The Corner

The one and only.

The Irish Goodbye


Morgan Stanley economist David Greenlaw thinks the only way to lower the interbank rate (the rate at which banks lend money to each other; it’s a component of that scary TED spread Jim M. mentioned earlier) and unfreeze the credit markets is to have the U.S. government guarantee all U.S. bank deposits. This from Bloomberg radio:

TOM KEENE: David, it’s the most unfair question: How do we bring LIBOR in?

DAVID GREENLAW: Well, Tom, I think we may need to move toward some sort of system where the Fed stands as a guarantor of the counterparties involved. The most extreme example would be the Irish solution where you guarantee all bank liabilities. There are intervening steps, though, that the Fed might be more likely [to take] to resolve the elevation of counterparty risk that is pushing LIBOR rates higher. But I think something along those lines may well be necessary, because the special liquidity facilities that they continue to ramp up don’t appear to be doing the job.

KEENE: … When you look at the Irish solution, is it a verbal guarantee without cash injections? Is that what you’re suggesting?

GREENLAW: Yes, it would be a guarantee of all bank liabilities. I believe that the FDIC has the authority to take that action with approval from the Fed, the Treasury Secretary and the President. It’s in the FDIC Improvement Act as enacted about a decade ago. Most importantly, in that list of authorties who have to give approval, we don’t have Congress, so the FDIC could take that action without congressional approval. It’s a big step. It would be a very significant measure, but I think ultimately, if not an outright guarantee of all liabilities, something moving in that direction might be required to help rein in LIBOR.

KEENE: Do you have the size of that guarantee? Have you seen a number on that?

GREENLAW: Bank liabilities in the U.S. amount to about $11 trillion… but if you believe that a lot of the most problematic institutions have been resolved at this point, then maybe you can move forward with some type of guarantee for the remaining institutions who are deemed to be in better shape.

Ireland has already taken this step, hence “the Irish solution.” I heard a money-market broker making this same point on NPR’s Planet Money yesterday:

NPR’S ADAM DAVIDSON: These guys are pretty unimpressed with what’s happened so far. They say the $700 billion bailout is not going to open up these short-term credit markets. They say it’s like spitting in an ocean to raise the water level. They insist that what has to happen is that the government has to guarantee all deposits in all the major banks, not this FDIC thing up to $250,000, but all deposits, full stop, or else banks won’t start lending to each other. And that affects all of us, because if banks don’t lend to each other, they don’t lend to you, they don’t lend to me, they don’t lend to your boss who pays your salary and on and on.

MONEY-MARKET BROKER: The interbank market basically in the United States — not basically. The interbank market is frozen. For the simple reason that — and you hear this everywhere you turn — banks are afraid to lend to each other. And until the U.S. Treasury stops the primping and posturing of “We’re going to take an ownership stake here, we’re going to do this, we’re going to do that,” all they need to do is say one thing: We guarantee deposits six months and in, and this will loosen up.

$11 trillion. The Paulson plan “spitting in an ocean.” I have no idea whether these guys are right. But I agree with the argument that once other countries (like Ireland) start doing this, the pressure to follow suit will be hard to resist at a certain point. Capital will gravitate to the countries where bank deposits are guaranteed.


Sign up for free NRO e-mails today:

Subscribe to National Review