued the same command to other EU states whose banks were in trouble and has since insisted that the actions taken to bail out the banks were necessary.

“We avoided the equivalent of Lehman Brothers,” Trichet recently told the news channel France 24. His justification is, of course, self-serving but he is supported in that view by economists in the US who argue that it would have been far better for America and for the global economy if the Federal Reserve had helped Lehmans to survive.

Ten years on from our own bank bailout, have we learnt anything and was it worth it? Those are key questions that will be asked for many years to come. There is still no overall consensus on whether the banks should have been bailed in this manner and to the extent to which they were.

There is consensus, though, on the ramifications of saving the banks. It has cost hugely — not just in financial but also in social terms.

It was the bailout that begat recession and recession that begat austerity and the scars remain. Almost one in ten households remains in negative equity and around 400,000 people live in persistent poverty.

While the economy is growing and unemployment is now little more than 5%, the fallout from the financial crisis and its consequences remains. Greece and Ireland have paid the heaviest price. For the EU as a whole, the bank bailouts added 4% of GDP to debt. For Ireland, the equivalent figure was 21% of GDP.

But it is the human cost that should concern us most.

A 2013 study by Oxfam showed how austerity programmes involving regressive taxes and deep spending cuts dismantled the mechanisms that reduce inequality and enable equitable growth. As a result, we now have 15m more poor people in Europe than a decade ago. Unlike the banks, they were never offered a bailout.