So now is the time to ask: do we work for the banks, or make them work for us?

Ireland’s banks. We don’t like them. They’ve cost us a fortune. Given how much they’ve cost us, we want them to function as they used to. We want them to do the simple things, things like taking deposits, creating loans, the bread and butter stuff of funneling credit into the real economy.

We’d like overdrafts and short-term loans for plumbers again. The odd SME loan. Little plastic savings boxes and stickers for kids. We want them to repair their balance sheets and recoup their losses, without causing too many of their customers crippling psychological damage. All that.

It would also be just super of them not to blow up again with cheap inter-bank loans from Britain and Europe, cause an unsustainable asset bubble based on flipping properties, and then require tens of billions of taxpayer euro to bail them out. That also would be good.

Never before in Ireland’s history has so much effort been required to keep things roughly the same. We have most of the same banks we had in 2006 with us today, despite them suffering the kind of shocks that wipe entire banking systems out.

Post crisis, the banks were forced to reduce the ratio of their loans to their deposits, sell off profitable bits of themselves, downsize their workforces, and return themselves to sustainability. The Financial Regulator was ingested by the Central Bank.

But that’s about it. For the most part, the headed notepaper is the same, the contracts are the same, the customers are the same. It is remarkable, given the large changes in the European economy, that 40 per cent of Ireland’s mortgages are with AIB, not a subsidiary of a larger multinational bank.

Anglo and Irish Nationwide are fiscal stains we’ll still be scrubbing off in the 2030s. The two ‘pillar’ banks are so stuffed with capital from the taxpayer that one ‘wafer thin mint’ might cause them to explode. By 2016, the state should have sold its stakes in the pillar banks and paid down some of the debt it incurred to save them. Business as usual will be restored. If you’d said that in 2011, you probably would have been laughed at.

The work required to get us to this place shouldn’t be discounted. But it is not a success story. Over 23 per cent of all loans on the pillar banks’ books are impaired in some way. The approach taken by the troika was to prioritise fixing the state’s coffers, then the banks, and then everyone else. Everyone else has suffered as a result. The recent Permanent TSB ruling, as well as the design of the Insolvency Service, shows that prioritisation perfectly.

A tension exists when the state is a large shareholder of a bank like AIB. The banks are ripping off some of their customers, primarily because they can, and because some of their other customers are ripping them off with their awful, nasty tracker mortgages. The Minister for Finance can’t ask a bank he owns almost outright to change the interest rates it charges some of its customers. The Central Bank, correctly, doesn’t want the power to compel interest rate changes. The banks have to be seen to brazen it out, well aware they are not going to win any popularity contests.

The tensions come from targets set by both the European and Irish authorities clashing with the need to return the bank to some form of sustainability in the near future, and with the government’s need not to annoy roughly 100 per cent of the population with tales of bad bank behaviour and get elected again.

The economist Hyman Minsky put banks, and their behaviour, at the heart of his theory of financial instability.

It starts after a crisis has passed, and things calm down, much like our situation today. Banks are risk averse. People applying for loans are not applicants, but supplicants. Because only the best loans get approved, the banks start making money again. It’s actually very hard for banks to lose money when they take deposits at interest rates close to zero, and lend out at anywhere between 4 and 12 per cent.

Then, as the economy improves, members of the bank forget the lessons they learned. They begin to rail against intrusive regulations introduced during the previous crisis, and lobby for the removal of these regulations. If they fail in getting the regulations watered down, they simply invent new products.

This is called ‘financial innovation’, but it is the seed of the system’s destruction. It was junk bonds in the 1980s and credit derivatives in the 2000s. In 2020, in Ireland it will be something else. The banks begin to get cocky. They extend more and more credit to riskier and riskier customers, obtaining funds to support these loans wherever they can get them. The spread between banks borrowing short and lending long increases. The economy is euphoric. Credit is lashing around the system, and people are flipping assets as their expectations keep rising, and keep getting fulfilled with profitable sales. It’s all good. Except it isn’t.

Something happens. The economy crashes. The cause might be something small, like a news story. Or it might be something larger, like a financial crisis somewhere else. Whatever the cause, the financial system convulses. Credit extended too far into the system by cocky bankers doesn’t get repaid, the banks experience a balance sheet crisis, first for liquidity, and then for solvency, and either the state or its central bank steps in to sort the problem. The banks are re-regulated, chastened, and the system returns back to normal. It all kicks off again.

It also comes down to a choice about what kind of banking system we want. The one I’d advocate for the medium term requires something very close to a very simple one where banks create loans based on the size of the economy. The banks are systemically important in the modern economy in the same way electricity is systemically important.

When something is really, really important, you don’t leave it down to the market. The market cycles up and down, as Minsky has shown. Banks are not passive actors in the system — they lobby and work hard to further their own interests, which are not always the same as the state or its citizens.

Ultimately, either they work for us, or we work for them.