Restoring confidence - If banks are sound we should say so

THE world’s most famous hockey mom, Sarah Palin, wants creationism taught in America’s classrooms and, as unsentimental, unforgiving capitalist evolution topples masters-of-the-universe financiers, it is easy to envy the comfort offered by the certainty inherent in Palin’s Old Testament beliefs.

Sadly, that comfort cannot be found in today’s financial markets as we are caught in a tsunami of uncertainty, worry and the feeling that we have all lost control over something very important in our lives.

There seems to be a growing acceptance too that this is not a five-day wonder, that it may take some years before we can hope to see a degree of certainty return to our financial affairs. But already, even at this early stage, there is a chink of light at the end of the tunnel.

The moment US Treasury Secretary Hank Paulson drew a line in the sand by refusing to bail out Lehman Brothers he made a powerful declaration. He rejected threats dressed as advice that suggested that such an important bank should not be allowed fail.

Lehman, America’s fourth-largest investment bank, fell victim of the sub-prime mortgage greed and sought bankruptcy protection owing more than €433 billion.

By throwing Lehman to the dogs Paulson shrugged off the bankers’ doomsday warnings of “contagion”, “systemic risk” and “domino effect”. He dismissed the blandishments as no more than a last throw of the dice for the gamblers who literally broke the bank.

This is a rare, defining moment when a regulator calls the bluff of those who for so long now have made up — or ignored — the rules as they went along. The moment is especially rare as only a handful of finance ministers around the world actually have the power, the real, cold-steel power, needed to tell a bank once as powerful as Lehman Brothers to get stuffed.

If you want to live by the “credit default swaps” be prepared to die by the “credit default swaps”, as it were. And don’t expect the taxpayer to pick up the tab for the funeral.

Next month’s budget will give our government an opportunity for a Paulson moment. Will they bail out the builders or call their bluff? We have to wait a few weeks to see how that game of double bluff pans out.

At this week’s Galway brain-storming ministers and deputies were told that the outlook for Irish growth over the next few of years suggests that will record the largest cumulative drop in national income in an advanced economy since World War II.

This is hard talking and requires hard decisions and the courage to see them through. The international experience of housing booms and busts shows that house values fall for nearly five years after they peak. Real house prices peaked here at the end of 2006.Typically, house prices give up almost all of the gains recorded in the five years before the peak. That translates into a drop in real house prices here of about one third by 2011.

Experts at the large German bank, Dresdner, have predicted losses in the Irish banking system will be about €6bn. Our bankers argue about €6bn but concede that we are talking about billions. To rub salt into the wound the bad debt peak will not be reached until 2010. Bank lending will be curtailed but consumers will have the confidence to commit to loans. Business faces a double whammy; cautious consumers and a lack of enthusiasm on the part of the banks to fund growth or even normal capital requirements. That’s why we face at least two years of low growth. Add to that the woes of the builders.

Until this cycle ends there is precious little Government can do to get growth back into the 3% to 4% a year bracket. But what they can do is instill confidence by making the hard calls on public finances and by robust supervision of Irish banking.

That is where they must concentrate their efforts and if there is a chink in our banking system it should be confronted before the markets do their worst.

If our banks are strong enough to weather the storm the Central Bank and Regulator should say so and stand behind the banks. This is how confidence can be restored and businesses encouraged.

Right now that is what we need most of all.

One of the many lessons of this crisis is how quickly those who once championed the survival of the fittest become supporters of lame ducks when they become one themselves. Banks that derided state intervention when the sun shone are calling for the creation of government agencies to “facilitate the consolidation of the financial sector”.

So, we can put hypocrisy beside greed on the charge sheet. What a pity we can’t think about dispensing some Old Testament justice as well.