Falling prices of Irish bank shares and an unwillingness by international banks to lend money to one another were seriously hitting business lately.
The new Government guarantee for the assets and liabilities of Irish banks was a risky move for taxpayers but is worth it in our opinion.
Famous post war economist John Mayard Keynes said in the long run we are all dead, so do not overly worry about governments borrowing for proper purposes.
This is a huge crisis so people that complain about the banks must look at the bigger picture in Ireland. Banks say they are sound, but must deal with a fall in property prices and tighten up on lending criteria, which is not a bad thing really.
Sure there must have been irresponsible lending in some cases, like the 100 per cent mortgages, but these were not on anything like the same scale as in the USA, where mortgages were given to people in unstable employment.
These were known as sub prime and then re-sold to other banks in the US and Europe as if they were sound loans that would be repaid. This is where the problem grew and not enough of these investors asked questions and accepted the rewards. The Swiss bank UBS was one of these, as were some German banks.
Confidence will return to financial institutions in Ireland by the government’s guarantees and more businesses and banks will be encouraged to trade with one another.
If credit dried up, businesses would have found it hard to pay its bills. Unless they are nearly insolvent now this will not be the case.
Liquidity should improve, Irish banks can now go to the European Central Bank and get extra funding. The UK and the USA would love to be in the same position.
The US politicians vote against the US Treasury Secretary package set up by Paulson was a foolish decision and it will have to be voted on again. There the US government must guarantee bad loans and that the taxpayers do not like, especially those that lost their homes and their jobs.
Right wing politicians there do not like state intervention but in this case there is no alternative. Their simple approach is not helping stability and could trigger further problems.
We know how the mess was caused, by over loose credit and lending, but it still has to be solved. The Irish have pulled off a great move in making the country a stable place to invest and do business.
This could help pull the country out of recession next year if the international environment improves. It may also provide some confidence to the beleaguered property sector where money is really tight. The loan criteria has been toughened up and rightly so, but the banks can now release more money for investment and housing, given the Government guarantee.
A careful budget could nurture the country back from the very negative sentiment that is currently now out there.
As one business man said this week, things are changing so rapidly that it is hard to know what will happen in the next few months if stability does not return to the USA or UK.
Even Europe had some bank failures this week surprisingly. Less surprises in the next month or two would help.