Most histories are ultimately about war. Even if they are not, historians will normally stage a fight about what really happened. There is little about the past that is not fought over. I recently downloaded two new books to add to my collection of alternative theories and narratives about the First World War. The English still row about the site of the Battle of Hastings, a defining event in the history of all of these islands. In Australia, the argument over their experience of colonisation is called the “history war”. Plenty of other countries have their own battles about the past: if the victor always writes the history, it is subject to eternal revision. This would be harmless fun if it were not for that old cliché, the one about being doomed to repeat the mistakes of the past if we refuse to learn from them.
There are many antagonists involved in the writing of the history of the banking guarantee. Most recently, ex-International Monetary Fund (IMF) official Donal Donovan has argued in this newspaper that the guarantee was the least worst option available at the time. Most, if not all, of the politicians who were even vaguely associated with the decision defend it in similar terms. Professor Karl Whelan of UCD has been a leading critic of government policies before, during and after that fateful night five years ago and has consistently argued that much better options were on the table.
How is the dispassionate observer supposed to judge these arguments? The trouble with history is that you can’t actually observe what would have happened if events had taken a different course; if we still argue about what really did happen, it is no wonder we have fist fights about what might have happened.
The argument about a blanket guarantee being the best of a bad bunch of policy choices seems to fail a straightforward test: if we were to relive the events of September 2008 we would never, in a million years, repeat the policy choices we made on that night. This is not hindsight. A good rule of thumb in most situations is never assume potentially unlimited liability. The textbook on dealing with banking crises has been around for a long time, is uncontroversial and was well known five years ago (in banking circles at least, if not in the corridors of power). I think that the defenders of the guarantee are, in fact, arguing that they would do it all again.
Much of the row is about the word "blanket" rather than "guarantee". Here, we get into the old bond-holder burning argument and legal disputes over the "parri passu" status of depositors and bond investors. In addition, when Anglo should have been nationalised (and "resolved") is also hotly debated. Could we have taken on the European Central Bank (ECB) and faced down its head, Jean-Claude Trichet? We will never know: this is all getting a bit like the argument over the origins of the First World War.
It seems to me that a less extensive guarantee would almost certainly have saved us some money, so represented a better policy choice - there would have been fewer bond-holders left amazed when they got their money back.
The new European rules about dealing with problem banks are taking a long time to come into being, not because we are clueless about how to do this but solely because there is a dispute over who ends up paying. And because that someone is potentially the European taxpayer, including those of a German variety, it is deemed best to delay the dissemination of this simple truth for as long as possible.
As I said, we have known for decades how to deal with problem banking systems: there is no argument about who pays. It starts with shareholders and then moves through the capital structure - those pesky bondholders of varying degrees of seniority - and, if the problems are still big enough, arrives at the door of the depositor and/or the taxpayer. Amidst all the posturing and secrecy surrounding the nascent banking union, the debate essentially boils down to how quickly we get to the taxpayer and which one. The mechanism, the basic structure, is as it has been for years, and it has been ruthlessly applied in the US, which now has a pristine banking system.
This all kicks off, again, quite soon, starting with yet another review of European bank balance sheets (including Irish ones). Those banks deemed to be shaky will have to go shareholders first, then bondholders and, if they are in bad enough shape, depositors and taxpayers: it’s a familiar chain. It could, should, have been done ages ago.
