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My friend the economist and my dumb question

Jan 23rd 2009NiaLLLarkinUncategorized

I want to tell you a little about a friend of mine.
He’s got a PhD in economics and has been lecturing for years.

From time-to-time I say to him:
“Can I ask you a dumb question?”

He always replies with a wry smile
“Answering dumb questions is
practically my job description.”

We had one of our chats last night:

ME:

I keep hearing:“Strong banks
are essential to our economy.” But
surely, they should be saying: “A
strong banking system is essential to our
economy.”

The 1st statement leads us towards
bank rescues and nationalisations.
While the 2nd gives us more options.

My friend the economist:

Yes that is more accurate.
In fact, I was studying in Finland in 1992
as a series of banking collpases swept
across the Nordic countries. Many of the
possible options were tested with varying
success. Go on..

ME:

Well, I don’t know if this option was
available in the past… Why not establish 2
brand new internet-only banks in Ireland.
And capitalise them with the €15bn.

For that, you get 2 new banks. Each starting
with a clean sheet. Free to borrow.
Free to lend.

The advantages are you get a banking system.
You avoid nationalisation. You embrace pure
competition. And no money gets thrown
into a black hole.

Economist:

Yes. Pure internet banking wasn’t
an option in 1992. It could constitute a banking
system. Such new banks would be able and eager
to lend. The old banks could continue to deal with
cash. But if they do crash..?

ME:

If a physical branch network is important.
Co-opt the post office network.
Or the credit union network.
If internet access is important.
Support internet cafes.
Such an approach would be a snug fit with
the government’s policy of support
rural Ireland and the roll out of the national broadband scheme…

Economist:

Sounds like it could work. But you know the old
joke “If you want 4 opinions. Ask 2 economists”

So that’s it. My dumb question to you is “Why not?”
I’m hoping you can help me understand our options
a little bit better.

16 Comments »

16 Responses to “My friend the economist and my dumb question”

Paul Campbell on 23 Jan 2009 at 3:46 pm #
Paul Campbell on 23 Jan 2009 at 3:47 pm #

http://upload.wikimedia.org/wikipedia/commons/5/50/Brian_Cowen_in_Philadelphia.jpg
Triona Carey on 23 Jan 2009 at 3:54 pm #

Why not - lack of political will and politicians in bed with their old friends in the banks. I think a combination of credit unions and online banking are the way forward - rather than throwing good money after bad into the bonus black hole that is conventional banking. However, I fear we will just pore our money into these guys and end up in a bigger mess if that’s possible.
NiaLLLarkin on 23 Jan 2009 at 4:24 pm #

@Paul Shudder. A picture paints a thousand words

@triona I think a bigger mess is possible alright. An injection of cash will not give AIB and BOI the confidence to lend.
Derek Organ on 23 Jan 2009 at 5:50 pm #

Makes sense to me, but really is internet banking different to “banking”?

Is the internet not just another tool for banks to do business with there customers.
Triona Carey on 23 Jan 2009 at 6:36 pm #

a friend of mine was recently promoted to role of “bonus modeller” in a major UK bank - too afraid to lend but happy enough to purloin my taxes as bonuses. If there was ever a moment for the revolution, it is now.
NiaLLLarkin on 24 Jan 2009 at 12:03 pm #

@Derek

Existing banks are carrying such unquantifiable risks in terms of toxic loan books or other skeletons in their cupboards that they themselves are afraid to lend.

Newly established banks (internet-only or otherwise) would not have these problems. The advantage of internet-only is that it provides a quick and cheap way of setting up new banks. Thus providing a solid banking system.
Kaila Colbin on 28 Jan 2009 at 9:04 pm #

Hey there Niall,

It’s not a crazy idea — in fact, it’s exactly what we’ve got here in New Zealand, in the form of Kiwibank. Internet only, uses the PostShops for personal transactions, and has mobile lending officers and business bankers who will come to you. Owned by the government/taxpayers, and offers generally better rates than private banks.

I remember a conversation with two representatives of a large trans-Tasman bank, at which they basically whined to me about how unfair it is for them to have to compete against Kiwibank. Poor diddums!
NiaLLLarkin on 28 Jan 2009 at 9:57 pm #

@Kaila Wow. Thanks for that :)

I had a look at Wikipedia for more info.

“Kiwibank has won the first three Sunday Star Times/Cannex banking awards, in 2006, 2007, and 2008 for offering the best value across their range of products.”

“Kiwibank’s success is reflected primarily in its signup rate for new customers of over 300 new organisations and individuals per day (about 2100 per week).”

We need a banking system. But we don’t need banks who don’t know where they stand. We don’t need banks who have no idea how toxic their toxic loan books are. They just cripple the banking system.

Kiwibank shows just how easy it is to establish new banks and give us the banking system essential to our economy.

We don’t need to throw good money at bad banks. We can start afresh. It makes sense.
NiaLLLarkin on 30 Jan 2009 at 4:32 pm #

Willem Buiter who write Mavercon for the FT

http://blogs.ft.com/maverecon/2009/01/the-good-bank-solution/

“It would not involve nationalising the existing banks. Instead the state would create one or more new ’good’ banks - all state-owned and state-funded to begin with. ”

“As regards the the legacy bad banks, the easiest and cleanest way to proceed is to stop them from doing any new business on the asset side of their balance sheets: no new lending and no new investment. They would also not be permitted to take new deposits. A simple way to ensure this is to take away their banking licenses. “
MICHAEL WALKER on 31 Jan 2009 at 2:44 am #

I still think that the “Good Bank” idea has to deal with the issue and real possibility of the “Bad Bank” system
sinking the financial system. As I understand it there is $52 trillion of outstanding debt in the global system that is currently unwinding with only 5 to 8 trillion (best case scenario) of reflation funds in the system. Surely deflation will fully express itself, Good Bank or Bad Bank?
NiaLLLarkin on 31 Jan 2009 at 9:20 am #

@Micheal I agree. Deflation will fully express itself. Like a wildfire. And any taxpayers money used to ‘prop up’ ailing banks is likely to be lost.

That said there are always green shoots of growth to come after the losses. We should be prepared to support a quick recovery. Such a recovery would get a welcome boost if there is a banking systems made up of fresh new banks (free of hidden toxic debts) ready to lend to the creditworthy.
Mario Sikorski on 05 Feb 2009 at 9:07 pm #

How can policy makers address a problem without knowing a full scope of the problem which is inherent to the current banking system? No way.

PEOPLE For Mathematically Perfected Economy™ (PFMPE™) : mathematically perfected economy™ (MPE™) (interest-free-monetary-stystem, not debt free) is the singular integral solution to 1) inflation & deflation, 2) systemic manipulation of the cost or value of money or property, & 3) inherent, irreversible multiplication of debt in proportion to a vital circulation, engendering inevitable systemic failure at a finite system lifespan defined by an inevitable, terminal sum of insoluble debt. Mathematically Perfected Economy™ is every prospective debtor’s right to issue their promise to pay, free of extrinsic manipulation, adulteration, or exploitation of that promise, or the natural opportunity to make good on it.

For example: While 12,000 homes a day continue to go into foreclosure, mathematically perfected economy™ would re-finance a $100,000 home with a hundred-year lifespan at the overall rate of $1,000 per year or $83.33 per month. Without costing us anything, we would immediately become as much as 12 times as liquid on present revenue. Transitioning to MPE™ would apply all payments already made against existent debt toward principal. Many of us would be debt free. There would be no housing crisis, no credit crisis. Unlimited funding would immediately be available to sustain all the industry we are capable of.

There is no other solution. Regulation can only temper an inherently terminal process.
NiaLLLarkin on 07 Feb 2009 at 2:35 pm #

Now the Wall Street Journal is chiming in
“Let’s Start Brand New Banks
A clean slate would keep TARP money away from bad banks”

By PAUL ROMER
Everyone agrees that the United States urgently needs a few good banks. Turning bad banks into good banks is a difficult and risky way to get them. It’s simpler and safer to start entirely new banks.

In this context, “good” means a bank with assets and liabilities that are easy to value using market prices. At a good bank, officers, regulators and investors can be confident about the value of the bank’s capital…

Continue:
http://online.wsj.com/article/SB123388681675555343.html

Thanks to Triona Carey for pointing this out to me via Dave Winer and twitter
Clunky Flow » New banks: Did I get the scoop? Did you hear it here first? on 11 Feb 2009 at 10:53 pm #

[...] wrote about my idea of ‘My friend the economist and my dumb question‘ here on 23rd [...]
Clunky Flow » Can Andreessen reach Obama with the “new bank” idea? on 21 Feb 2009 at 5:48 pm #

[...] As you know.. I proposed the simple idea of ‘internet only’ ‘new banks’ back here in “My friend the economist and my dumb question.” [...]

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My friend the economist and my dumb question

16 Responses to “My friend the economist and my dumb question”