Where will the bail-out culture end – MoneyWeek

BrianLenihan,Irelandsfinanceminister,saidhehadtakentheunprecedentedaction,whichstartsimmediately,tomaintainfinancialstabilityafterIrishbankssharescollapsed。

Thinkofthis€400billioninsuranceasacompetitivere-capitalisation,moreakinthanyoumightguesstothosecompetitivedevaluationsthatswepttheworldwhenglobalfinancelastsufferedaGreatDepressionduringtheearly1930s。

Backthen,nationalgovernmentsfoughttosquashtheexchange-ratevalueoftheirowncitizensmoney,biddingtograbexportshareandrevivetheirhomemanufacturing。

Today,andnotquiteincontrast,nationalgovernmentsarefightingtosquishtheriskofcollapseamongtheirdomesticsavingsandloans–theindustrythatnowmattersmostbypumpingmoneyintolocalbanksandguaranteeingthesecurityofcashsavers。

Thecompetitivebit?

Itcomesinthecross-borderflowsthattax-fundedbail-outsinvite。

TheIrishpledgetounderwritethecountrysbankingsystemtriggeredafloodofcashfromBritishbusinessestoIrishbanks,aseniorIrishstockbrokertoldTheIrishTimesinDublinonWednesday。

AspokeswomanforthePostOfficewheresavingsproductsarebackedbytheBankofIrelandsaidtherehadbeenanincreaseincustomerssincetheIrishgovernmentsannouncementthatitnowguaranteesall€400billionofIrelandsbankdeposits,reportstheBBC。

Smartmove,youllagree。

MondaysawtheIrishStockExchangedropamassive12。

7%ofitsvalueinthemarketsworsteverone-sessionplunge。

SinceguaranteedbytheTaoiseach,thecapitalvalueofAngloIrishBanksankbyalmostone-half。

Butthen,inpouredthesavingsandupwenttheISEQ,jumpingby8%thenextday。

WejustwanttheIrishgovernmenttolookquitecloselyatthearrangementstheyareputtinginplacetomakesuretheycomplywithEUcompetitionlaw,saidaBritishgovernmentspokesmanonWednesday。

Hepickedhiswordsascarefullyasanymanshouldbeforethrowingstonesinsidehisownglass-house。

TheUKadministrationwasthefirsttoleapinandseizeafailedbankwhenthisglobalcrisisfirsthitinSeptemberlastyear。

SavingNorthernRockfromitself,financeministerandWestminster-villageidiotAlistairDarlingalsoguaranteedthecashsavingsofeveryman,womanandchildinthenationduringwhathelaughablycalledthethencurrentinstabilityinthefinancialmarkets。

NotthattheBritishnationhasagreatdealondeposit,ofcourse。

AsIvenotedbefore,private-sectordebtsnowoutweighthesumtotalofallcash,banksavingsandshort-termnear-moneybondsintheUKeconomy(theM4moneysupply)byamassive43%。

Alltooliterally,theUKcannotpaywhatitowes;theresimplyarentenoughpoundsintheworld,neitheraspaperorphotons。

Butnomatter;becauseinthenewglobalracetobailoutbiggestandbetter,government-backedbanksprovidejustthesecuritythatfrightenedcashsaversneed。

HencetheheadlinesinLondon。

BanksprotestatNorthernRocksunfairadvantage,reportedtheEveningStandardinFebruary。

NorthernRockrivalscomplainofunfaircompetition,saidTheTimesonemonthlater。

NowNorthernRockcutsmortgageratesasrivalsgoup,reportstheDailyMail。

Butwhynot?

CheapmortgageshavebeengovernmentpolicysincetheTechStockCrashonbothsidesoftheAnglo-Atlantic。

Higherhome-ownershipratesbecameatargetandtenetoffaithjustasmuchinWhitehallasitdidintheWhiteHouse。

Andwithinterbanklendingonceagaingroundtoahaltbutwiththefullweightoftax-payersfundsstoodbehindthemwhatstostopFannie,Freddie,NorthernRockandalltheothergovernment-ownedlendersfromdominatingtheirmarketspumpingouttax-fundedloansatpolitically-friendlyratesofinterest?

NevermindthepreferredstockownersinAsiaandArabia,nowcursingtheirpartinthe$200billioncash-raisingsomehowpulledoffbytheworldsmajorbanksbetweenJuly2007andJune2008。

Citigroupalonemanagedtoraise$41。

7billionamidthefrenzyofrightsissues,so-calledhybriddebt(itcomeswithequity-likerightsandthuslosses),andsovereignwealthfundinjections。

Itsstocklosttwo-thirdsofitsvalueintheyeartomid-summer。

Butevenafterselling$130billionofitsassetsoverthattime,LehmanBros。

stillcollapsedeightweekslater,takingabigchunkofthe$8billioninfreshcapitalitalsoraisedfrominvestorswithit。

Oncebitten,andnodoubtneedingtorecapitalisefinancialfirmsclosertohome,allthatKorean,Japaneseandpetro-fundmoneywillnowsteerclearofWesternbankinginvestmentsforaslongasittakesbankruptcy,bail-outsandstatenationalisationtostoptrumpingriskcapital。

Intheabsenceofnewfinancing,then,letsapplythisweeksIrishSeacashflowstotheverybigpicture。

ForisntthatmovementofdepositorscashthebestHankPaulsoncanhopeforwithhis$700billionbail-outofWallStreetassuringforeigncapitalthatitssafetoreturntotheStates,ifonlyascash-on-depositratherthanequity,becauseUncleSamisunderwritingthebanks?

DoesntthatrisksettingthewholeworldalightwithIrish-stylepromises,allchasingthesamedepositorsfunds?

Everyoneknowsthatapolicyofbail-outswillincreasetheirnumber,asformerSt。

LouisFedpresidentWilliamPoolesaidinaspeechoflate2006。

CalamityPoole,however,wasonlythinkingthismoralhazardappliedinsidethedomesticUnitedStates。

Every[US]company,financialorotherwise,knowsthatifitgetsintotroubleitisatleastworthamajorefforttoattempttosecureabail-outbecausethereisalwaysasignificantprobabilityofsuccess,heexplained,asiflookingahead(withoutseeing)tothe$25billionbail-outofChrysler,FordandGM。

Theracetorescue,however,hasspreadfarbeyondDetroit。

Competitivebail-outsarenowaglobalisedgame,withtaxpayersandsaversbothsettokeeppaying。