Banking weaknesses have to be dealt with
It may seem a long way from the Cork builders John F Supple to the mighty New York investment bank Lehman Brothers.
But, behind the billions, the news that the Cork firm's creditors are being asked to accept 70c in the euro on their debts, rather than risk the firm go into bankruptcy illustrates in microcosm the kind of troubles which have turned Wall Street upside down.
We must hope that Supple's creditors can be persuaded that the firm can trade its way back to profitability. Lehman's could not be persuaded.
And this time, there was no attempt to escape reality. Northern Rock was rescued, Bear Sterns was rescued, and Fannie and Freddie were rescued. The fact that Lehman was not marks a turning point.
The two US mortgage giants had to be bailed out, or the whole system might have collapsed. The Rock and the Bear probably should not have been rescued — although the ordinary savers' deposits had to be protected.
But back then, the global authorities believed, or at least hoped, that they could ride out the storm. No-one believes that now.
Few, though, would have thought we would come to this pass so quickly. There were five great New York investment banks when the credit crisis began 14 months ago. Now there are just two.
Lehman's troubles were well-known, so Wall Street was even more shocked by the news that another of the five — Merrill Lynch — had offered itself for sale to Bank of America.
Just as shocking was the news that the insurance giant AIG was also in trouble and was only saved from bankruptcy by the US Federal Reserve, which stumped up an $85bn (£48bn) rescue package.
One reason the crisis is so dangerous is that everything is so connected with everything else.
Companies like AIG insured the debts of firms like Lehman against the risk that they would not be repaid. It seemed a small risk at the time, but it has come to pass in spades. The losses on such insurance could provoke the next big crisis.
The lesson of Meltdown Monday is that these crises have to be faced. Global banks, and their customers, have borrowed huge amounts against assets which are not worth what they thought, or said, they were. That debt has to be repaid, or written off the hard way.
Until it is paid off or run down, the crisis will not be over. The refusal to rescue Lehman means the process has at least started. Any financial institutions over whom there is particular doubt can expect to be shown no mercy.
This includes the Irish banks. Rumour and speculation have surrounded them — especially some of the smaller ones — since the crisis started. Post-Lehman, we may soon find out if there is real truth in any of it.
The lesson which should have been learnt by now is that the sooner problems are sorted, the better. Irish banks are different from the failed US ones, in that they do not hold the complicated mortgage packages which, in some cases, are worth as little as a fifth of the values the banks put upon them.
That automatically shrinks the banks' capital, forcing them to sell more assets and, if that does not work, putting them into bankruptcy. Irish banks' difficulty is that they have lent far too much to builders and developers, and will not get a lot of that money back. They will have to find it elsewhere, from profits or the sale of assets.
Analysts at the big German bank, Dresdner, think the total losses to the Irish banking system will be around €6bn. Irish bankers would say a bit less, but still several billion. Worse, the bad debt peak comes, not even next year, but in 2010.
This is where the economy suffers. It is a credit crisis, which means bank lending will be constrained over those years. On the other side, consumers will not want to borrow as much anyway. Business will be hit from both sides; consumers reluctant to spend and banks reluctant to fund firms' expansion plans, or even their normal needs for capital.
That is the main reason we can expect at least two years of low growth. To that will be added continued contraction of the building industry — to which Ireland is more exposed than any other EU country. Until this process has worked itself out, nothing the Irish Government does can get growth back to its normal level of 3-4% a year.
But ministers must do what they can. They may be able to soften the construction fall a bit, and fan a few embers in the smoking remains of the housing market.
But the main thing they can do is instill confidence — in their management of the public finances and in the state of Irish banking. That is where their attention should focus. If there are weaknesses in Irish banking, they should be actively dealt with, before the markets wreak their havoc.
If there are not, the Central Bank and Regulator should produce the evidence and promise to stand behind their banks. As with growth, it will still not be possible to get bank lending back to normal for some years, but every little will help.
Brendan Keenan writes for the Irish Independent