We were so young.

The Prime Time exchange between Brendan Keenan,of Independent newspapers, and UCD professor of economics, Morgan Kelly, just hours after the banking guarantee on the night of September 29/morning of September 30, 2008 was revealed.

Go to 1.30

Miriam O’Callaghan: “Morgan Kelly, professor of economics at UCD, what’s your reaction to this guarantee?”

Morgan Kelly: “My reaction is very negative. Initially, when (late former Minister for Finance Brian) Lenihan announced the €100,000 deposit guarantee, I was very optimistic. Had we not had that we would have had queues outside banks yesterday. However what we need to ask is, what the problem here, as Brendan (Keenan) said, is foreign banks are afraid to lend to Irish banks. They’re not afraid to lend to banks in other parts of Europe. We need to ask ourselves ‘what’s going on here?’ The underlying reason is that Irish banks have made very big loans to developers and, above all, the builders. They’re losing money on these, they’ve a lot of bad debts. They’re covering them up. But international institutions know they’re there. That’s why they’ve stopped borrowing.”

O’Callaghan: “But what would the alternative have been Morgan Kelly? Like, if they hadn’t done this today. I suppose they could have done a form of nationalisation. Are you saying they shouldn’t do anything?”

Kelly: “No. They need to do what has been done everywhere else as individual banks run into problems. The government goes in and, first of all, sees if they need to survive. A lot of the banks in the US have just been let go. And we obviously need to keep our retail banks going. There are some non-retail banks that could have been let go, nobody would have missed them. But what you need is, for Government to come in, offer new capital to the banks, in return for a share of ownership and recapitalise them. That is a real big problem here. Irish banks have made big losses on their loans. They’re short of capital…

Brendan Keenan: “We don’t quite know if that is the real problem. Banks insist that they don’t need capital from the Government, they don’t want capital from the Government. They can trade their way through this, if they can access the normal funding. And that’s where all of the discussions have been, for the last three or four weeks.”

Kelly: “The banks of the world disagree with them.”

Keenan: “The other banks have gone to their governments saying ‘give us money or we go bust’ The Irish banks are not saying that. They’re not asking for money.”

Kelly: “No, we have to ask them, if this was simply the problem of liquidity, what we would have seen is that Irish banks’ share price today would have exploded. Instead what we have is that Irish banks’ share price, this evening, is slightly lower that it was yesterday morning for the three main retail banks – AIB, Bank of Ireland, Permanent TSB. It’s not liquidity is a problem for these guys, they’ve bad loans. They’re huffing and puffing and pretending it’s not going on. The example for us should be what happened in Sweden. Nearly 20 years ago, they had a big property bubble, just like ours. At the end of it, banks lent a lot to developers and builders, they went under. The Swedish government moved in decisively, made these banks realise bad debts, took them over and ended up not losing money. And that’s what we need to do here. The alternative, the Finns did the same thing. Like here, they said ‘oh we know what’s going on here, things are fundamentally sound’, they ended up losing about 10% of their national income, bailing out their banks.”

O’Callaghan: “So you don’t view it as a pre-emptive strike by our government?”

Kelly: “Well it was basically they didn’t  really know what to do and they decided an Irish solution for an Irish problem. Effectively, the situation is, it’s like you have a stupid kid who keeps going out and smashing up his car.”

Keenan: “I think the difficulty is, we know what the Irish banks’ bad loans are, they’re going to be about 1% of their loan books.”

Kelly: “No, that’s complete nonsense. What we, we have a situation. Irish banks lent…

Keenan: “You disagree with Deutsche Bank…”

Kelly: “Yes.”

Keenan: “…you disagree with…”

Kelly: “I disagree entirely yes. They have €25billion in loans to builders. All the ghost estates you can see around the place, that is the capital of the Irish banks right now. They’re going to make horrific losses on these.”

Previously: To Cut A Long Story Short