In the interests of brevity, readers may wish over the coming weeks and months to substitute Portugal, Spain and Italy for the word "Ireland" within this week's commentary.
“..Brian Lenihan, Ireland’s finance minister, told Irish radio early on Wednesday the banks had “no funding difficulties.”
- The Financial Times, November 18 2010.
The rule of thumb during a banking crisis: trust no-one, least of all the politicians. Peripheral Europe’s banks and its governments are now caught like Macbeth’s “two spent swimmers that do cling together / And choke their art”. Ireland’s banking system and its sovereign creditworthiness are now effectively one and the same fragile thing. A comparison with US banks and their Latin American debt adventuring in 1982 is instructive. As Nassim Taleb put it in ‘The Black Swan’:
“In the summer of 1982, large American banks lost close to all their past earnings (cumulatively), about everything they ever made in the history of American banking – everything.”
Richard Koo, the Chief Economist of the Nomura Research Institute and author of ‘The Holy Grail of Macroeconomics: lessons from Japan’s Great Recession’ tells it with extraordinary candour at the Centre for Strategic & International Studies website. The presentation gets particularly fruity after roughly 31 minutes. Koo recounts his experience as a syndicated loan desk officer at the New York Fed. Late on a Friday afternoon in August 1982, his job and that of his colleagues was to try and convince the rest of the world, and notably other central banks, that the US banking system was solvent when it was not. The following is taken verbatim from this presentation:
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