Anglo bailout saved nation from anarchy in the streets
Published 29/09/2010 | 05:00
THE Labour Party's decision to oppose the bank guarantee scheme two years ago leaves that party in the enviable position of being able to crow 'I told you so' as we watch the slow-motion car crash that our economy has become. The question Labour must answer is whether a high-speed car crash would have been any better?
While it is understandable that Labour washed its hands of the fraying guarantee scheme that has left most banks in state hands, close to collapse and unable to lend, a decision not to guarantee Anglo Irish Bank's liabilities would have had dire consequences that might have left us without any sort of banking system and no access to the markets to fund day-to-day borrowings.
It is, of course, impossible to say with certainty what would have happened had Labour been in power and told Anglo's bond holders to take a hike but nobody disagrees that the collapse of a major bank (and that is what Anglo had become) always has far-reaching consequences that are rarely understood at the time.
The demise of Lehman Brothers shook the world but most of us have forgotten that other bank busts have also destabilised countries for decades.
The military historian John Keegan suggests in his 1993 masterpiece 'A History of Warfare' that the origins of World War One can be traced back to the collapse of a now obscure Austrian bank decades earlier. Like a skyscraper falling, people far from the action can be killed and maimed by the rubble, while those closer to the disaster can survive unharmed.
Had Anglo been allowed to fail, it is certain that millions of people living in Ireland beyond the bank's shareholders, bondholders and depositors would have suffered. Labour would have tried to help Anglo's depositors but it is almost inconceivable that the other banks would not have gone bust as credit dried up, forcing the Government to nationalise the entire system overnight; something that has pretty much happened anyway but in slow motion and over several months.
A sudden drying up of credit and the collapse of all major financial institutions would probably have led to a shortage of cash in the real world. Like many Icelanders, people here and overseas would have gone to the ATM only to be told that no cash was available.
It is possible the country would have witnessed 'Mad max' scenes for several days as cash shortages forced people to barter and then loot supermarkets and other sources of food. It is a truism that we are only seven meals away from anarchy and it is all too easy to imagine that the emergency services would have been temporarily overwhelmed as grannies battled with gardai for food while the economy made the bumpy, traumatic transition from cash to barter.
There were ugly scenes in Iceland two years ago and there have been ugly scenes in other countries faced with a complete financial meltdown in recent years, such as Argentina.
Like Argentina and Iceland, we would have seen thousands of companies go to the wall within weeks and many would have lost their jobs but that is probably as bad as it would get. Just as we developed ways of coping during the bank strike in the 1970s, we would have quickly developed ways of coping with these new problems.
The cathartic value of such an event should also not be forgotten. A brief and close skirmish with death might have brought us to our senses and enabled the Government to take the action needed to slash public spending, which remains our biggest problem and is still out of control three years after the credit crisis began and two years after the banking system effectively collapsed.
TODAY, thanks to easy credit from the European Central Bank, we are still in denial about the extent of our problems. Still telling ourselves comforting little stories about how we have enough money to last us until sometime in the new year when the reality is that even Zimbabwe and North Korea keep enough money in the kitty to ensure that they can stagger on for a few months. Still telling ourselves that the Croke Park agreement makes sense when those funding that agreement no longer feel like lending to us.
The irony of the Labour Party's position is that it would have hurt its traditional supporters hardest. Those who depend on the State for a salary or benefits would have seen their incomes halved and halved again had Anglo been allowed to fail because the State's funding would have dried up completely for some time.
The benefit would be that the losses from Anglo would be much smaller than they are today while we would have borrowed far less and have brought our public finances into order. We would have saved two wasted years and be years closer to redemption, although we would have passed through a hell that would have been even more painful than the hell we have endured since September 2008.
The process would almost certainly have wiped out the Labour Party for good but it would not have wiped out Ireland. No country has yet been destroyed by a financial crisis, not even Germany after the Weimar Republic. Countries last and prosper although millions of lives are cut short and millions more see their potential wasted by unemployment and limited opportunity.
Finance Minister Brian Lenihan's policy was the safer option but also the easier one. If he succeeds in avoiding the twin perils of a banking and fiscal crisis he will have played one of the greatest games of poker ever to be played on the markets with pitiably weak cards.
If he fails, he will have ensured that our eventual debts are higher than they could have been and the recovery comes much later. In retrospect, the bank guarantee was a case of double or quits. We don't know yet whether Mr Lenihan was right to double.
The answer will tell us whether Labour's counterfactual alternative would have been better but it is impossible not to suspect that any Finance Minister of any political hue would have chosen the gambler's cry of double or quits had they sat where Mr Lenihan sat two years ago this week.