The Bank Bailout

The bailout of the banks through the establishment of the National Asset Management Agency is not only inequitable but completely disgusting. The citizens of Ireland will be paying for the reckless lending of the banks to not only the property developers but low income mortgage holders for at least the next 10 years.

Nonetheless, the bailout is necessary. Without a mechanism in which credit can be pushed out into the economy in order to establish new businesses or for the private sector to purchase assets of any class, recovery will be impossible.

Yet, the removal of these so called "toxic" or "legacy" asset should not be seen as the end of our economic crisis. Previous history of massive property bubbles has shown that even if credit is made available to the private sector once more. Companies and individuals will be unwilling to borrow, as will prefer to pay back their existing debt. Thus, it is important that the Department of Finance do not place all their energies into the creation of NAMA as this is only a small part of the solution.

New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average.”

The scheme as presently presented will result in the complete nationalization of the Bank of Ireland and AIB in the short to medium term. A recent research by CLSA highlighted that banks throughout the world have only began the process of write downs.As on average banks have only marked down assets to 98 cents on the dollar. Yet, previous history, from Japan for example suggests that the valuation of assets peak to trough could be as much as 87%.

Therefore, if the government are not going to overpay the banks for these toxic assets the write downs will be so significant that new capital will be required. The Government will provide this capital through ordinary shares.

Pass the parcel

On Tuesday, Brain Lenihan, the finance minister will announce plans to increase taxation and reduce expenditure. This will reduce the governments borrowing requirements and make it somewhat cheaper for the government to source more money in the future.

Therefore, the balance sheet of the government will improve. Yet, this is no reason to celebrate. As the improvement in the balance sheet will be caused by transferring risk from government to the private sector's balance sheet.

Thus, there will be further increases in unemployment, businesses will close but more saliently many more people will begin to default on their mortgages.

The level of default on loans will overwhelm so many of the Irish banks that the Irish government will be forced to take not only the risk but now the actual loans on their balance sheet.

As a consequence, Brain Lenihan will be faced once more with the exact same issues he was hoping to address as Government borrowing will becomes more expensive and our borrowing requirements will increase again.

Part 1--Economic Bubbles:Boom and Bust

On the 10th of March 2000, the NASDAQ index reached 5132.52. This was its peak value and was more then double the value of index from the previous year.

This represented the end of one of greatest bull markets of our modern time. From then, the market began a steady decline downwards. Even today, the NASDAQ has never returned to those heady heights.

The reason for the metamorphosis of market sentiment is unknown. It could of been related to the negative findings of the United States V Microsoft case which was being heard in the Federal Court. Or the reduction in spending by companies on information communication technology following the passing of the Y2K switchover deadline.

The conclusion of the unrelentless upward advance of the New York Stock Exchange in October 1929 is equally unknown. It could of been caused by the refusal of the Massachusetts Department of Public Utilities to allow Boston Edison to split its stock into four highlighting in its decision that "due to the action of speculators" stock levels had reached a level" where no one in our judgement... on the basis of earnings, would find it to his advantage to buy". Or by some negative comments by economists in the press at the time.

These bubbles were created by rising share prices commonly in new emerging markets such as internet or radio companies. These rising prices encouraged more people to invest in the hope that the share price would rise further. These investments were not based on economic fundamentals such as price earnings ratios but on stupid speculation. This caused further rises and resulted in the creation of massive economic bubble.

When these bubbles finally collapsed, significant social and economic costs developed. These included large unemployment, wealth destruction, the collapse of consumer confidence and the start of a deflationary spiral as was the case during the great depression.