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Irish Political Economy, Class 4: Debt

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Irish political economy for activists and trade unionists.

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Irish Political Economy, Class 4: Debt

  1. 1. Irish Political Economy for Trade Unionists and Activists 4. Debt
  2. 2. “… a tangled interaction between the market and the state….”
  3. 3. The commercial creation of debt has slipped from public control…
  4. 4. The commercial creation of debt has slipped from public control… Although not from public liability.
  5. 5. While the capitalist financial system has privatised the money system, it remains a system of social trust.
  6. 6. While the capitalist financial system has privatised the money system, it remains a system of social trust. The market alone cannot sustain it.
  7. 7. Page.37 This creation of credit-money by lending in the form of issued notes and bills, which exist independently of any particular level of incoming deposits, is the critical development that Schumpeter and others identified as the differentia specifica of capitalism. If banks could not issue money they could not carry on their business. Credit creation is the actual business of banking
  8. 8. Page.39 It is clear that in the late twentieth and early twenty-first centuries, the bank credit creation system was not just responding to the needs of production but to the demands of speculative inflation. Page.40 As states were receiving the product of uncontrolled credit creation, the public would eventually have to pay the price in its role as guarantor of the money system.
  9. 9. Page.47 Money was seeking a way to make more money, but with so much ready money available, there was a limit to where viable investments could be found. Page.48 Securitisation – ‘originate to distribute’
  10. 10. LIQUIDITY AND FINANCIAL ASSETS Like a real asset, a financial asset may have more than one function. In addition to serving as a store of wealth, a financial asset may make it possible to transfer risk from one person to another, and may make it possible for speculators to make "bets" on the fortunes of a particular company. - Fischer Black, “Fundamentals of Liquidity” (1970)
  11. 11. LIQUIDITY AND FINANCIAL ASSETS Like a real asset, a financial asset may have more than one function. In addition to serving as a store of wealth, a financial asset may make it possible to transfer risk from one person to another, and may make it possible for speculators to make "bets" on the fortunes of a particular company. But these functions are separable. There is no reason why the person who supplies the money for a financial asset should take the risk associated with the asset. And the risk can be transferred from one person to another independently of any transfer of the money investment from one person to another. - Fischer Black, “Fundamentals of Liquidity” (1970)
  12. 12. LIQUIDITY AND FINANCIAL ASSETS Like a real asset, a financial asset may have more than one function. In addition to serving as a store of wealth, a financial asset may make it possible to transfer risk from one person to another, and may make it possible for speculators to make "bets" on the fortunes of a particular company. But these functions are separable. There is no reason why the person who supplies the money for a financial asset should take the risk associated with the asset. And the risk can be transferred from one person to another independently of any transfer of the money investment from one person to another. …a long term corporate bond could actually be sold to three separate persons. One would supply the money for the bond; one would bear the interest rate risk; and one would bear the risk of default. The last two would not have to put up any capital for the bonds, although they might have to post some sort of collateral. - Fischer Black, “Fundamentals of Liquidity” (1970)
  13. 13. Residental / Commercial Mortgage Backed Securities
  14. 14. Failing to see that commercial money creation was behind the flood of money in the new financial world, bankers and financiers congratulated themselves on the amount of money they were making. As money markets have grown, bringing together a wide range of financial organisations including the banks, the privatised financial system is effectively creating money for itself. Mary Melor, The Future of Money (Pluto Press, 2010), p.53
  15. 15. Irish Mortgage-Backed Securities listed on Irish Stock Exchange, April 2012 AIB Mortgage Bank (AIB) - €11.87 billion Celtic Residential Irish Mortgage Securitisation - (Ulster Bank) - €20.6 bn Phoenix Funding Limited - (KBC Bank) - €11.55 billion Emerald Mortgages (EBS) - €4 billion Kildare Securities (Bank of Ireland) - €3.45 billion Fastnet Securities (Irish Life & Permanent) - €23.774 billion Lansdowne Mortgage Securities (Start Mortgages) - €729 million Total listed (of those found) : €75.973 billion http://dublinopinion.com/2012/04/02/irish-mortgage-backed-securities-initial-notes/ http://dublinopinion.com/2012/04/04/irish-mortgage-backed-securities-part-two/ http://dublinopinion.com/2012/06/08/update-on-amoroin-securities-from-clare-day-td-6-june-2012/
  16. 16. Irish Executives in the six lenders must have been rubbing their hands with glee as the State-sponsored €400 billion insurance policy covers commercial, institutional and interbank deposits, and investors who have bought some of their debt. The State guarantee allows the six lenders to borrow more freely and more cheaply for short-term funding that had become scarce due to the global credit crunch.
  17. 17. Mr. Lenihan said on Tuesday that the increase on the cap on deposit guarantees up to €100,000 from €20,000 last month covered 97 per cent of customer deposits so the guarantee has clearly been included for the benefit of the banks rather than the savers…
  18. 18. “Denis Casey, chief executive of Irish Life and Permanent, said the guarantee would allow Permanent TSB and the other Irish banks covered to borrow more cheaply. “The oxygen supply for Irish banks was being cut off and healthy banks were starting to gasp for breath. This guarantee turns on the oxygen supply.”

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