Centuries of financial crisis underline need for radical reform

WE like to think we are special in Ireland, that, somehow, the post-boom transition we are going through is as unprecedented as it is unpleasant.

This is not the case.

The insularity of our collective perspective blinds us to the lessons learned in other places and at other times, and it is costly. In fact, we are part of a longer term problem all developed economies like ours share. We can't have a high level of public spending and low taxes in an era of globalisation, where markets and countries are connected as never before.

Ireland's property boom and bust was an old-fashioned one, where over-excited locals pushed the price of land up using cheap credit from willing banks. Much of this credit came to Ireland's banks from their French and German counterparts, who got it from the ECB at low, low rates.

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One Reply to “Centuries of financial crisis underline need for radical reform”

  1. Stephen,

    Sorry to hound you today but I was very interested in this article straight from the headline. Obviously I agree that reform of the banking sector is needed and if you're looking for a specific reform, full reserve banking is well documented on our website and others and recently in the IMF's 'The Chicago Plan Revisited'.

    One major issue I had with the article though is the description of how Irish banks funded loans. You're suggesting that the ECB created Euros, lend them to French/German banks who lent them to the Irish banks who in turn lend this money to Irish businesses and households?

    In actual fact the Irish banks created the money they lent. This is where money comes from and it's why almost every Euro has a matching debt.

    Almost completely separately the any loans that Irish banks processed, some Irish banks issued their own bonds (promissory notes) and some German/French banks bought these bonds with either existing money from their own profits, or money which they created for the purchase.

    Once a promissory note was issued the Irish banks would have a liability to the French/German banks. Upon processing a loan to an Irish business/household the Irish banks would have a new liability on their books to that business or household, nothing to do with their liability to the French/German banks.

    Separately again, the ECB may have created some central bank reserves for Irish/French/German banks.

    The whole process is described in our publication, How Banks Create and Destroy Money, which can be found at;
    //sensiblemoney.ie/data/documents/How-Banks-Create-and-Destroy-Money.pdf

    I think we have to be very clear about these details because I think it's only through education about banking that we'll find a resolution to this crisis. It's very misleading to suggest that banks lend existing money.

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