THE WRATH OF KANE: BANKING CRISES AND POLITICAL POWER
Jan 30th, 2015 by Conor McCabe
I’ll be writing more about this at the weekend but I think this is a good standalone clip from evidence to the banking inquiry given by Prof. Ed Kane on Wednesday 28 Jan 2015.
He was asked by Deputy Pearse Doherty to elaborate on the statement below which was made in a paper that Kane co-authored in 2004:
Realistically, every government-managed disaster relief program is a strongly lobbied tax-transfer program for redistributing wealth and shifting risk away from the disaster’s immediate victims. A systemic crisis externalizes – in depositor runs and in bank and borrower pleas for government assistance – a political and economic struggle over when and how losses accumulated in corporate balance sheets and in the risky portfolios of insolvent financial institutions are to be unwound and reallocated across society.
Professor Kane’s analysis is that the way a crisis plays out in terms of who pays for the crisis is an issue of power - that is, it is related to the nature of political and economic power in a state and the relationships between the worlds of finance and politics.
Anyway, the official transcript is below, with a video clip of the ecxhange. You’ll notice that the official transcript differs slightly from the actual exchange, but not in a significant way. The meaning is still captured and essentially stays the same.
the 2004 paper referenced is available here.
Deputy Pearse Doherty: [your] 2004 paper says that while policy-making during a crisis may be of the seat of the pants variety, the policy itself is informed by a political and economic struggle over who pays for the losses. How important in the view of Professor Kane is that dynamic, namely, the political and economic struggle of who pays for the crisis in terms of framing the terms of the resolution?
Professor Edward Kane: I think it is terribly important. I define a crisis as a battle over loss allocation. There are firms with losses and no one wants to hold them. People are contracted to take the losses, by writing insurance or lending money or bonds, but they do not want to pay and they have the political power, in many cases, to see that they are paid. My superficial understanding of Ireland is that many foreign creditors were paid off with Irish taxpayers’ money and it is astonishing to me how good politics, the way a republic or a democracy is supposed to work, would ever lead to that solution.
Conor,
It would be really great if you commented on economic developments in Ireland as they happened, responding to comments by Enda, Noonan, Burton and what have you.
There are few people who have the perspective and understanding that you do, of Ireland’s economic history in the last 200 years, of banking in those years, and how we have given over so much of value to corporate ownerhip, the so-called family silver, and how this is proceeding even today but it is never shown to the people, who live in ignorance. Could you please do a little examination of this and tell us here on your website. Your work is being lost on the general populace, and if it’s lost on them (us), then it’s not having any impact and is going down the tubes.
Best wishes,
Coilin
I’ve just been reading Cowen’s evidence today on ‘The Irish Rugby and Fine Gael Times’ website, and I find it remarkable that if he was indeed the architect of the blanket guarantee, why didn’t he face hard questions (in the media also) about the nature of the guarantee and why it extended to covered bonds, senior debt and especially ‘dated subordinated debt (lower tier II)’.
He needs to be asked where and how he came up with ‘dated subordinated debt (lower tier II)’ - it seems to me rather too specialized a term to simply pop into your head when discussing the merits of nationalization versus a guarantee with the clock ticking.
“ I explained my reservations about it and reassured him that nationalisation was something that we could not rule out in the future and would remain an option available to us.
“I also told him that a time limited guarantee seemed to me preferable than giving an open-ended guarantee which a full nationalisation would entail.”
“Then I said to him ‘fuckit, d’ya know what? Let’s extend the guarantee to dated subordinated debt (lower tier II) while we’re at it, what’s the worst that can happen?’”