The Sustainability of Europe

by Henry on May 13, 2011

Matt Yglesias

I’m not intimately familiar with the details of Greek public finance, but it does occur to me that sage words I keep reading in the American press about how Europe’s leaders can’t just keep kicking the can down the road and need to deal with Greece’s basic insolvency strike me as unwarranted. In general, the capacity of large wealthy societies to allow festering problems to go un-addressed seems perennially underrated. … as I can remember people have been talking about how the United States needs to address entitlement spending and trade imbalances … Presumably at some point something will happen. But in practice we’ve managed a great deal of can-kicking, seem to have more can-kicking in us, and actually the public and the political elite alike are quite averse to the kind of steps that would address these issues. Is Greece so different?

On the economics of can-kicking, I think this is right. On the politics of can-kicking, not so much. The difference between the US and the European Union is that the US is a relatively robust political entity. Americans may vigorously dislike this or that aspect of their government, but their political arguments are mostly about what the US should do, or be, not whether the US should exist at all (even die-hard we-were-screwed-in-the-Northern-War-of-Aggression-ers mostly seem to think of themselves as patriots; Alaska and the commonwealth of Puerto Rico are the only parts of the US I can think of with significant secessionist movements). Europe is quite different. The EU’s legitimacy is relatively fragile. Very few people indeed think of themselves as more European than French or German. Even fewer feel that they have any strong allegiance e.g. to the European Council or the European Commission.

So my worry is straightforward. Greece is not so big a problem that it cannot be kicked down the road by the Europeans indefinitely. So too, Ireland and Portugal, and perhaps even (with more straining) Spain. But the specific manner in which the can is being kicked down the road has consequences for European legitimacy. Greeks, Portuguese and Irish people don’t like being at the sharp end of imposed austerity. They have obvious villains to blame for it – the EU (in particular the ECB and the Commission) and the ‘Germans.’ But Germans, Dutch people etc don’t have much reason to like the EU these days either. For them, it is associated with a giant sucking noise pulling frugal German taxpayers’ savings into the gaping maw of Greek pensioners. Neither those on the receiving or those on the giving end of current policies is very happy. And both have good reason to associate their unhappiness with the EU. And the EU does not have much legitimacy to spare in any event.

I don’t think that this will lead to the collapse of the European Union. I do think that it is likely to result in very long-lasting institutional stagnation, if it continues. Ad hoc decisions, none of which seem unjustifiable at the time, may have long term fallout for European integration (for one: can we see Irish people voting through any new Treaty changes any time soon?). And kicking the can down the road at best does nothing to solve these problems (which I do not think are likely to go away of their own accord), while doing a lot to exacerbate them. NB though that this is my personal view – I suspect that at least one CTer disagrees, and is more optimistic.

{ 179 comments }

1

Matt 05.13.11 at 3:26 pm

I’m not sure how likely the types of changes worried about in this article are:

http://www.guardian.co.uk/world/2011/may/12/europe-to-end-passport-free-travel

but if they come about, I think that it’s likely that the EU won’t only not develop further, but will at least weaken, and perhaps fall apart.

2

chris 05.13.11 at 3:42 pm

For them, it is associated with a giant sucking noise pulling frugal German taxpayers’ savings into the gaping maw of Greek pensioners.

Gaping maws pay interest now? Since when?

3

Zamfir 05.13.11 at 3:43 pm

On the other hand, if they manage to muddle through a few more years, the economic situation might improve and it becomes far easier to do the bailouts properly, both financially and politically.

4

William Timberman 05.13.11 at 3:45 pm

I would argue that Matt Yglesias is one of those who depends on the vast can-kicking machinery in Washington for his living, and thus is bound to see things as he does. I’m not accusing him of dishonesty, or, God knows, of stupidity, but the intricate machinery of the status quo is clearly what he understands best, so it’s hardly surprising that he doesn’t see it being as fragile as those of us who — some by necessity, and some by choice — have always stood outside its supposed benefits.

Francis Fukuyama thinks that we’re living in the best of all possible worlds — give or take. Matt Yglesias resides far from that comfortable plantation, but he does see inertia everywhere he looks, and apparently thinks of it as the only force in the universe which can command his respect.

It’s entirely possible to look at the same evidence, and see something quite different. What are the odds of cataclysm at the moment? I have no idea, but then I’m neither a bookie nor a prophet. I do think, though, that stagnation as the most likely scenario for the future is being oversold, and not just by Matt Yglesias. I’d also say, looking at history, that when the status quo goes, it tends to go awfully quickly.

5

dsquared 05.13.11 at 3:47 pm

I suspect that at least one CTer disagrees, and is more optimistic.

Yes, that would be me.

1. I think one needs to appreciate how small a problem Greece is. It’s much smaller than Lehman Brothers – the aggregate national debt is about the same size as the balance sheet of LEH, and while Lehman creditors lost 90% of face value, everyone agrees that a 50% writedown on Greek debt would be much too much.

2. And to be aware that the can-kicking policy is working, whatever Martin Wolf thinks. One year ago we were talking about “PIIGS”. That included Italy, a G7 country. Nobody remotely believes that Italy is in trouble now. Spain is very nearly off the attention list too and probably will be once the caja restructuring exercise is completed. That is not at all bad progress. This has gone from being a potentially systemic crisis to a genuinely peripheral one.

3. It might have been better fortune if we’d been able to leave a few days’ gap between the Krugman/Winecoff Wars and this thread. If elites make policy in the USA, why exactly do we think that German and Dutch taxpayers are going to be able to force the issue on this one? After Bulgarian and Romanian EU accession, the Euro itself, reunification at Ostmark parity and having American nuclear missiles for forty years, I think we can pretty much establish that “the German public will not stand for this” is a pretty weak forecasting tool.

4. Ireland will vote through treaty changes in exchange for the money. I am afraid to say that with the conditionality on the lending program in place, the basic way in which the EU institutions manage their relationship with Ireland is going to be summarised by the doctrine of “it puts the lotion on its skin or it gets the hose again”.

5. This is a case where JQ’s usually excellent point about the mutual incoherence of different levels of realism (at the level of states vs at the level of individual voters) doesn’t apply. The question is not one of whether people identify themselves as European – it’s whether they think that causing a great big sweaty crisis is going to hit their pocketbook or not. I suppose we will have a good test case here, but I don’t think that the political constituency for tearing everything apart in a fit of pique is anything like as strong as it appears. Even the True Finns are actually not causing anything like as much trouble as expected.

6. I don’t see how can-kicking exacerbates problems. Relative to what baseline? If we decided to face up to the truth &c &c &c, and put Ireland and Greece into default, then even if the expected benefits accrued and Ireland was able to obtain as good an economic outcome as Iceland, things would still be pretty crap and I really doubt that things would go appreciably better for EU institutional legitimacy. In the meantime, as I say, every year’s can-kicking makes the problem a little smaller and easier to solve in economic terms.

6

Latro 05.13.11 at 3:49 pm

Just on a tangent, but I would very much like to read the opinion of Crooked Timber about Spain economic troubles, causes, size, probabilities of bailouts, or whatever you think about it.

You know, just because I’m there and looking at the ship and trying to think if we are sinking or just in disarray with no wind and no sails – that is, our previous state before the years of money and bubbles.

7

dsquared 05.13.11 at 4:05 pm

Greeks, Portuguese and Irish people don’t like being at the sharp end of imposed austerity.

Also actually, I think that the Plain People of those respective nations might not have quite the skewed view of the world that their local equivalents of Bild or the Irish Independent portray for them. Because really, who are the villains here, and who “imposed” the austerity? Greece had a crisis because it spent ten years using borrowed money to paper over serious social fissures. Ireland had a crisis because it accidentally-on-purpose handed over the keys to a bunch of property speculators. Portugal, somewhere between the two. It’s obviously more complicated than that, and all, but whatever the outcome of the internal blame game, these three countries are having austerity forced on them because they’ve run out of money. The pernicious Germans and the EU institutions are helping them, by lending them money, on much better terms than anyone else is proposing, to smooth out and lessen the austerity. They aren’t forcing contractionary budgets on them out of sheer cackling evil, or by way of revenge for embarrassing them in the past. Neither Ireland (post the bank bailout), Portugal nor Greece were in a position where Keynesian stimulus was an option, as they had borrowed in foreign currency and reached an explosive debt path.

8

Zamfir 05.13.11 at 4:06 pm

How openly can people admit to can-kicking?

9

dsquared 05.13.11 at 4:13 pm

By the way, if Ireland wants to be building bridges with the rest of Europe, sending fucking Jedward as their representative to the Eurovision Song Contest was a bit of a courageous move.

10

William Timberman 05.13.11 at 4:18 pm

dsquared @ 7

I seem to remember an old Greek proverb: Beware the Germans bringing gifts.

11

ajay 05.13.11 at 4:36 pm

9: humbly agreeing to deliberately lose Eurovision in this way might be quite a good PR move.

12

belle le triste 05.13.11 at 4:47 pm

If they do lose: Jedward were pretty great last night — a hitherto unimagined cross between Pet Shop Boys deadpan and Banana Splits frenzy — and may have the last laugh on the “My Lovely Horse” plan they were perhaps assumed to be the idiot patsies in. Portugal pulled the MLH stunt off far more effectively. What are Moldovia’s economic dynamics with/in the EU?

13

Martin Bento 05.13.11 at 5:14 pm

Are we ready to ask whether the whole EU was a mistake to begin with? It is easy to say “It doesn’t matter now! We are stuck with it and have to save it, because the costs of failure are too high!” If it was a bad idea, even if one Europe is committed to now, those who advocated it should at least re-evaluate the reasoning and values that led them to support it. Even if you think the basic project still worthwhile, relative not to the costs of failure but to the status quo ante, you might think how it has gone so badly wrong, if you think it has, and what you should have insisted on as the condition of your support. All I’m hearing here is “how do we save the EU?” Not why it is worth saving. If the answer is just “cost of failure”, well, that is pretty pathetic. This was pretty much imposed on Europe against the popular will, and support from the left seems to have had a lot to do with faith in elitist technocracy and a sentimental cosmopolitanism. How do those values look in light of where we are?

14

P O'Neill 05.13.11 at 5:55 pm

A case study in Henry’s point is last Friday’s secret EU meeting on the Greek crisis, which the Germans leaked to Spiegel forcing dishonest denials that (1) such a meeting was occurring and (2) the Germans had leaked it, leaving everyone looking silly. But one aspect of the can-kicking that is different from the US is that the EU periphery really could run out of access to borrowed funds. Ireland and Greece simply can’t borrow at their current bond yields. So it’s a game of chicken with the collision point rather closer than for the US.

15

chris 05.13.11 at 6:06 pm

One year ago we were talking about “PIIGS”. That included Italy, a G7 country.

It did? I thought the Is were Ireland and Iceland.

16

marcel 05.13.11 at 6:13 pm

But Germans, Dutch people etc don’t have much reason to like the EU these days either. For them, it is associated with a giant sucking noise pulling frugal German taxpayers’ savings into the gaping maw of Greek pensioners.

But don’t the taxpayers’ savings exit the other end of those Greek pensioners and end up in the hands of Dutch and German banks? Isn’t this a problem because of the way it is being framed, as a bailout of Greece (and Ireland and Portugal, etc.), and not of the northern European banks that lent to those governments?

How would the Dutch and German taxpayers feel if they were told that they are bailing out not slatternly southern Europeans, but their own upstanding Protestant ethic type bankers, which is ultimately what is going on, no?

17

chris 05.13.11 at 6:27 pm

If elites make policy in the USA, why exactly do we think that German and Dutch taxpayers are going to be able to force the issue on this one?

If elites make policy in the USA (and thus by implication in other countries, if we assume that the differences in political systems aren’t relevant), why should the man on the street in Athens or Dublin be on the hook for sovereign debts?

Greece had a crisis because it spent ten years using borrowed money to paper over serious social fissures.

Isn’t this just the sort of nation-as-person metaphor that we tore apart a few months back as a way of looking at international relations? Why does it make any more sense for international finance? Greece didn’t have a plan, a set of Greek rulers did. Now the Greek people are expected to pick up the tab? On what basis? Why would or should they accept such a demand? And since, ex hypothesi, the underlying problems have gone unsolved for ten more years, do they even have the capacity to do so?

A real independent country could monetize, devalue, inflate away the problem and although creditors might grumble, they would know it was a risk they had taken (and received their risk premium for) when they made the loans. Hard money very much *is* being imposed on the periphery against both their will and their interests.

The pernicious Germans and the EU institutions are helping them, by lending them money

This is a contradiction in terms. Lending someone money at interest makes them poorer and you richer. That’s not the kind of help that helps. If they *really* wanted to help the periphery they’d institute some policies aimed at encouraging their population to buy more Greek goods and take more vacations in Greece, or something like that. Or, for that matter, if the EU had the sense of community that a real nation does they’d make actual transfer payments to their poorest regions.

18

Kevin Donoghue 05.13.11 at 6:49 pm

dsquared: … the basic way in which the EU institutions manage their relationship with Ireland is going to be summarised by the doctrine of “it puts the lotion on its skin or it gets the hose again”.

Analogies like that could get you a job offer from the Irish Independent. As a response to Henry’s parenthetical question about treaties it’s not so bad, but if anything it reinforces his larger concern about “long term fallout for European integration.” The Act of Union was also pushed through with carrots and sticks, but the fallout involved more than a century of swatting troublesome taigs. That’s not a viable policy for the EU. The Irish just aren’t worth the hassle. It would be more cost-effective to just push us into some sort of free-trade area on the fringes. The same is probably true of other peripheral upstarts.

19

Kevin Donoghue 05.13.11 at 7:01 pm

Incidentally, on the whole borrowing thing, I don’t suppose my acquaintances are a representative sample of the Irish population, but what seems to really piss people off is that fact that if it wasn’t for being in the Eurozone, we could just call in the IMF which, for all its faults, has a better understanding of the needs of debtors than the ECB. But the fact that Tim Geithner peers over the IMF’s shoulder is a complication.

20

piglet 05.13.11 at 7:20 pm

“Very few people indeed think of themselves as more European than French or German. Even fewer feel that they have any strong allegiance e.g. to the European Council or the European Commission.”

You are right, Europeans won’t any time soon participate in flag-waving parades celebrating former European Commissioners (they are far more likely to give their commissioners an earful when they get the chance). European schoolkids aren’t going to be forced to recite a Pledge of Allegiance to the star-spangled, or any other, flag.

How sad that left liberals can’t bring themselves to understand the absence of “strong allegiance” to a government entity as a wonderful blessing.

21

piglet 05.13.11 at 7:28 pm

But one aspect of the can-kicking that is different from the US is that the EU periphery really could run out of access to borrowed funds. Ireland and Greece simply can’t borrow at their current bond yields. So it’s a game of chicken with the collision point rather closer than for the US.

Really? As opposed to US states and municipalities? Are you sure? Has anybody done a comparative study of European vs. American austerity policies yet?

22

Chaz 05.13.11 at 9:31 pm

piglet: The U.S. federal government makes up a large share of overall taxation and expenditures. Local and state governments are facing catastrophic budget cuts, but at least the federal part is pretty stable. That means that critical state and local services disappear, but the federal services stay in place and the economy doesn’t completely crash. Looser monetary policy is helping as well. In the EU, EU-wide spending is a tiny share of total taxation and expenditures, so when a nation (and its provinces and cities) hits crisis and goes the austerity route, that’s a much bigger hit to public services and a much bigger dose of government spending taken out of the economy.

23

Chris E 05.13.11 at 9:52 pm

“I don’t think that this will lead to the collapse of the European Union. I do think that it is likely to result in very long-lasting institutional stagnation”

What is this, if not more can kicking? In fact, with the much vaunted ‘recovery’ actually benefitting fewer people than last time around, even an economic uptick represents more can-kicking. Look at the proposals to reform the banking sector in the UK – this against the background where most people, outside a small number in London and the Home Counties, feel significantly worse off. Ditto a US recovery against rising unemployment and lower labour market participation.

I think even those of us who knew that apathy was possible, underestimated it’s effect in reality.

24

piglet 05.13.11 at 10:22 pm

Chaz, when US and EU are compared (which I don’t recommend but P O’Neill did at 14), EU member states are analogous to US states. And I’m wondering whether anybody has actually looked at the comparative numbers. Your assertion of a “much bigger dose of government spending taken out of the economy” in Europe needs validation. I don’t believe it.

25

James Wimberley 05.13.11 at 10:32 pm

chris in #17: “If elites make policy in the USA (and thus by implication in other countries, if we assume that the differences in political systems aren’t relevant), why should the man on the street in Athens or Dublin be on the hook for sovereign debts?”
That’s what peasants are for.

26

Peter 05.13.11 at 11:27 pm

piglet, regarding your comment:

“How sad that left liberals can’t bring themselves to understand the absence of ‘strong allegiance’ to a government entity as a wonderful blessing.”

Well, such a thing may be a wonderful in some ways (it might make wars led by the government entity in question less likely, for example). In other ways, however, it’s not so wonderful at all. Not if one wants to see a large, comprehensive, and effective welfare state, at any rate.

Take my country of residence (Sweden). In this country, there’s a relatively strong sense of national togetherness, and a relatively strong popular allegiance to the government entity known as the Swedish state. Of course, this isn’t a very belligerent type of patriotism — which may be due in part to the fact that Sweden’s prospects for effective militarism are quite limited (how many countries is it capable of invading and occupying, for example?). So, this relatively strong national allegiance has — perhaps largely on account of luck — rather little in the way of negative consequences for international peace and comity.

In the Swedish case, in other words, the potentially bad side of the thing has very little in the way of bad consequences. And the potentially good side of the thing has in fact had some rather sweeping good consequences. (Or, at least, it has had some good consequences from a social-democratic or social-liberal point of view. But, of course, if one is a Friedmanite — or a libertarian, an anarcho-capitalist, or the like — then what I’m calling a “good side” here won’t seem good at all.) That is to say, the relatively strong allegiance to the Swedish state displayed by the bulk of the Swedish population has been very helpful for instituting a decent welfare state in this country. It increases the willingness of Swedish citizens to pay their taxes, for example. It also both reflects and promotes a sense among citizens that the doings of the Swedish state are relatively comprehensible, as well as halfway amenable to effective popular and democratic control.

I am indeed suggesting here, among other things, that Swedish citizens would be far less willing to support a large welfare state if said welfare state were erected at a large multinational level. This may be regrettable from a strict moral standpoint, but it’s a stubborn fact of political sociology (and welfare-state advocates can’t afford to ignore political sociology). Let’s assume, for example, that a proposal were made to institute a large-scale welfare state at a pan-European level. (I leave aside for the moment the question of whether such a thing has any realistic prospects for occurring, or whether the EU is structurally or institutionally capable of such a transformation, etc.) The sad truth of the matter is that, in Sweden (as in essentially all other countries of Europe, I’d wager), the bulk of the population would not support such a thing. That’s because they’d find it too hard to identify with the larger European population, and they’d feel they wouldn’t be able to work together with them as a political matter (not, at least, if the political cooperation in question were of the advanced, elaborate, and dense kind found in a comprehensive welfare state). They’d also, almost certainly, regard the doings of the pan-European central government as largely incomprehensible, and they’d accordingly feel capable of exercising any reasonable degree of control over it — and so would distrust it. They’d probably start suspecting it, for example, of squandering loads of revenue on boondoggles and corruption. That, in turn, would gravely undermine their willingness to pay high taxes to finance such a body. And that would mean, of course, that there’d be no robust political support for the multinational welfare state in question.

It is THIS which is the big problem — at least from a social-democratic or social-liberal point of view — when a “strong allegiance” to a “government entity” is lacking. And it is this which is makes the eurozone so fragile. In the eurozone, namely, we have a monetary union operating which is unaccompanied by a fiscal union. (NB: the 1 to 2 percent of Union GDP spent by the EU authorities falls hugely short of any “fiscal union” worthy of the name.) And it is only with a fiscal union that the “asymmetric economic shocks” attendant upon monetary union can be parried in any socially acceptable way. Unfortunately, however, the eurozone lacks that “strong allegiance” to a “government entity” which — as a practical political matter — is a precondition for establishing any fiscal union worthy of the name.

In sum, the absence of a “strong allegiance” to a “government entity” is by no means a unmixed blessing. Not from a social-democratic or social-liberal point of view, at least.

27

Shay Begorrah 05.13.11 at 11:28 pm

dsquared@5

I take it you have not been following the European banking crisis too closely.

Firstly the problems of the peripherals are many and varied.

Greece is not a fully functioning country, it moved from the reign of the generals to a highly corrupt state with damaged legitimacy to which a large proportion of the citizenry felt no obligation to pay taxes. It needs more than just debt forgiveness, it needs the space and encouragement to remake itself – of all the PIIGS it needs the most sympathy and help.

Portugal has severe inequality which it tried to address with large public projects at the same time we had a global financial crisis. They were unlucky and Spain has a milder version of the same ailment.

Ireland is the most relevant to the overall question of the EU’s legitimacy because it was used as an example to other states as to what happened if you threatened the European financial system in its current configuration. We have been lent money, at extortionate interest rates, to keep the European banking system whole by keeping our Zombie banks alive. The message is clear – Europe is about the German export sector, making the Euro the world’s hardest reserve currency and giving France the impression it still enjoys global clout.

No one has come out well of the current crisis except bank bondholders and groups with large Euro positions, you can expect a polite disengagement from the political elements of the EU from the peripherals while Germany and France do a Ratzinger and work on a smaller, but more devout, Mittel-EU.

All pretty sad.

28

Chaz 05.13.11 at 11:36 pm

piglet: California’s entire budget is only 5-6% of gross state product, and most of that has not been cut. Even after the first round of austerity, Greece’s budget deficit in 2010 was 10.5% of GDP.

http://en.wikipedia.org/wiki/California#Economy
http://www.dof.ca.gov/budget/historical_ebudgets/
http://online.wsj.com/article/SB10001424052748703778104576286441287643636.html

29

Peter 05.13.11 at 11:45 pm

piglet: From a fiscal standpoint, the EU and the US are not comparable at all. (The constituent states of the two bodies are somewhat more comparable, but what matters here is that the central authorities of the two zones are not comparable: they are vastly different in size — fiscally speaking.) That is to say, the central authorities of the US spend over 20 percent of the US GDP; while the central authorities of the EU spend less than 2 percent of the EU GDP. This observation is a commonplace among specialists on the subject. For confirmation, please consult the writings of Perry Anderson, Paul Krugman, or Sverker Gustavsson. (Disclosure note: I translate for the last-mentioned chap.)

30

P O'Neill 05.14.11 at 12:19 am

This US vs EU comparison stuff ain’t hard.

http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=41922

There’s lots more. Google it.

31

Castorp 05.14.11 at 12:43 am

It did? I thought the Is were Ireland and Iceland.

Nope. To be a member of the PIIGS one had to be a member of the Euro. Italy was the second (or first) “I.”

32

simple mind 05.14.11 at 12:55 am

I think Italy can claim the prize as expert can-kicker and why they are not with Greece on the hot seat is beyond me. The Prodi government was doing its very best to combat tax cheats and pay down its gi-normous social debt but Martin Wolf and S&P ganged up on it and brought it down. Things are just as bad if now worse now, and there a thousands of African refugees pouring into Lampadusa, but we haven’t heard a peep from the ususal suspects. A fine dirty little secret.

33

Andrew 05.14.11 at 1:01 am

dsquared @7: What about contagion? Can we be so confident that a Hellenic default would not raise the borrowing costs of (roughly) similarly situated countries to the point where those countries too come close to default? I don’t think the problem is so much the size of Greek debt, as it is what the default would imply about the risk of other countries.

I’m a little less sanguine about the possibility, even if I’d agree that it probably won’t happen.

As to the cost of can-kicking politically, it’s obviously unpleasant for everyone involved while it occurs; and once it is over, the structural problems that allowed the can to exist in the first place will remain, but with the added obstacle to change of the resentments formed by all the kicking.

I don’t see any alternative though, and it’s also plausible, alternatively, that when conditions are better, enlightened self-interest on the part of nations will spark institutional reforms.

34

simple mind 05.14.11 at 1:19 am

Just a quick second comment here.

The EU is the stepchild of NATO, whose No. 1 raison d’etre is binding Germany, France and the UK in a security alliance (preparing for the tank battle of the Fulda gap and keeping the Left out of power were secondary), in other words, keeping pit bulls on a very short leash and stifling any opportunity to ascend to the status of a global power. I would bet US geopolitical strategist love to see a former power like Germany fret about PIIGS on pensions and the EU in general completely incapable of conducting foreign policy. IMHO there is no way the USA would let Greece leave the euro area if there are means available to it to prevent it.

35

trotsky 05.14.11 at 5:51 am

Now, for what it’s worth, I went to high school and college in New Mexico, where “U.S. out of N.M.” bumper stickers were fairly common — 150 years after the Mexican War led to the territory’s annexation.

36

dsquared 05.14.11 at 11:03 am

#27: Hang on, there is a bit of MOPE creeping into this debate. Just to set out a couple of facts.

1: “Extortionate rates” compared to what? Compared to what Ireland could borrow at in the open market? Ireland couldn’t borrow at all in the open market. If it wasn’t for the EFSF facility then Ireland would need to be running a primary budget surplus and I can scarcely imagine the level of austerity that would involve. The actual interest rate on the EFSF loans is not usurious; it’s higher than the 5% rate on the Greek package, but it’s not intrinsically a massive number.

2: Ireland has been offered a deal reducing the interest rate on the debt twice so far, and has turned it down both times because Irish politicians have decided to make a shibboleth out of the 10% corporate tax rate; it really is quite difficult to expect France and Germany to subsidise tax competition against themselves.

3: It is true that Ireland’s problems are largely the result of its banking system, and that it is a major priority for Euroland to stop Ireland’s insane property bubble from taking down the whole euro area, but again let’s be real here. Letting your entire banking system go bust is not exactly a silver bullet solution, is it?

In general, there’s a lot of rewriting history going on here (Greece also has a lot of politicians who are starting to pretend that it was the EU that forced them to falsify their national statistics and not bother collecting taxes for ten years). The state that Ireland is in today is a result of its own political and business class, and it would be significantly worse if it was not a member of the EU (and no better if it wasn’t a member of the euro). The political institutions which ought to have lost every shred of legitimacy in Ireland are the Dail, the Central Bank of Ireland and the Fianna Fail party.

37

Guido Nius 05.14.11 at 11:27 am

To be even more positive about all this: maybe over time the insight will grow that, economical chit-chat aside, this situation is the result of competition between countries, and that therefore what is needed is to eliminate competition between countries. Once we are there we might see a union-wide policy that no longer punishes the poor to keep the rich affiliated to one country or another but one that taxes the rich for the specific benefits they enjoy for being able to live in a perfectly stable union.

There is much for Europe to be envious about, politically, towards the US but fairly distributed risks and rewards is not part of it. Whatever Krugman’s good intentions his analysis of going for debt followed by economic fragmentation was completely off and probably somewhat of a self-fulfilling prophecy.

38

Kevin Donoghue 05.14.11 at 12:29 pm

The state that Ireland is in today is a result of its own political and business class, and it would be significantly worse if it was not a member of the EU (and no better if it wasn’t a member of the euro).

That sentence would be much improved by lopping off the bit at the end. If Ireland hadn’t joined the eurozone, the Irish banks could not have run up such huge liabilities without either persuading the lenders to hold Irish pounds, or funding their Irish assets with euro liabilities. Maybe they were crazy enough to try the latter, but if they did we wouldn’t have needed a Morgan Kelly to highlight the risk.

39

Guido Nius 05.14.11 at 12:36 pm

@38: if that were true then there would not have been any financial crisis anywhere. Low-taxes Ireland was hot and everybody wanted a part of it; having the euro or not was inconsequential.

What would have worked was demanding that in order to join the Euro, low-tax Ireland should change into normal-tax Ireland. If we’d have done that, nobody would have lended more to the Irish banks than they would have lended to others.

40

dsquared 05.14.11 at 12:44 pm

Kevin: doesn’t the example of Iceland rather cut against that? If Ireland had been outside the Euro for ten years then the authorities could, in principle, have run a more conservative monetary policy and avoided creating the bubble, but on the evidence of what happened, I think it’s hard to argue that they would have done.

41

Shay Begorrah 05.14.11 at 12:51 pm

dquared@36

The fact that your answer to Greece needing help is “Screw em! solidarity aint what the EU is about.” is rather telling.

I will skip the corporation tax bait, that is simply Sarkozy playing the tough guy to shore up his dwindling political base. Tax is never going to be set to benefit Mitteleurope without there being a European budget, which there is never going to be. Yawn.

It is true that Ireland’s problems are largely the result of its banking system, and that it is a major priority for Euroland to stop Ireland’s insane property bubble from taking down the whole euro area, but again let’s be real here. Letting your entire banking system go bust is not exactly a silver bullet solution, is it?

The big lie! Excellent.

Ireland’s inability to secure funding on the bond markets is primarily a function of the socialization of private banking debt and the large amount and high interest rates of the borrowing necessary to do so. It is a nice irony that Germany gets to turn a profit on the Irish public protecting German banks from an inability to price risk, but then that is the story of modern capitalism. Moral hazard is strictly for the little guy,or the little state.

This socialization of banking debt had to done as the normal resolution process for a failed bank (screw the shareholders, save the depositors as much as is possible, if there is a carcass left let the senior bondholders fight over it) would have caused European investors pain (the poor dears) and exposed just how fragile the rest of the European banking system is (German Landesbanken,I am taking about youuhooo).

Ireland is screwed because the balance of European political power is such that saving the current configuration of the EU financial system is a higher priority then the welfare of its citizens and the remaining sovereignty of the non-conforming states.

It is this, not too shocking, revelation which has started to call the legitimacy of the EU into question. If the project has become chiefly about protecting capital Jean Public might wonder if it was worth pursuing, and the efforts to use the PIIGS as a punching bag are just part of the show intended to distract from this sad state of affairs.

Capital co-opts political power to protect capital. Same ole same ole with the same ole apologists.

42

Kevin Donoghue 05.14.11 at 1:10 pm

dsquared: Before we joined the EZ, the Central Bank had a well-deserved reputation for being absolutely paranoid about the possibility that the Irish pound might come under speculative attack. When Norman Lamont was singing in his bath back in early 1993, they were hiking short-term interest rates up to astronomical levels to prevent a devaluation. It was only when they realised that persisting with that policy would mean pushing the unemployment rate in Tallaght to 99% that they relented.

After we joined the EZ, bank regulation was rendered invisible by an SEP field. The ratings agencies said the banks were fine, so why worry? Bear in mind that T. K. Whitaker and Maurice O’Connell are both alive and lucid. I can’t imagine them watching a huge property bubble inflating before their eyes without them asking what the hell is the Central Bank playing at? The risk to the currency would have been obvious to them — if we only had a currency. And their warnings, unlike those of Morgan Kelly, would not have been derided.

The sad truth is that we thought we didn’t need competent central bankers any more, because the ECB was looking after it.

43

dsquared 05.14.11 at 1:27 pm

The fact that your answer to Greece needing help is “Screw em! solidarity aint what the EU is about.” is rather telling.

I have never written the words which you put in quotation marks, and in fact I am wholly in favour of the EUR100bn package of concessionary loans already given to Greece, support the extension of further loans (also on subsidised interest rate terms) and would even be in favour of a correctly handled writedown, all in the name of European solidarity, and all despite the fact that Greece is the country in which the domestic electorate is most culpable for its current problems and in which the average voter benefited the most from the run-up of the debt.

You will perhaps understand how your first paragraph does not dispose me particularly well toward the rest of your comment. Nor does the fact that you just skip over the fact that Ireland apparently wants to continue to pursue the policy of being an onshore tax haven, and that there is something inconsistent between demands for “solidarity” from larger European states, and an ongoing attempt to raid their tax base. This self-pitying dishonesty is becoming all too characteristic of the Irish political class at the moment and it is no more attractive than the bombastic and arrogant dishonesty of the boom years.

This socialization of banking debt had to done as the normal resolution process for a failed bank (screw the shareholders, save the depositors as much as is possible, if there is a carcass left let the senior bondholders fight over it) would have caused European investors pain (the poor dears) and exposed just how fragile the rest of the European banking system is (German Landesbanken,I am taking about youuhooo).

Mate. Please. Have a bloody word with yourself:

1. It is the Irish banks whose losses are a multiple of GDP, not the Landesbanks. Germany has a massive fund allocated to bailing out the Landesbanks, and their losses are likely to be a fraction of the Irish banks.
2. The Irish banks failed to price risk correctly, to a much worse extent than anyone else. It was the Irish banks that fuelled the Irish property bubble, not the German banks.
3. The main creditors of the Irish banks are the Irish people through their deposits. That’s why they had to be saved. “European investors” could have seen your financial system implode and shrugged it off, but you would have been rather more inconvenienced when the ATMs stopped working and the pension cheques didn’t clear.

Ireland is screwed because every single financial institution in the country went hog wild and lent stupid amounts of money to property developers (in Ireland), using money largely borrowed from the Irish people. The fact that Ireland simultaneously turned itself into a tax haven and thus managed to link its financial system with that of other countries is not exactly exculpatory. Ireland is not guaranteeing the debt of Depfa Bank plc and the other German-Irish banks; the state is bankrupt because of Bank of Ireland (its largest bank, which actually predates the Republic), Allied Irish Banks (its second largest bank) and Anglo-Irish Bank (the private bank of the Irish political class). None of this is the Germans’ fault, is it?

44

dsquared 05.14.11 at 1:32 pm

Kevin: hmm maybe. But I think it would have taken a hell of a lot of Irish exceptionalism – remember that falling interest rates were a worldwide phenomenon – and the policy you outline would have had some strange consequences for the value of the IR£, potentially sufficiently contractionary consequences as to leave you worse off than you actually are. The only places that managed to pull off the trick you’re describing were Canada and Australia and both of them are resources economies (although tbf, their other common characteristic is that they’re amazingly oligopolistic banking systems, a characteristic shared with Ireland).

I think the counterfactual is just too far away because you have to assume away the entire cute-hoor political class of the last twenty years. Your alternative history couldn’t have had the tax-haven policy, couldn’t have had the co-option of the government by the property/financial nexus … I’m not seeing it.

45

Guido Nius 05.14.11 at 1:38 pm

Kevin just wants to be able to blame others. That’s not unlike a lot of other Europeans.

46

Shay Begorrah 05.14.11 at 2:18 pm

We are talking at cross purposes dsquared@43. I believe that the problems of the EU periphery are a manifestation of the power of international capital and the increasingly warped structure of EU political control while you believe it is basically down to national fecklessness in small countries and Ireland being the only country in the world to culpably miss the fact that there was a property bubble. Stupid, greedy paddies. You’ve never liked them anyway.

It is not a reasonable position that the banks and investors who threw money at Ireland’s tiny economy on the basis of higher returns somehow deserve more protection from their poor judgement than the domestic Irish banks who crazily lent to property developers on the same basis. The loses incurred should have been shared but the EU ensured not only that they were not but that the Irish public paid twice for them, through keeping the banks on life support to make investors whole and paying absurdly high interest for the privilege of doing so.

The larger EU economies did this substantially because recognizing the losses that their domestic banks would incur was politically unattractive, regardless of how easy it would have been to bail these banks out. Germans would have been none too pleased to find out that after years of welfare “reform”, increasingly insecure and temporary employment and diligent saving the banks trusted to guard their savings were more dependent on implicit state guarantees than investment nous. Far easier to blam small countries, far away.

In the end Ireland took the blame for the poor risk pricing across Europe’s financial institutions (and to hide the lack of tier 1 capital in some of them) because we could be made to. Welcome to the new EU.

On corporation tax it might help you if you considered how exactly businesses would be distributed across Europe if smaller jurisdictions were obliged to exactly mirror the business and taxation environment of the larger countries and who exactly the flight of capital and employment would benefit.

What precisely do you think would happen to smaller, more geographically peripheral countries in these circumstances? Would it tend to benefit countries in the more densely populated geographical and industrial centre of Europe a little more perhaps?

I look forward to your answers.

47

piglet 05.14.11 at 2:18 pm

chaz 28, Peter 29: not remotely answering my question. I am asking for comparable numbers about austerity (i. e. budget cuts) in US versus EU. And Peter, try reading other people’s comments before pretending to answer them.

P O’Neill 30: “This US vs EU comparison stuff ain’t hard.”
Maybe it ain’t hard but nobody seem to have comparable numbers. The article you are linking to is completely worthless. “Paradoxically, despite this grim picture, it is actually Europe that should be envious of California”. That was written last November. Who is taking stuff like that seriously?

48

William Timberman 05.14.11 at 3:10 pm

I live in a small state, which once prided itself on a miraculous economy largely driven by real estate and retail development, and funded by capital inflows from elsewhere. With a government characterized by right-wing boosterism and anti-union fervor, it offered the benefit of low taxes and a cowed labor force liberally salted with low-wage immigrants to all comers. Then came 2008.

Now we have elementary schools with 40-plus students per teacher, closed state parks, and next to no social welfare services. Our psychotic government has sold off and re-leased the buildings it meets in, raised sales taxes and cut corporate taxes yet again, repealed virtually all our existing gun laws, and authorized the hunting down of immigrants in its streets as though they were a form of vermin.

As many of you may have realized by now, the state I live in is called Arizona, and I’m as angry about what’s happened to it as SB is about what’s happened to Ireland. Yes, we should’ve known better, but our delight in our good fortune ten years ago, and our ignorance about its consequences, were at very least encouraged by those who did know better — the very same people who are now telling us that it was all our fault. Privatize the profits, socialize the losses is a lovely irony, and it makes a great bumper sticker, but if political stability is what you’re after, you’d be well-advised not to adopt it as public policy.

49

dsquared 05.14.11 at 3:49 pm

Guido: I think you mean SB – Kevin (here and on his website) is actually facing up to reality and trying to take on the challenge that Fintan O’Toole set out clearly in his book – to take a lot of the very real benefits of the boom in cultural terms, to accept the consequences of the crash and to try to think about building a new politics and economics in Ireland.

Meanwhile, SB has decided to double down on self-pity, accusing me of harboring racist sentiments about Irish people and suggesting, absurdly, that Irish tax policy was simply aimed at stopping Ireland’s industrial base from fleeing to Germany. Apparently the Dublin financial centre was built because “international investors” randomly decided to throw capital at the Irish economy, seeking “higher returns”. And the Irish people are being prevented from enjoying the benefits of the magic solution of declaring their entire banking system insolvent. And a 5.7% interest rate is “absurdly high”, because if Ireland left the euro and defaulted it would probably issue bonds on the same terms as Norway. Or something.

SB, you really don’t understand as much as you think you do. The “Irish people” are being shafted, by their own political class and their own banks. They’re not paying for foreign banks’ losses, particularly not German banks (the German taxpayer is paying for those). There would not have been any great benefit from declaring the Irish banking system bankrupt; quite the reverse. The decision to guarantee BoI and AIB was unavoidable and the decision to guarantee Anglo-Irish was nothing to do with the ECB. Ireland has been lent EUR87bn, on terms which are perfectly reasonable, and which would have been subsidised even more if the Irish government was prepared to negotiate in anything approaching good faith. The Irish political/business/financial community is being blamed for a lot of things, but this is because a lot of things were their fault.

50

dsquared 05.14.11 at 3:50 pm

Privatize the profits, socialize the losses is a lovely irony, and it makes a great bumper sticker, but if political stability is what you’re after, you’d be well-advised not to adopt it as public policy.

Indeed; and also to make sure that the public sector you’re planning on socializing the losses to is actually capable of bearing them.

51

Steve Williams 05.14.11 at 4:04 pm

‘I believe that the problems of the EU periphery are a manifestation of the power of international capital and the increasingly warped structure of EU political control while you believe it is basically down to national fecklessness in small countries and Ireland being the only country in the world to culpably miss the fact that there was a property bubble. Stupid, greedy paddies. You’ve never liked them anyway.’

This seems to me like a very uncharitable misreading of what dsquared actually said, and I don’t think accusations of racism are likely to help the issue.

To try to help clarify things, can you please explain what you mean by ‘the increasingly warped structure of EU political control’?

I have to confess to not understanding your position so far. You seem to be attributing blame to Germany for things it seems blameless of. It wasn’t the German banks who fuelled a ludicrous property bubble. It wasn’t the German government who guaranteed the debts of every bank in the country.

You seem to want the German government to advance Ireland either an interest-free, condition-free loan(s) for several years going into the future, or for a system of transfer payments from the centre to the periphery. Even if you believed that was somehow ‘right’, ie the moral thing to do (and I don’t actually), I’m sure you can see why it simply isn’t politically feasible.

52

dsquared 05.14.11 at 4:15 pm

In as far as I can reconstruct it on reasonably objective grounds and stripped of the bullshit, SB’s position (which is quite widely held in Ireland AFAICT) is made up of something like:

1) Ireland’s sovereign debt problem is largely a result of the collapse of its banks (true)
2) At some point in the bailout negotiations, it was suggested that the sovereign debt could be reduced by putting the Irish banks into bankruptcy and writing down their debts (true as far as I can tell)
3) The IMF was in favour of this approach, but the ECB was against it because of the danger of a systemic Sept-08 style collapse of the euroland money market (not necessarily true but widely and credibly rumoured – the US Treasury was also very much of the ECB’s point of view according to the same rumours, but blaming the Americans isn’t so attractive).
4) And if only the Irish had been allowed to make their entire banking system bankrupt, everything would be much better. (IMO, absurd).

There is a technical debate over whether writing down the bank bonds might have given Ireland a sufficiently better long-term debt position, but remember that the context here was the bailout negotiations. Banks bust and no EFSF loan would clearly have been the worst possible outcome for Ireland – banks still supported and EFSF loan was the only other option on the table.

And consider the potential risks the other side! SB seems to think that a systemic banking collapse across Euroland would just have been a minor political inconvenience for Angela Merkel and Nicolas Sarkozy.

53

dsquared 05.14.11 at 4:19 pm

(ah, the spirit of “never use preview” strikes again – by “a sufficiently better long term debt position in the penultimate paragraph above I mean “a sufficiently better long term debt position to offset the significant disadvantage to Ireland of having blown up the banking system”.)

54

William Timberman 05.14.11 at 4:22 pm

Indeed; and also to make sure that the public sector you’re planning on socializing the losses to is actually capable of bearing them.

That’s actually the last thing we worry about, and then only when we look out the window and see what appear to be pitchforks and torches approaching. So far, no sign of either in Arizona — and one confidently expects, or at least one hopes, that a modest cordon sanitaire will keep the Greek and Irish pitchforks at a reasonable distance, at least until wiser heads in Berlin or Brussels can conjure something more permanent with the imperfect tools presently at their disposal.

Still, isn’t this a hell of a way to run things? Who is minding the store anyway? And is your trust in them justified by events to date? I do wonder, especially about that last bit.

55

William Timberman 05.14.11 at 4:25 pm

Damn! Sorry about doing it again, but will somebody please close the italics tag before I wreck what’s left of the thread? Thanks.

56

dsquared 05.14.11 at 4:25 pm

Well, this is it – Henry has a good description of the actual politics, but from my point of view sitting half a mile from the North London Irish Cultural Centre, I would say it ought to be the domestic political institutions of Ireland and Greece that had lost all legitimacy and the European ones gaining it.

57

Kevin Donoghue 05.14.11 at 4:29 pm

I think the counterfactual is just too far away because you have to assume away the entire cute-hoor political class of the last twenty years. Your alternative history couldn’t have had the tax-haven policy, couldn’t have had the co-option of the government by the property/financial nexus … I’m not seeing it.

We had the cute-hoor political class and the co-option of the government by the property developers back in the 1970s too, but when property bubbles burst the big banks didn’t go under. They just used up some of the huge provisions (by the standards of the time) which the Central Bank insisted they build up in the boom years.

The assumptions I’m making are pretty uncontroversial I think. In particular: the banks wouldn’t have borrowed huge amounts of euros if the Irish pound was their reporting currency and the only currency which they could borrow from the Central Bank. So the bubble, if any, would have had to be financed by Irish depositors funding Irish pound mortgages. When the crunch came, a devaluation would have shrunk the real value of debt, which is precisely what needs to happen. But the experience of the period 1970-2000 would have led us to expect a boom to end in just that way, which is why I think the Central Bank would either have prevented it, or dealt with it reasonably effectively when it happened.

What’s the “tax-haven policy” got to do with it? The transfer-pricing sector, or whatever you want to call it, lives a life of its own. Its contribution to GNP is mostly just the wages it pays to Irish employees. It really has nothing much to do with the problem, except insofar as Google employees and suchlike were just as likely to be buying property as anyone else. That and the fact that it’s about all we have left, which is why nobody is entertaining the demand that we should risk shrinking it in return for an inconsequential reduction in interest rates. The interest rate is academic if the principal is 150% of GNP, since there’s no realistic prospect of repayment.

On the MOPE meme, I largely agree with you. But you’re the one who likened Ireland to the helpless victim of a serial killer who proposes to turn her skin into a lampshade, if I remember the story correctly. Not even John Waters goes that far.

… Kevin (here and on his website) ….

Presumably you have some other Kevin in mind. I have a blog of sorts, but nothing serious.

58

P O'Neill 05.14.11 at 4:39 pm

Actually d^2 Depfa is an interesting case because it would have been an Irish bank had those clowns at Hypo not bought it just before the crisis, a deal nearly as bad as the RBS/ABN Amro one. Germany got stuck with the bill for a tax-avoiding Irish bank that happened to descend from a German bank and happened to be bought by one, but it didn’t exactly help Ireland’s case in arguing that it needed some loss-sharing on the actual Irish banks.

I’m also more inclined towards the Giant F*ck Up theory of the Irish crisis complementing the political analysis, our two Brians had absolutely no idea what they were getting into in September 2008, but once in the hole, kept digging.

59

dsquared 05.14.11 at 4:42 pm

Sorry, yes, I got you mixed up with Kevin O’Rourke.

The tax policy was intrinsically bound up with the financialisation of the Irish economy – recall that it started out as a specific industrial subsidy. And the biggest users of Irish tax dodges were the Irish banks themselves. Unlike in the 1970s, the creation of a bubble was government policy, which is why the counterfactual needs to assume that away too.

The Icelandic banks did have to raise kronor deposits and borrow internationally and they managed to fuck things up just fine – remember that money was cheap internationally those days and the Irish banks would have had no trouble raising Euro at low rates. The only way to have stopped them converting those euro into IR£ would have been capital controls, which you couldn’t have imposed while remaining in the EU.

Btw, while a debt/GDP ratio of 150% is high, it’s not at all unbearable. Plenty of places have had higher debt ratios at higher interest rates than 6.7% and recovered.

60

Shay Begorrah 05.14.11 at 5:31 pm

End of the Italics, I hope.

If I have time I will address some of the points above, though it depresses me profoundly to have to do so.

61

Peter 05.14.11 at 6:09 pm

piglet 47:

No, I don’t have directly comparable figures on US cuts vs. EU cuts. But I do believe it’s reasonable to presume, given certainly underlying (and quite drastic) structural dissimilarities between the two entities, that the cuts in Greece involve a “much bigger dose of government spending [being] taken out of the economy” (as Chaz claims in 22)than in California.

My presumption here follows from these premises:

(1) There hasn’t been any far-reaching austerity program at the federal level in the US yet. (Although to be sure it certainly seems, grimly enough, that this will be changing soon.) The Obama stimulus may well have been, as among others Paul Krugman has argued, badly insufficient; yet it wouldn’t appear to be the, all the same, that any large-scale cuts have been instituted at the federal level in the US over the last couple of years.

(2) The larger part of government spending in California comes from the federal government — not from the California state government, or from lower-level governments in that state.

(3) Premises 1 and 2, taken in combination, mean that the great bulk of government spending in California will remain intact even if truly drastic cuts are instituted by the state government there.

(4) Greece is in a different situation, because the proportion of government spending in Greece which is represented by the (relatively stable) expenditures of the EU central authorities represent such a tiny proportion of overall government spending in Greece. It is instead the expenditures of the Greek central government, together with those of lower levels of government in Greece, that account for the overwhelming proportion of overall government spending in Greece. And these expenditures, of course, are being cut drastically — without the relatively stable expenditures of the EU central authorities being able to mitigate the impact of the cuts in anything other than an extremely small measure (since the expenditures of the central EU authorities are so small).

Putting these various pieces together, I believe there’s pretty good prima facie reason to believe that, as Chaz puts it in 22, a “much bigger dose of government spending [is being] taken out of the economy” in Greece than in California.

You’re certainly right, though, that I don’t have any directly comparable figures on this question. Still, I hope I’ve set out some halfway believable reasons for my presumption here: that the cuts in overall government spending in Greece right now are more drastic than the cuts in overall government spending in California right now. I would be very surprised indeed — given the structural differences between the EU and the US that I’ve outlined — if the cuts in overall government spending in California prove to have been higher than those in Greece. But I’ll certainly be interested to see any directly comparable figures on these cuts, if anyone has any.

62

Kevin Donoghue 05.14.11 at 7:02 pm

dsquared: Sorry, yes, I got you mixed up with Kevin O’Rourke.

The apology should go to K O’R. I’m exceedingly flattered. Just started reading Power and Plenty, which is terrific.

As to the tax policy, yes, it started out as a specific industrial subsidy. But AFAIK it was extended to all sectors because the EU said you can’t subsidise particular industries. I’ll take your word for it that the banks were big into tax dodges; it’s not something I follow. But in any case it’s nothing new: the banks were big into Section 84 lending and suchlike during earlier property booms.

You can say that property bubbles were not government policy in the 1970s, in the sense that ministers didn’t say things like “the boom is getting boomier.” But that’s just because Charlie Haughey liked to think of himself as a classy kind of person. Inflating property prices was certainly Fianna Fail policy, implicitly if not explicitly. (Charlie Haughey bought Kinsealy in the 1960s.) The Central Bank couldn’t stop them creating booms, but it could and did insist that the banks were adequately provisioned to survive the busts.

Again, I accept that the Irish banks would have had no trouble raising cheap euros. But their mortgages would have been denominated in Irish pounds, so the currency exposure would have stuck out so far that even an auditor couldn’t pretend not to notice. (It pisses me off that auditors don’t get mentioned more often when the guilty parties are listed; granted the list is long, but they deserve a more prominent place.) No capital controls would be needed to put a stop to that kind of folly. All the Central Bank would have had to do is make some anxious noises. If nothing else, they could have said: when the shit hits the fan, don’t say we didn’t warn you. That alone would have made it much harder to guarantee a scruffy name like Anglo-Irish. The Labour Party could have made its entire case out of quotations from the CB’s Quarterly Bulletin.

Being in the eurozone made the danger much harder to see. Even shrewd people got suckered. Warren Buffett had Irish bank shares. Would he have been a buyer if they were borrowing euros and lending punts?

Plenty of places have had higher debt ratios at higher interest rates than 6.7% and recovered.

I’m sure that’s true, but I expect that such things as devaluation, capital controls and financial repression come into the story in nearly all cases – things which are supposedly unthinkable in Ireland’s case.

63

piglet 05.14.11 at 7:11 pm

No, I don’t have directly comparable figures on US cuts vs. EU cuts. But I do believe it’s reasonable to presume, given certainly underlying (and quite drastic) structural dissimilarities between the two entities, that the cuts in Greece involve a “much bigger dose of government spending [being] taken out of the economy” (as Chaz claims in 22) than in California.

I’m not looking to compare Greece and California – it’s US and EU we are supposed to compare. And we shouldn’t compare just one level of government, but all, from the municipal to the federal.

64

Shay Begorrah 05.14.11 at 7:12 pm

dsquared

Meanwhile, SB has decided to double down on self-pity, accusing me of harboring racist sentiments about Irish people and suggesting, absurdly, that Irish tax policy was simply aimed at stopping Ireland’s industrial base from fleeing to Germany.

The argument on coporation tax may have been a little complex for you, I will try again, but using bullet points.

The larger economies of Europe enjoy economies of scale and large domestic markets that the peripheral economies do not.
The PIIGS have smaller industrial bases and limited natural resources and less native corporate activity.
There is free movement of capital in Europe.
That capital will flow to where the best return can be had
If the peripheral economies had exactly the same employment and taxation policies as the larger economies it would usually be more profitable to situate your business, particularly its headquarters, in one of the larger and geographically more central economies.
In this ideal world of identical tax rates across Europe the main way the peripherals would have to compete would be through lower wages.
The peripheral economies have no real choice other than to undercut some of the costs of the larger economies to attract business or face being reduced to retail outlets, call centres and charming tourist destinations.

To use a sporting analogy (you are a sports guy, I feel it in my gut) the playing field is already uneven, the low corporation tax is an attempt to level it and not lose every match.

Next up, Steve Williams.

65

Walt 05.14.11 at 7:48 pm

I was actually curious what sort of bullshit the Irish were telling themselves about why they had a god given right to allow corporations to dodge taxes. The Internet comes through again!

66

Britta 05.14.11 at 8:04 pm

On a Europe related note, I am disappointed you don’t have a Eurovision contest live blog. Perhaps you’re saving up for a great analysis after it’s finished (or should I say…finnished)?

67

Peter 05.14.11 at 8:06 pm

piglet: “I’m not looking to compare Greece and California – it’s US and EU we are supposed to compare.”

Youch, that’s tricky. There’s so much variation — both in the US and in the EU — between different regions, states, etc. I suspect the differences in this regard are rather greater in the case of the EU than in that of the US. I must hasten to add, though I haven’t read anything which addresses this issue directly; it’s just a general impression on my part. Which states in the US are being hit least hard by government austerity? Connecticut, maybe? Which states are being hardest? California, perhaps? I haven’t gotten the impression, at any rate, that the variation in this regard is as great in the US as it is in the EU.

Where the EU is concerned, let’s take the case of my country (Sweden) and compare it with that of Greece. The austerity being imposed in the latter country, of course, is famously severe; in Sweden, by contrast, there’s essentially no austerity being applied right now.

This is not to say, by the way, that everything is hunky-dory in the latter country. No indeed! The present bourgeois government in Sweden is systematically — although perhaps rather quietly — shifting social and economic resources away from the least favored and towards the privileged. Still, while these developments are most unfortunate, they do not mean the government is presently pursuing austerity in respect of overall tax-and-expenditure levels.

Or, if we prefer to restrict the comparison to members of the eurozone more specifically, we might compare Finland or Austria or Germany on the one hand, with Greece or Portugal or Ireland on the other. Here too, the variation in degrees of austerity is enormous.

In any case, you’re of course perfectly welcome to compare austerity in the EU overall with austerity in the US overall. Doubtless that’s an interesting inquiry in its own right. Speaking for myself, though, I find the issue of the worst-hit cases within the two entities (i.e., the US and the EU) to be the most interesting and important question. It is namely in connection with the worst-hit cases that the design flaw in today’s monetary union in Europe shows up most clearly. That is to say, in a monetary union which is operating unaccompanied by a fiscal union, the effect of asymmetric economic shocks is especially difficult to correct or to compensate for. On account of this design flaw, we get outcomes like that seen in Greece today: a terrible debt trap, with no future in sight but years of grinding austerity. I’m frankly not sure what ought to be done now, now that things have reached this pass. But I do think, at least, that there’s an important lesson to be learned here for other countries that might ever consider introducing a common currency. Said lesson is this: If you decide to set up a monetary union, then set up a fiscal union at the same time! Or, if you’re not willing or able to set up a fiscal union, then don’t set up a monetary union either! A monetary union without an accompanying fiscal union is like a car with an accelerator but no brake. A car like that shouldn’t be driven — not, at any rate, until it gets a brake to go with its accelerator.

piglet: “And we shouldn’t compare just one level of government, but all, from the municipal to the federal.”

That’s what I was doing (within the specific Greece and California cases, at least). Indeed, my whole point hinged on so doing. I was claiming that, in view of the pronounced structural differences between the US and the EU, it is reasonable to presume that the cuts in overall government spending in Greece right now (from all sources: EU, national, municipal, etc.) are more severe than the cuts in overall government expenditures in California right now (from all sources: federal, national, municipal, etc.).

Still, as you quite rightly point out, I don’t have any directly comparable figures here: neither for the large-scale comparison (EU vs. US), nor for the smaller scale comparison — the one that I personally find most interesting (Greece vs. California). All I have here is a reasonable presumption, based on (I hope) some halfway sensible reasoning.

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Shay Begorrah 05.14.11 at 8:13 pm

Its Steve Williams at 51.

This seems to me like a very uncharitable misreading of what dsquared actually said, and I don’t think accusations of racism are likely to help the issue.

That is odd, rereading his posts dsquared seems to have a pretty nakedly hostile opinion about Ireland and our special failings as a nation. Quoting Fintan O’Toole approvingly is always a bad sign, Fintan being a man who was utterly focussed on the dangers of Republicanism and the insidious influence of the Catholic Church right up until our latest and greatest crisis of capitalism hit.

To try to help clarify things, can you please explain what you mean by ‘the increasingly warped structure of EU political control’?

Eh, the transfer of executive power to EU control structures (chiefly the council of ministers and the ECB), where the powers are exercised with less accountability and popular democratic control than when they were exercised at a national level. Pretty uncontroversial stuff, post Lisbon. Think of them as antidemocratic reforms in the name of efficiency and integration.

I have to confess to not understanding your position so far.

There is no shame in that, its a special area of interest for me.

You seem to be attributing blame to Germany for things it seems blameless of.

Absolutely not, Germany’s interests and the interests of European financial capitalism are currently closely aligned while Ireland’s are opposed to it. Naturally this means that the policy prescriptions Germany favours are bad for Ireland. It is not a matter of blame, just differing (indeed opposed) national interests, along with vastly different power which Merkelism is much less precious about throwing around.

It represents the disintegration of the idea of a common European interest and its replacement with more traditional jockeying for influence among large states where smaller ones have to choose which great power they will ally with.

It wasn’t the German banks who fuelled a ludicrous property bubble. It wasn’t the German government who guaranteed the debts of every bank in the country.

You are partially right on your first point and initially right on your second.

The property bubble was fuelled by cheap credit; as a country of net savers with a vast export surplus Germany was not doing its fair share of consuming and so did help increase the amount of money sloshing about in the markets. Low interest rates also suited Germany (and France) when it would have been much better for Ireland if they were lower. That having been said there was a general excess of credit, Germany was a part of the problem but not the cause of it.

The initial Irish bank guarantee was an attempt to get some analytical space, when the realization hit that the banks were insolvent it was the ECB, with the blessing of Germany and the US, who decided that Ireland had to stay the course and keep the banks alive long enough for the European banking sector to recover its funds. It was a naked act of financial aggression.

So Ireland dug its own hole, but it was the ECB that prevented us from making a relatively painless escape, and that remains the policy because it suits the domestic political requirements of the dismal Christian Democratic parties in power in the larger economies.

You seem to want the German government to advance Ireland either an interest-free, condition-free loan(s) for several years going into the future, or for a system of transfer payments from the centre to the periphery. Even if you believed that was somehow ‘right’, ie the moral thing to do (and I don’t actually), I’m sure you can see why it simply isn’t politically feasible.

Let me help you find the plot again.

* The loans advanced to Ireland are actually extremely profitable, this is not charity we are receiving – quite the reverse – an example is being made of us, which you well know.

* I actually do agree with the transfer of funds from the wealthy parts of Europe to the less wealthy ones, Ireland’s real shame was that we remained a net recipient of European largesse during our boom times rather than contribute money to Eastern Europe. The EU holds no interest for me if it does not have a moral component, the world does not need another empire.

* What I really want is that the costs of a systemic failure in the European financial sector to end up being private losses spread across the system. No free movement of capital without free movement of losses.

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Shay Begorrah 05.14.11 at 8:51 pm

dsquared@

Btw, while a debt/GDP ratio of 150% is high, it’s not at all unbearable. Plenty of places have had higher debt ratios at higher interest rates than 6.7% and recovered.

I’ll just repeat what has been said repeatedly elsewhere about banking on a recovery from a very high GDP/debt ratio.

* Plenty of places have also ended up having to default with high debt ratios
* If default is inevitable extending the agony exports even more of your countries resources.
* A fixed exchange rate with your trading partners makes an export led recovery more difficult.
* A domestic recovery is extremely unlikely if you are pursuing serious austerity to service foreign debt.
* If a domestically fuelled recovery is not possible than recovery is also very much dependent on there not being another economic shock to your trading partners.

The proposed bleed yourself better approach to economic security has more than a few weaknesses, and it is based on the same combination of breathless optimism about economic growth and the success of market liberalism as the policies that brought us all here.

These beatings will continue until morale improves.

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William Timberman 05.14.11 at 8:59 pm

SB @ 68

As Marx complained, capital to this day has always been able to flee the jurisdiction in which its crimes are committed. It seems to me that the fiscal union of which so many have spoken so longingly needs to encompass more than just the EZ. We may as well place all our hopes on the Second Coming, of course, but in the meantime, there’s no need to pretend that we don’t know where the Devil’s been hiding all along. Despite all the reasonableness opposed to your view of the Irish crisis here in this thread, I agree with you that the PIIGs crisis isn’t a management problem. It’s a fundamental political problem, of which the Irish crucifixion is merely a manifestation.

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IM 05.14.11 at 9:13 pm

Well, I agree with dsquare. But then I am german and the germanophobic conspiracy theories tend to annoy me. A few points:

a) Ireland was like Iceland a poster child for neoliberal policies. And now, instead of revising this policies, they vote another neolib party (FG) into office and demand of Christian democratic/social democratic countries (Germany, France , Netherlands, Austria, Finland etc.) to rescue them, without any cost.

b) The crisis did strike Ireland in autumn 2008. At this point the Irish government to issue the idiotic blanket guarantee to the banks. To the consternation of the rest of Europe. The bailout, where the rest of Europe and the ECB indeed pressured Ireland, happened two years later. Most of the socialization of bank losses happened in these two years. Now these two years are somehow vanished from the collective irish memory.

c) 5.8% is indeed to high. But that was invented for Greece. But let’s say Greece and Portugal and Ireland would get the loans from the other countries at cost. That would mean 3.5% from Germany, 3.7% from the Netherlands, 4.0% from France, 4.5% from Italy. On average 4.0% or so. And that would change the big picture exactly how?

d) Ireland is a tale of bankrupt banks. But that is’nt the problem in either Portugal or Greece.

e) A transfer union is a nice idea. But wouldn’t that mean transfers from Ireland to Eastern Germany? (Both Greece and Portugal actually receive around 5% of their gdp in transfer payments from the EU).

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IM 05.14.11 at 9:22 pm

By the way this whole just let’s move to transfer union is naive. Take the US. The US does a lot of transfer through social security, medicare etc. So a european transfer union needs a common pension system or health care insurance system or employment insurance system. Or we just situate a lot of German military bases in Ireland or Greece…

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Shay Begorrah 05.14.11 at 9:46 pm

im@71

e) A transfer union is a nice idea. But wouldn’t that mean transfers from Ireland to Eastern Germany? (Both Greece and Portugal actually receive around 5% of their gdp in transfer payments from the EU).

Absolutely. Germany’s self funded reunification was an amazing and wilful act of discipline (though I question whether it should have been so fast), Germans have also suffered the Hartz labour reforms (which I was shamefully unaware of until this year) and I believe that Germans are by and large underpaid and, as a result, under consume. Western Europe generally has not done enough for Eastern Europe, and the market reforms we heaped on them instead were, in my opinion, sinful.

To go further back Germans should have enjoyed a higher standard of living and Ireland’s should have been lower for at least the last decade, it is natural that Germans now expect some payback after the two decades of toil since reunification started.

Sadly at the exactly the same time we have encountered another crisis of capitalism, a crisis that can not be dealt with without confronting the state of the EU financial system, controlling the extent of tax arbitrage and eliminating the tacit approval of tax avoidance by large corporations (Google’s double Irish for instance).

Unfortunately at the very same time that these measures need to be taken both Germany and France’s ruling coalitions political interests mitigate against them, so here we are with an EU suffering from a real crisis of legitimacy and the periphery enjoying old style IMF market reforms.

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Chaz 05.14.11 at 10:54 pm

The “Irish people” are being shafted, by their own political class and their own banks. They’re not paying for foreign banks’ losses, particularly not German banks (the German taxpayer is paying for those).

Are not German, British, and other non-Irish banks among the major creditors being shielded by the Irish bank guarantee? It seems a lot like AIG. The U.S. nationalized AIG, and even though it was miles beyond insolvent, we kept it operating and paid all its creditors. That money didn’t really go to AIG or to “America”. It went directly into the pockets of Goldman Sachs, Societe Generale, and a slew of other large banks. Many of whom were foreign, many of whom were culpable in the collapse, and all of whom should have been made to eat their losses. We did this because 1) Some of those other banks would have otherwise been made insolvent (as in Europe) 2) The Fed/Treasury lacked appropriate tools to deal with such insolvency (as does the ECB) and 3) Because paying off wealthy and influential bankers at the expense of the public was a lot easier than getting Congress to give them those tools (as in Europe).

The decision to guarantee BoI and AIB was unavoidable and the decision to guarantee Anglo-Irish was nothing to do with the ECB.

Why do you say this? The consensus view seems to be that the decision was both avoidable and terrible: that it was a terrible decision made by corrupt/incompetent Fianna Fail leaders. A lot of people (like the IMF) also say that, after making the foolish guarantee, Ireland should have retracted it, and still should. But they were reportedly heavily pressured–arguably extorted–to maintain the guarantee by the ECB, with backup from Geithner et al. Fianna Fail was apparently quite eager to agree to this, but it still sucks.

——————————————-

I think the comparison to Arizona (or Nevada, parts of California, or Texas in the S&L crisis) is instructive. The subprime crisis hit Arizona very heavily, and as William Timberman points out, the Arizona government has been behaving very badly. But among all of the crimes he attributes to the Arizona Republican Party, it is notable that none of them actually have much to do with the housing boom. The housing bubble was fueled by large financial institutions based in the U.S. and Europe, and regulated by federal institutions. The overbuilding and speculating was done by private companies and citizens. Various local governments acted overly boosterish in the boom areas, but that’s typical, and it didn’t make a big difference. The state governments really didn’t do anything notable to cause those crises, nor did they neglect their regulatory duties (seen as mostly resting with the feds) more than their counterparts in unafflicted states. As tempting as it is to blame Arizona’s vile politicians for their state’s current woes, it’s not really true. It was a national problem, and the states that got hit hardest were just those that were growing quickly. And since put the responsibility for dealing with it entirely on federal shoulders, the financial fallout has been pretty much dealt with by now.

The Irish government seems to be more responsible for their bubble than the U.S. states, but it is fundamentally an EU-wide issue. Spain, Latvia, and other nations had major housing bubbles which burst at the same time. And like Ireland, international lending and investment played a big part. As in the U.S., it seems that the key factor in whether a country suffered a major housing boom and then a crash was not how prudent its government was. It was simply how fast its economy was growing, and how much foreign capital was clamoring to get in on the action. The concentration of capital in the boom areas is a borderless, private sector phenomenon, and if there’s a public entity who could have restrained the problem, it seems like it’s the ECB.

Really I think it comes down to the fact that if you want an international/EU-wide finance system, you need to handle it entirely at the EU level. Here in the U.S., that means the Fed, the FDIC, Treasury, etc. The notion that every individual country, even a tiny one like Iceland, should be trusted to and expected to regulate whatever international banks happen to be based there, and bear the burden of bailing them out, is insane and reckless. With so many member states, it is all but inevitable that one of them will fail to regulate. And the one country that fails to regulate will attract all the banking activity, whose losses it cannot possibly cover. For all the blame-trading over corrupt Irish developers, this happened even more spectacularly in Iceland. Take a nation stereotypically full of honest, responsible Nordics. Looking good. Oh, and they also have a few crazy bankers, and the tempting opportunity to gobble up profits from banking all across Europe if the regulators just take a nap. Hmm.

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IM 05.14.11 at 11:14 pm

>Really I think it comes down to the fact that if you want an international/EU-wide finance system, you need to handle it entirely at the EU level. >

Yes. But wasn’t and isn’t the system in place. The ECB ist not the Fed. Financial regulation is a national matter. And that failed in Ireland. By the way the bankrupt banks are nor evil foreign banks – except Depfa – but the “Irish” banks of the Irish banking sector. And regulation is a national matter because states like Ireland blocked a union-wide regulator.

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Shay Begorrah 05.14.11 at 11:40 pm

im@75

By the way the bankrupt banks are nor evil foreign banks – except Depfa – but the “Irish” banks of the Irish banking sector. And regulation is a national matter because states like Ireland blocked a union-wide regulator.

The banks are indeed all domestic and almost no one in Ireland is unsophisticated enough to think otherwise. However, a sane resolution process for these insolvent banks (which might well have entailed depositors loosing money, and so be it) was not possible because protecting the European banking system from any significant losses was an ECB priority and a German/French political requirement. This reluctance to expose investors to losses (Euro capitalism is risk free, always has been, always will be!) is substantially motivated by the fear that the mere process of accounting for the losses would entail an examination of the wider EU financial system that it could not survive in its current configuration.

As for Ireland fighting against a trans-EU banking regulation authority (which I never knew was seriously mooted), was Irish opposition a significant factor? (I really do not know, but it seem a little unlikely given our limited clout)

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IM 05.14.11 at 11:55 pm

A sane resolution process was not possible because Ireland didn’t have the laws in place – like other countries – and the Irish government decided in autumn 2008 to guarantee everything. Back then nobody asked the ECB for their opinion. The government would have been forced to admit that the banks were bankrupt. And insurance of the deposits alone would have been quite expensive. And some of the bond-holders are of course in Ireland. Now perhaps, as rumoured, the ECB did demand this or that in late 2010. But that was two years later.

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William Timberman 05.15.11 at 2:29 am

Chaz @ 74

I couldn’t agree more. Your analysis of AZ’s problem is spot on, and the rest of your comment makes eminently good sense as well. Who could have imagined that making two words out of political economy would be morally equivalent to eating the fruit of the Tree of Knowledge? Now that we’re all outside Eden looking in, however, recriminations are to be expected. That doesn’t mean that we should indulge them. With malice toward none, with charity for all…. is likely to be a far more fruitful use of our sympathies.

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Chaz 05.15.11 at 5:38 am

a) Ireland was like Iceland a poster child for neoliberal policies. And now, instead of revising this policies, they vote another neolib party (FG) into office

Yup. That’s what happens when your government and your opposition are both neoliberal. But if that seems awful to you, just think how terrible it is for the Irish! Poor bastards.

b) The crisis did strike Ireland in autumn 2008. At this point the Irish government to issue the idiotic blanket guarantee to the banks. To the consternation of the rest of Europe. The bailout, where the rest of Europe and the ECB indeed pressured Ireland, happened two years later. Most of the socialization of bank losses happened in these two years. Now these two years are somehow vanished from the collective irish memory.

That’s a good point. I tend to forget the amount of time involved. At this point if Ireland drops the bank guarantee, they’re not stiffing the right people. But even so, the situation is not tenable. If Ireland needs to default then the other Europeans should help them do so. Or, if Merkel, Sarkozy, and co. strongly want to avoid an Irish default, then they need to actually bail Ireland out–with grants, not loans.

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john b 05.15.11 at 6:22 am

“That’s what happens when your government and your opposition are both neoliberal.”

Ireland has STV. The Irish people could have voted for Sinn Fein and/or Labour, but chose to vote for FG instead. They’re responsible.

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Chaz 05.15.11 at 7:56 am

Is the Irish Labour party not neoliberal? I thought that they were, along with both major parties in the U.S. and all three in the UK. I’m not really an expert on Ireland though. Just to be fair we should note that most neoliberals to not consider tax evasion and property bubbles to be key tenets of their ideology.

In any case, saying what the Irish people could or could not have done is a mug’s game. The Irish people could have formed a new party that was socialist, social democratic, libertarian, revanchist, or whatever you like, and they all could have voted for it. The fact is that the existing political structures and the prevailing political views among the public were geared towards neoliberalism, so that’s what they got. These things do not turn on a dime.

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Chris Bertram 05.15.11 at 1:19 pm

_The Irish people could have voted for Sinn Fein and/or Labour, but chose to vote for FG instead. They’re responsible._

Not a great fan of collective responsibility myself, especially when I get a whiff of the desire to punish from the person invoking it. In any case, the Irish people is not the same as the Irish electorate and persons too young to vote (or even unborn) are going to be suffering the consequences.

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Protesilaos Stavrou 05.15.11 at 1:37 pm

This situation could in fact lead to the collapse of the European Union, or at least to its fundamental reconstruction.
Apart from the diverging and conflicting interests and agendas between the member-states of the European periphery (PIIGS) and those of the center (Germany, France, Netherlands etc.), the EU also has to deal with its own structural problems that are most apparent in its multidimensional, extremely complex, bureaucracy.
If Greece turns default, it will cause a chain effect, first because its main creditors are Germans and French and second because other countries with similar problems such as Portugal and Ireland will have to endure greater pressures from the markets, potentially leading them to the same fate with Greece. Furthermore if Spain also asks money from the European safety mechanism, then the Euro will not be a viable currency any longer and will be destroyed.
I have written a series of articles on my blog regarding these issues.
In case you are interested here is the link. Thanks.
http://protes-stavrou.blogspot.com/search/label/Economic%20Crisis

What you say here is true. Especially the issue about the sentiment of belongingness to European institutions. No one in Europe feels “European”. National identities are still dominant.

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john b 05.15.11 at 1:49 pm

Not intended that way – just disagreeing with the suggestion that, because Ireland’s two largest parties are neoliberal, therefore Irish voters don’t have a choice other than neoliberal government. It struck me as a rather US-centric way of looking at things (where this actually *is* the case).

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Shay Begorrah 05.15.11 at 2:57 pm

john@83

On neoliberalism in Ireland.

Even from the last election the intellectual influence of the neoliberals in Irish politics was quite diminished – we only ever had one out and proud neoliberal party (the Progressive Democrats, no seriously) and even at the height of Ireland’s enthusiasm for the American model there was never a wave of privatizations or efforts to”reform” our quite generous social welfare system. In contrast good old non-neoliberal Germany eviscerated its social welfare provisions in the early noughties with little fanfare.

I am not sure neoliberal every really captured the state of Irish politics, they were more like low tax Gaullists.

Sadly despite their small numbers the PDs did enormous damage as they were in several coalition governments. They were a collection of odious barely green Thatcherites, the most repellent of which (Michael McDowell) shamelessly stirred up racist tensions in order to curry popularity. The light touch regulation fetish was originally theirs, it gelled nicely with the Irish fetish for property (which has long cultural historical roots). It is also notable that the two main Irish newspapers were (and indeed still are) both compromised by rightism, the editor of our newspaper of record (The Irish Times) was a former Progressive Democrat TD (MP/congressperson) and the other main broadsheet, The Irish Independent, has a ferociously right wing editorial line controlled by a tax absentee media magnate (Tony O’Reilly) with very strong neoliberal tendencies.

With the two quality newspapers intellectually committee to right wing economics and the state broadcaster historically resistant to anything that sounded too left wing there was precious little hope of voices of warning being allowed.

Chris Bertram@82

The urge for punishing the future children of the nation for the sins of omission of the previous governments are rather odd and distasteful. The property boom in Ireland notably suited the elite more than the working class and yet the enthusiastically endorsed punishment will overwhelmingly affect the worse off.

Contrary wise the loss of savings that a bank resolution might have entailed would have seen a more equitable distribution of loss with those who had benefited most from the bubble also suffering the most. Reparations and austerity on the other hand leave the elites untouched, in fact sometimes even more influential thanks to deflation.

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dsquared 05.15.11 at 3:38 pm

If Ireland needs to default then the other Europeans should help them do so. Or, if Merkel, Sarkozy, and co. strongly want to avoid an Irish default, then they need to actually bail Ireland out—with grants, not loans.

No this can’t be right. Ireland doesn’t want to default – the consequences for Ireland would, as I’ve noted above, be horrific as I really can’t imagine how Ireland would reach primary fiscal surplus. And this idea of “grants not loans” is imposing a completely untenable burden on France and Germany – it’s effectively saying that Ireland can spend ten years pursuing a tax-haven strategy, build up a massive financial bubble, and then by threatening to bring down the whole eurozone financial system, get all its debts paid off by France and Germany. If France and Germany were to be underwriting Irish fiscal and bank regulation policy like that, how much control over it would they want, and would Ireland be prepared to give it to them? Ireland doesn’t even want to give up its secrecy-jurisdiction laws and corporation tax rate!

I’d also note that Ireland, even at current levels of GDP, is one of the richest countries in the EU (which in turn is one of the richest economic areas in the world). The Irish elite and political class certainly ripped off the working class (although to be frank, you did not hear very many people complaining about the property boom, other than Fintan O’Toole, at the time), but if we’re going to have countries at all, then I don’t see how you can get away from the fact that it is the country of Ireland and its taxpayers that bears the costs of massive policy mistakes in Ireland. These weren’t “odious” debts – they were run up by elected politicans who didn’t make a secret of what they were doing. It wasn’t the fault of the man in the street in Offaly, but it wasn’t the fault of the French and Germany ordinary taxpayers (who experienced their own lost decade, by the way) either.

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dsquared 05.15.11 at 3:54 pm

Contrary wise the loss of savings that a bank resolution might have entailed would have seen a more equitable distribution of loss with those who had benefited most from the bubble also suffering the most.

see, this is still the silver bullet solution of the bank default.

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Shay Begorrah 05.15.11 at 5:15 pm

dsquared@86

These weren’t “odious” debts – they were run up by elected politicans who didn’t make a secret of what they were doing.

Private debts were guaranteed on a temporary basis, when it became clear that guaranteeing them was not tenable EU pressure prevented an equitable and just solution where those directly involved in speculation had to pay for it when it went wrong. It is not as if there was any way that Irish citizenry could have stopped the bailout, could have expected the government to embark on it and then be bullied into continuing it.

Your argument has roughly the same validity as holding every US citizen equally responsible for the invasion of Iraq (and perhaps having 300,000 of them shot). Someone has to pay after all, and the US is a democracy.

The end effect is collective punishment for the masses while the markets not only go unpunished but are handsomely rewarded.

see, this is still the silver bullet solution of the bank default.

A brilliant refutation of an argument no one has made. Bravo.

You want every echelon of Irish society to pay for not being savvy capitalists when those who will suffer the most from your fetish for punishment are the ones who benefited least from the bubble. Meanwhile the capital markets are reminded again that when they misallocate resources on a colossal scale there will always be a government who refuses to let them take their losses.

It was always thus with the capitalist.

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dsquared 05.15.11 at 6:23 pm

I’m really no longer interested in arguing with someone who constantly accuses me of bad faith or racism, so I will conclude this part of the debate with a hearty “Go And Fuck Yourself, Idiot”. Perhaps Kevin, Walt, IM, Chaz or someone else would like to make the case that declaring the banking system bankrupt would have been the right policy for Ireland, and we can continue?

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Shay Begorrah 05.15.11 at 6:46 pm

dsquared@88

I have often been tempted to call people I disagree with idiots but then I think – What if they are and I still lose the argument?

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dsquared 05.15.11 at 7:07 pm

I am, as indicated, perfectly happy to continue the argument, but not with you.

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Walt 05.15.11 at 8:02 pm

I’ll volunteer, since the alternative is arguing about Obama’s birth certificate, but wouldn’t a bankruptcy with the Irish government only guaranteeing certain debts have worked out better? This would simultaneously mean the Irish taxpayer was on the hook for a lot less, and it would minimize the moral hazard that will lead to the next crisis.

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Kevin Donoghue 05.15.11 at 8:06 pm

Perhaps Kevin, Walt, IM, Chaz or someone else would like to make the case that declaring the banking system bankrupt would have been the right policy for Ireland, and we can continue?

I’m at a disadvantage for two reasons: I’m going out for a beer and I don’t altogether disagree with you. However I think it was possible to rescue enough of the banking system to meet Ireland’s needs without incurring anything like the liabilities we did. If Brian Lenihan had been wiser and better advised, he could have liquidated Anglo and put AIB into some sort of administration which enabled it to do its day-to-day business without any committment to existing creditors. Of course new deposits would have had to be guaranteed but there’s no reason I can see why bondholders shouldn’t have been left to sweat it out. If I wanted to put numbers on this I would just plagiarise Karl Whelan’s posts at the Irish Economy blog. If you think he’s wrong about anything important, I’d suggest that’s worth a blog-post rather than a comment.

Now I’m off to the pub. Good night.

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dsquared 05.15.11 at 8:37 pm

Right OK lads. The thing is; Ireland does need the ATMs to work and the pension cheques to clear (which, let’s be clear, is what we are talking about here). If AIB and BoI had been let go, then Ireland would be in the position of trying to live without a banking system. Iceland did this by printing a lot of money to recapitalise Nyi Landsbanki et al, but Ireland wouldn’t even have been able to do this. Under Irish corporate law as it currently stands, there is no such thing as a sort of administration that would allow AIB to carry out day t day business without paying existing creditors. It might be possible to change the law at some point in the future, but in order to get from here to there, you need to find some way of financing the bank run in the interim.

Morgan Kelly’s view makes no sense to me, as he is explicitly saying that Ireland ought to move to primary surplus, something that AFAICS just simply can’t be done. But, that is what you would have had to do if you’d gone down the no-bailout route in November last year. The banks would have been unable to fund from anyone in Euro (not least because of the overhanging legal risk – saying that new deposits were senior to old ones doesn’t necessarily make it so), and nor would the government. Things would have been much worse than they actually are, and the degree of austerity would be much greater.

I think the two counterfactuals people are trying to consider are 1) the bondholder liabilities of AIB and BoI just somehow magically go away, but Ireland is still able to operate a normal banking system, and 2) France and Germany decide that an appropriate response is to give Ireland a present of EUR87bn, no strings attached. I don’t think either of them are realistic.

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Walt 05.15.11 at 8:54 pm

Maybe I’ve lived in the US for too long, but the actual law seems like a weak constraint on governments in emergencies. (Anyway, couldn’t the Irish parliament pushed through the necessary law in under a day?)

Would the IMF’s haircut plan have been impossible under Irish law?

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dsquared 05.15.11 at 9:12 pm

It would have been amazingly difficult and probably counterproductive, and it could only possibly have succeeded if the ECB was prepared to take basically all of the short term debt of the Irish banking system onto its own balance sheet; the problem here is that there’s basically no way of discriminating in bankruptcy between bondholders and the short term creditors who make the system work (and who make it possible to continue to clear cheques, stack ATMs, extend overdrafts etc)

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P O'Neill 05.15.11 at 9:27 pm

The counterfactual should be —

Dump Anglo and Irish Nationwide to their secured bondholders. The depositors (which contain a significant yield/demutualisation chasing bunch anyway) get mostly covered by deposit insurance and above that, they get Parexed (partial deposit freeze). The saves about 35 billion euro, and the sovereign is a lot better position to ringfence the other problems. But I also want the luxury of no NAMA in the counterfactual, in its own way as disastrous a decision as the original guarantee, since it put all the worst assets on the fiscal balance sheet.

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dsquared 05.15.11 at 9:37 pm

Hmm, haven’t you just crystallised a massive deposit insurance liability with that plan, Minister? I thought the November suggestion was specifically to shaft the bondholdets but leave the depositors intact – I think your plan might work for Anglo but by adding Nationwide depositors that is really going to raise issues of political feasibility.

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Shay Begorrah 05.15.11 at 9:38 pm

walt@94

Maybe I’ve lived in the US for too long, but the actual law seems like a weak constraint on governments in emergencies.

Indeed, the legal aspect has been wildly overstated as a barrier to bank resolution, the state had no legal obligation to backstop bank losses indefinitely and could have allowed the guarantee to lapse on a number of occasions, or instead chosen to narrow its terms (the Danes did this). What happened instead was the interests of the Irish sovereign and the European financial system parted ways and guess who won?

A clue: Money (more precisely, the hard euro).

On the IrishEconomy.ie blog, where these things have been debated in great detail for many months, my best description of course of the logic of the bailout was as follows:

The banking bailout and the gradual slide to bankrupting the state to help keep the current European financial system whole started its journey as pragmatic and restorative, moved through necessary and purgative, passed unfair but unavoidable to reach its final destination – suicidal but dignified.

There were then, as now, horror stories about the ATMs being out of action for weeks, (followed inevitably by the total collapse of society and cannibalism) if we attempted a commando style bank resolution process and it ground on. In retrospect it seems like it would have been a better way out, morally and fiscally.

As a not at all amusing postscript, after the bail out, the state is now literally and figuratively invested in re-inflating the property bubble as it owns so much of it, either directly through NAMA or implicitly because of the new orthodoxy that the government has to continuously make up bank losses on over valued property loans.

Make no mistake, the bailout is about preserving rescuing European financial capitalism from itself without hurting the value of the Euro or assets, but it is being done in the interests of widows and orphans.

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dsquared 05.15.11 at 9:39 pm

And also if you are having no NAMA in your counterfactual, you haven’t got the two large capital increases carried out since 2008; also you’re even more dependent on the ECB to fund the Irish banking system which raises its own set of problems.

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Alex 05.15.11 at 10:10 pm

D^2, I recall you being terribly superior about anyone who thought the US Senate supermajority was a real constraint on passing the US healthcare law. There was no law; there was only power. If Obama really wanted, he could just crush these arrogant scorpions. Suddenly, in a far worse fix, it’s impossible to push through a short bill in a legislature that had a stable working majority and no such bollocks?

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P O'Neill 05.15.11 at 10:14 pm

Yes d^2 it’s not a great plan but I think it gets better separation of the sovereign and the banks that Ireland actually had. The complaint about NAMA is that the whole idea of pain upfront through offloading the bad assets just didn’t work. It sounded good at the time — tut-tutting about German internal bad banks while Ireland was going to value everything instantaneously. But instead NAMA became the Irish property market, freezing everything and removing the price signals needed to value the stuff. So accountants working with NPV formulae and not a hint of actual recent transaction data to go on. And then once the valuations came in at rock bottom — inevitable with pricing for an illiquid and dead market — the state was on the hook for the recaps to cover the losses.

Also in the back in my mind is that the Latvia comparison — which Paul Krugman in particular has rubbished as an alternative model — may not be so bad for Ireland. Given the future of debt overhang that the country now seems to have.

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dsquared 05.15.11 at 11:16 pm

Suddenly, in a far worse fix, it’s impossible to push through a short bill in a legislature that had a stable working majority and no such bollocks?

The thing is, what would that short bill actually say? It has to say something like “Irish bankruptcy law is now rewritten, retrospectively, so as to subordinate certain classes of bondholder in bankruptcy and allow selective default on instruments that were previously pari passu with deposits. Furthermore, we are 100% sure that this is both constitutional in Ireland and compatible with all relevant European law”. That’s quite some draftsmanship.

And then once you’ve passed it, what now little man? The Irish Parliament isn’t actually allowed to pass “A Bill To Compel Foreign Private Sector Creditors To Finance AIB”, so it comes right back up against the initial reason for guaranteeing the banks in the first place – solo, they were experiencing a bank run, and if they weren’t able to roll over their short term credit, then they wouldn’t have enough money to pay their depositors (I am at a loss to understand why people think that this possibility is some sort of science fiction outcome that clearly couldn’t happen). You would have had less government debt, but about the same ratio to GDP, because things in the real economy would have been incalculably worse than they actually are.

The basic problem here is that in the absence of a local central bank which is the local monetary authority, the “make the bondholders share the pain” slogan only works if you have someone prepared to either lend or give you more or less unlimited short-term working credit in euro. Since a massive writedown of that sort could quite easily have knocked over the entire euroland money market (unlike Greece, Ireland is substantially larger than Lehman Brothers), it could never have been a realistic possibility, which is why the IMF (who apparently hadn’t learned the lesson of September 2008) were so firmly knocked back when they suggested it.

Iceland could and did pass such a bill, because they were then able to recapitalise the banks with newly printed kronor. Ireland couldn’t, unless it was prepared to go the full Argentina, leave the euro and introduce capital controls.

Minor factual btw: my actual point of view with respect to the Senate and healthcare was that if the Democrats couldn’t pass a main manifesto commitment when they had a 60-vote supermajority, then there was no point to them as a party. I ended up assuming that the consequent was true, not that the antecedent was false.

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dsquared 05.15.11 at 11:17 pm

The complaint about NAMA is that the whole idea of pain upfront through offloading the bad assets just didn’t work

I very much agree with this; the Spanish approach of gradually sorting things out offstage and presenting fully worked-out plans when they were properly baked was massively superior.

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dsquared 05.15.11 at 11:21 pm

By the way, Walt has lived in the US too long; the purchase & assumption powers of the FDIC have been written into US banking law for the last 70 years, which is why the US authorities can move fast when they have to. The UK, Germany and Denmark passed similar powers for themselves recently, in non-crisis situations. In Ireland, on the other hand, people only noticed that this might be a useful thing to have when it was too late.

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dsquared 05.15.11 at 11:28 pm

Before going to bed, I’ll note perhaps that what some people are missing is that the Irish banking system needed to roll over between EUR50bn and EUR200bn of wholesale and interbank credit more or less every week in 2010 – ie, that amount fell due and needed to be borrowed again (this is the normal state of affairs in a banking system that has outgrown its core deposit base to a tragicomic extent). This is what makes it IMO unrealistic to assume that any great wheezes with the bondholders could have made things materially better for Ireland – the bonds were the tip of the iceberg and the banking system couldn’t have functioned without rolling over the short term credit.

Of course, in principle, the ECB could have taken the entire financing roll of the Irish banking system onto its own balance sheet, but it was unwilling to do so if this meant underwriting a Lehman-style meltdown of the whole Euro zone.

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Shay Begorrah 05.16.11 at 1:11 am

I wish I could go to bed but this can not be let go, its an issue that cuts right to the heart of what the obligations of government are and how much power capital has been gifted in the EU.

The Irish banks were in a untenable situation, not just illiquid but insolvent, but that problem was spread among everyone with a financial interest in them, every kind of bondholder, every type of creditor and every depositor. How those loses were apportioned was a technical detail, but as always, when you owe someone a billion, they are in trouble, not you. Deals could have, and would have, been struck with the state doing the very minimum necessary to protect depositors to a reasonable level. Old banks would have been would down and new ones created (despite dsquared’s opinion that the Irish are unsuited to drafting complex legislation.).

The division between the sides of the argument on restructuring therefore remains as it was before. The pro bailout camp claims that the necessary cleansing and apportioning of losses in the European financial system that bank resolution would entail would be an appalling vista and that its current configuration must be protected*, with the supporters of bank resolution and restructuring saying that not only would it would it be just but that the longer accounting for the losses is put off the more money will be transferred from the citizen and the state to private investors and the greater the economic loss.

Choose your sides and enter the fight.

* Remember, when investors lose money it is the better off widows and orphans who get hurt, and we like them.

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dsquared 05.16.11 at 6:31 am

despite dsquared’s opinion that the Irish are unsuited to drafting complex legislation

Dickhead.

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dsquared 05.16.11 at 6:48 am

Recapitalising the losses of the Irish banks on a going-concern basis costs around EUR40bn (of which quite a significant proportion has actually been provided by private capital markets), while declaring them bankrupt could easily have made this a problem stretching into the hundreds of billions as short term obligations became due while loans couldn’t be liquidated; banks tend to lose a lot of value very quickly when a bankruptcy lawyer shows up . Unlike some of their stupider citizens, the Irish government realised that Bank of Ireland and AIB were genuinely “too big to fail” compared to the size of the Irish economy, and that since the Central Bank of Ireland can’t print money, there was no possibility of replacing them with brand-new institutions on the Nyi Landsbanki model.

Furthermore, it needs to be remembered that Ireland is currently in primary deficit. The debt associated with the bank bailout is not affecting the degree of austerity, because the depth of the austerity plan is simply what has been agreed by Ireland and its international bankers – if you owe someone a billion, and you need to borrow 2 billion more, then you don’t get to make that joke. At some point in the future, it will probably be agreed among all concerned that some writedown of the debt (possibly including some alteration of the guarantee or restructuring of BoI and AIB) will be carried out. But it will be done so on a sensible legal basis (which will take time to work out), as part of the general European post-2013 approach to sovereign debt workouts, and in a context which allows the money market to keep functioning. Simply trying to slap down a default, completely unannounced, in October 2010 was about the stupidest and most counterproductive way possible to try to obtain debt relief, and the suggestion that the Irish government was using this as some sort of threat against the rest of Europe is something I’d consider absurd and libellous if it was made about anyone other than the neoliberal chancers who formed the government of the time.

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Kevin Donoghue 05.16.11 at 8:58 am

dsquared: Unlike some of their stupider citizens, the Irish government realised that Bank of Ireland and AIB were genuinely “too big to fail” compared to the size of the Irish economy ….

Whereas someone who is not an Irish citizen and most definitely not stupid believes that, given the small size of the Irish economy, they were simply too big to save.

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Daniel 05.16.11 at 9:46 am

Krugman also thought that about quite a few American banks though and he wasn’t right.

The thing is, as I say, these banks probably do need to be restructured, taken apart and put back together again and potentially (depending on outcomes for the Irish economy) that might involve writing down their debts. But this is going to have to be a drawn-out process, revised as more information comes in, carried out with as little damage as possible to Ireland’s reputation, and with the co-operation of the EU partners. Unilateralism could be very damaging indeed unless and until Ireland is capable of establishing primary surplus, or unless it makes the decision to actually leave the euro.

And for the mean time, the anti-EU sentiment is really very unedifying. Taking the Irish Independent point of view, the negotiating position appears to be:

1) France and Germany should have given Ireland a no-strings grant of EUR87bn; certainly making lending conditional on any requirements of Ireland is tantamount to fascism.
2) There is something sneaky and underhand about wanting to prevent a Euroland banking crisis; the only thing that the ECB should be considering is the interests of Ireland
3) Global investors and financial capital are the villains here, which is why they must be offered a 10% tax rate to keep attracting them
4) Ireland doesn’t really need a banking system of its own, it’s not like it was ever a financial centre or anything. Shutting down the banks would be “equitable and tenable”, and depositors would be made whole from the “insurance fund”, which is a completely different thing from the government.
5) Remember all the problems were the fault of the French and Germans in the first place, for forcing all those loans down the throats of the Irish property market.
6) And 94% debt/GDP (the level of this ratio in 1993) is an unbearable burden, and 6.7% an outrageous interest rate. Ireland cannot sustain 6% debt service costs. Any and all payments made on EFSF loans come directly from the mouths of widows and orphans – see 3) above, it is literally impossible to raise corporation tax.

Can you see how the rest of Europe might not find this particularly constructive? The Irish government can, which is why it doesn’t make these arguments.

The bottom line here is that the debt service issue is a technical one, not a moral one, even though there are distinctly moral aspects to the way in which the debt bubble was built up. The question of what Ireland does and doesn’t need to do in terms of paying and servicing its debts has to be decided purely on the grounds of what leads to the best outcomes. When on the one hand you have a party (the EFSF, France and Germany) which is prepared to lend you large amounts at below-market rates, conditional on your co-operation, and on the other hand you have no way of printing currency, the idea of unilaterally repudiating guaranteed bank liabilities is a pipe dream. If someone wants to make a moral case for a much (even) more generous bailout, then go ahead, but it’s really quite difficult to argue that there is something intrinsically nefarious in those two countries trying to protect their own financial systems from the fallout of Ireland’s property bubble.

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Shay Begorrah 05.16.11 at 10:07 am

Its dsquared@108 time!

Recapitalising the losses of the Irish banks on a going-concern basis costs around EUR40bn

It is estimated that the total costs of the banking crisis could rise to 75 billion euro, which of course you know. When you consider how Ireland was bounced into a one hundred and twenty billion bailout complete with painful interest rates to deal with the banking crisis (or rather papering over it) it is fair to say that your 40 billion cost is way, way, under the cost incurred by the state for the pleasure of making the European financial system whole.

If Ireland is forced into sovereign default by attempting to rescue the banks from the practice of banking all these costs will seem rather inconsequential.

banks tend to lose a lot of value very quickly when a bankruptcy lawyer shows up .

Profound thinking, unless you are one of the people who are not that concerned about the losses private investors end up taking, or the money they waste on bankruptcy lawyers. As for the time it takes to liquidate loans, it might concentrate investors minds on how exactly they could realistically minimize their losses (hint: restructuring).

Unlike some of their stupider citizens,

Style guide – use “more stupid” in future.

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Chaz 05.16.11 at 10:09 am

I’m not going to try to address all the issues ds raised about bank restructuring, as I am feeling out of my depth. I guess my ideal scenario is pretty straightforward:

1. Ireland passes whatever law it needs to to seize and restructure the banks.
2. Ireland guarantees (possibly domestic-only) depositors up to some level, and future depositors entirely, and freezes everyone else as they proceed with restructuring.
3. The banks seek to raise new capital, which should not be impossible because the new creditors will come ahead of all the frozen folks and there are presumably some real assets in Ireland. Maybe they even give a state guarantee on this.
4. The Irish banks’ foreign creditors/partners get hit by this as well. Their own governments step in to help them as above or leave them to handle things privately. Ireland is not involved in this.
5. And here’s the key: To the extent that the private sector is not willing or able to finance the bank restructuring and the government deficit, the ECB steps in to fill the gap. The ECB does this because they are helpful people and they do not want the Irish economy to collapse. If they are so not feeling virtuous, the ECB does this to prevent an Irish collapse from spreading to the Continent. I sort of understand that the ECB is unwilling, and maybe unable, to do this, but it is frankly hard to grasp. The Fed would do this stuff without a second thought.

That ideally starts in 2008, but better late then never. It ignores everything that happened before the crisis; it does not assign blame at all. It ignores disputes about tax sheltering and other matters; I wouldn’t object if the Continentals decided to force that in, but it’s really a separate issue. It gives Ireland the funds it needs to avoid austerity and maintain economic growth. It rests on ECB and the member states acting with compassion, solidarity, and cooperation.

I imagine that in reality, if Ireland actually went down this path step five would break down: the ECB fully financing an expansionary fiscal policy would be changed to full financing of extreme Irish austerity. But that happened anyway, and it’s not a law of nature, but rather a conscious decision by the ECB and the other member states. And I bet there are some stupid, little-known EU rules getting in the way at various points, but I think it would be seriously worth considering just flouting those rules. That stuff can be argued over later, if anyone even wants to bring it up.

And in the future, if the euro members are not willing to adopt centralized financial regulation, then they need to drop the euro and drop the financial system treaties, and go back to pure local responsibility.

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ejh 05.16.11 at 10:17 am

If people are going to say “the Irish people have to take responsibility for the acts of their government” then that’s fair enough up to a point, but only up to a point and only if there’s some perspective to it.

It is, for instance, more reasonable if the disaster was the cause of something people specifically voted for, rather than because of some deal that the government did ewith their mates, to benefit aforesaid mates.

It is more reasonable if the economic problems caused by the disaster are in some way manageable and limited. Which they’re not if they lead to either the emigration of most of the country’s educated young people over a period of many many years, or if they put the country into a state of of debt servitude that carries on for a similar period.

It is more reasonable if the costs of the disaster are borne proportionately by those who can afford it (or for that matter, those who did most to bring it about) rather than those who will find great difficulty in doing so. But that’s not going to be the case.

It is more reasonable if there is, in fact, some end to this process that can actually be pointed to – “under current projections, repayment will take x years” – which doesn’t seem to me to be the case.

It is more reasonable if the dislocation caused by the disaster isn’t such that it brings about a social and political dislocation of such magnitude as to threaten the whole social order. There are deep and desperate political consequences of economic disintegration (see for instance William’s very fine posting at #48, or thing, as I find myself doing a lot these days, of the collapse of Yugoslavia) and to my mind, IMF-style fuck-you measures make this sort of thing much more likely.

In business, debts do get written off and I am not sure why, in economics, they cannot be repudiated, if the consequences of this not happening be serious enough. I think the scale of what Irish people -especially those with little spare money – are being asked to accept is too great, much too great, for the priority of that country to be paying off somebody else’s debt and hence blighting the lives of its own citizens. Or waiting until the great transnational financial institutions find that the destruction being wreaked is great enough for them to notice (as the IMF did not, the other day, in re: Greece ).

Or, if you like: “suck it up, as much and as long as it takes” is not a proper social or economic policy. Nor is it the sort of thing we should say to other people, when we are not called upon to do it ourselves.

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Daniel 05.16.11 at 10:39 am

Chaz: the trouble is:

1. As soon as you start doing this, short term financing seizes up for the Irish banks because the interbank market doesn’t want to be a creditor at step 2. At this point, somebody has to meet the financing roll; unless you can persuade the ECB to do this, it has to be the Irish government.

2. “Domestic depositors only” not consistent with the treaty of Rome, and you have now definitely annihilated the short term interbank credit.

3. It might, might be possible (you would probably need to create an entirely new institution and indemnify its shareholders against legal claims on the predecessor). There are plenty of real assets in Ireland (it’s an OECD country! and quite a rich one!), but establishing a valid and unassailable legal title to them for your recapitalised bank would be quite difficult; unless your legislation in 1) was really perfectly drafted there would be a substantial common law claim because Irish corporate law really was not previously drawn up so as to facilitate this kind of phoenix restructuring. Even if all this is done perfectly, it could take months to execute. At this stage, a “sovereign guarantee” from the Irish state is unlikely to help very much.

4. What you are describing here is a Europe-wide (more likely, global) financial crisis, potentially much more disastrous than September 2008 was. As I keep saying, there is nothing particularly nefarious about the fact that the ECB, Sarkozy, Merkel et al would rather Ireland not do this.

5. The issue here is that the treaty establishing the ECB really does not give it this role. The ECB’s legal powers are pushed to the limit going as far as it has done. Since the money you are pumping into the Irish banking system is basically lost for the ECB, it needs somebody’s fiscal authority to indemnify it against the loss – this is how the Fed and Bank of England do it.

Because the ECB isn’t quite set up technically in the same way as other central banks, Euroland recently created a special fiscal fund to do the kind of job you’re talking about. The EFSF is the mechanism set up to express the European solidarity that you’re talking about, and it’s lent EUR87bn to Ireland. That came on terms and with conditions, but it has to be so, doesn’t it – the Fed doesn’t have the problem of lending to sovereign countries that can do what they like with the money, and Ireland currently isn’t even volunteering to stop raiding the French and German corporation tax base.

The bottom line here is that Ireland is much better off *not* causing a European and domestic financial meltdown than causing one, because it still needs someone to lend it the primary deficit. It would be better off still if it got a no-strings gift of that money, but I don’t see how that counterfactual can be a basis for policy.

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Daniel 05.16.11 at 11:14 am

With respect to #113, the issue here is that the Irish commentators are saying that the programs are being structured “so as to protect the French and German banks”. Which I don’t actually agree with, but let’s say they’re right. What does this mean? It means that France and Germany have offered Ireland a deal which is better than not getting help at all (or else why offer it?), but under which Ireland has to forgo some course of action that would damage France and Germany’s banking system.

What’s so evil about this? Why should France and Germany (which both still have significantly lower GDP/capita than Ireland) import a banking crisis?

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Shay Begorrah 05.16.11 at 12:02 pm

daniel@114

The bottom line here is that Ireland is much better off not causing a European and domestic financial meltdown than causing one, because it still needs someone to lend it the primary deficit. It would be better off still if it got a no-strings gift of that money, but I don’t see how that counterfactual can be a basis for policy.

Ireland would not have been forced into an IMF/ECB bailout without having taken on the bank bailout. There is a headache inducing circularity to the argument that we could not have let the banks suffer the consequences of free movement of capital because doing so would have prevented us from borrowing the money to save the banks from the consequences of free movement of capital.

Before Ireland’s Kamikaze bank dive for the Eurozone it did have a very large primary deficit but not so large than any IMF or ECB help would have been required, Ireland went from a bad but manageable 114% to a a bloody awful 132% in 2010 thanks to the second last round of bank recapitalization.

S0 the counter-factual, for Ireland, is what would have happened if we decoupled the banks from the state, not how good things would be if we got an 87 billion gift for the banks.

The logic, for Ireland at least, of forcing all the banks involved to acknowledge and restructure the debts seems difficult to argue.

However, and this returns at last to the original subject of this posting, the real arguments were political ones, Merkelism and the CDU would have taken a hit, Sarkozy would have had to look for another diminutive enemy and the Euro project would look in serious need of re-engineering (and devaluation), none of these seem like pressing moral issues so why exactly is Ireland the bad capitalist economy?

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Alex 05.16.11 at 12:20 pm

D^2, the reason why you are unpopular in this thread is that you’re the guy saying “well, it’s absolutely necessary that you shovel a load of your money into this black hole over here, or there will be a massive financial crisis that – trust me, I’m a stockbroker – is much worse than the one that led to this situation and – trust me, I’m a stockbroker – is much worse than the consequences of throwing all your money into the black hole, and – trust me, I’m a stockbroker – it’s all your fault anyway.”

You were very much more willing to reject the argument that the money must go into the black hole, or “I know not what but that they shall be the terrors of the earth”, when it came from Hank Paulson and was called TARP. Back then ISTR you rather thought it was an outrageous and ruinous bailout of a both bankrupt and morally bankrupt banking sector.

Now, it’s quite possible that there is no other way around this, and I’m not personally very convinced by the argument that we mustn’t have a bailout because it might lead to mixed dancing somebody might get some money and instead we can…have a bigger recession? But you should at least be aware that it is not the best argument ever and it is not one that anyone will like and that it is everyone’s right to demand bigger pies and shorter hours. Because you made these points yourself.

Further, do you not think that you’ve BACAI quite a lot as a matter of tone and style?

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Shay Begorrah 05.16.11 at 12:48 pm

Alex@118

Does dsquared really work in the financial sector? That would explain some things.

In the Irish blogs discussing these same issues, there seems to quite a sharp division of opinion between those who work in banking and those who do not about the necessity and desirability of a bail out and the general requirement to coddle financial capitalism.

To me it seems as if a philosophical commitment to the intrinsic rightness and necessity of the current configuration of the EU financial system (and extensive knowledge of the particulars of the complex credit flows so vital to modern civilization) are more prominent in these peoples calculations about the appropriate solutions than any idea of the common good, or whether we need a radically different financial system.

The same financial institutionalization (see what I did there?) is also widespread in the various establishment figures, in both Ireland and the EU, who are in charge of finding a solution. Policy by the banks, for the banks.

This obviously does not reflect well on the executive institutions of the EU, it is at least part of the reason for the alienation from them that is now so widespread.

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Daniel 05.16.11 at 12:51 pm

You were very much more willing to reject the argument that the money must go into the black hole, or “I know not what but that they shall be the terrors of the earth”, when it came from Hank Paulson and was called TARP. Back then ISTR you rather thought it was an outrageous and ruinous bailout of a both bankrupt and morally bankrupt banking sector.

YDRC.

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Daniel 05.16.11 at 1:30 pm

And can we get a bit reality based here?

1. We did in fact try the idea of “let’s not bail out the bankers, it’s all their fault anyway and it probably won’t cause too much of a problem”, in September 2008 with Lehman Brothers. The results were disastrous, weren’t they? So why would they be any less disastrous if Bank of Ireland and AIB had both simultaneously been declared bankrupt last year? What would the consequences have been for Portugal and Spain?

2. I was unpopular in the Icesave thread too but I was right then too. In the case of Ireland, the actual government has been reasonably sensible (apart from the 10% corporation tax policy) and has negotiated in good faith with its European partners. All of the xenophobia, self-pity and unrealism has come from the Irish Independent and its epigones, and they are explicitly advocating a beggar-my-neighbour policy which would have made the crisis worse. People might not realise this (I can only hope they don’t understand the consequences of what they are saying), but all this talk about “an equitable and tenable solution” and “solidarity” on the part of France and Germany is actually describing a policy under which Ireland would have made a fairly crude threat to create a crisis unless it was given more generous terms. A crisis, by the way, which France and Germany would have survived, but Portugal and Greece might not.

3. 94% is not an unbearable ratio of debt to GDP (it is what Ireland actually had in 1993, at higher interest rates; even the 125% of the current 2013 projection is actually where it was in the 1980s) and 6.7% is not an absurdly high interest rate. As figure 2 of the Finance Ministry’s latest report on the stability program shows, Ireland in 2015 will be spending a substantially lower proportion of its tax revenue on debt service than it was in any year before 1992. The problem in Ireland is private sector debt, not public. This sort of propaganda is actually quite harmful, as it encourages young Irish workers (who by and large don’t have the mortgage debts that are the real problem) to believe that the Irish economy hasn’t got a viable future, which is a clear danger of self-fulfilling.

4. Even if you want a radically different financial system, it does not follow that the best way to achieve it is to swiftly destroy the one that we currently have. This also seems rather obvious to me.

Further, do you not think that you’ve BACAI quite a lot as a matter of tone and style?

Not really, no, although things were bound to go downhill after the first accusation of racism. On that general subject, however, you must be aware that I am not ashamed of the job I do, and your apparent low regard for the honesty and quality of my advice has not been so great as to prevent you from asking for it on a number of occasions. FFS.

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Alex 05.16.11 at 2:33 pm

On that general subject, however, you must be aware that I am not ashamed of the job I do, and your apparent low regard for the honesty and quality of my advice has not been so great as to prevent you from asking for it on a number of occasions.

I have no “low regard” for the honesty and quality of your advice – it’s just that quite a lot of people (apparently in the low millions), several of whom are conveniently available upthread, seem to feel that they are being bullied and pushed around by people who claim authority on the basis of financial expertise. This is simply a matter of observation. My advice is that it might help your argument to try to avoid this.

Further, I think you were kicking up chalk-dust about here:

the basic way in which the EU institutions manage their relationship with Ireland is going to be summarised by the doctrine of “it puts the lotion on its skin or it gets the hose again”

I mean, it’s hardly a new idea that Irishmen might be a bit hacked off about getting this sort of stuff from the Brits.

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Shay Begorrah 05.16.11 at 3:14 pm

A person could get confused, what with the explanation for the necessity of the Irish bank bailout moving from the simple pleasures of watching Ireland get the hose or the cream, Ireland’s special culpability in the GFC, our status as Europes most evil tax haven, our MOPEry (very Slugger O’Toole), the shocking injustice of French and German investors losing money in a common financial market, the potential collapse of the otherwise totally fine European banking system and, now, finally – poor old Portugal and Spain, who have always been in our hearts.

What cads we were.

and 6.7% is not an absurdly high interest rate.

How about we just say it is an intentionally punitive interest rate for the largest, least willingly taken, bailout? Iceland rejected repayment terms for Icesave at less than half these rates (3%) over a 35 year period.

Your points about the sustainability of the reparations with a fixed exchange rate have been addressed repeatedly elsewhere but “wildly optimistic” just about sums it up.

alex@122

I do not believe Daniel is English, but for better examples the kicking of chalk dust you could have chosen (43)

This self-pitying dishonesty is becoming all too characteristic of the Irish political class at the moment and it is no more attractive than the bombastic and arrogant dishonesty of the boom years.

and I have a special place in my heart for (56) which sort of comes from left field.

….from my point of view sitting half a mile from the North London Irish Cultural Centre…

I am not an anti-Semite, as my position here only 600 meters NW of a synagogue conclusively proves.

124

IM 05.16.11 at 3:58 pm

Patriotism, last and first refuge of a scoundrel.

125

dsquared 05.16.11 at 4:13 pm

All the unattractive features of nationalism on display here at once:

1) It cannot seriously be argued other than that Ireland had an unusual role among European states in the creation of the financial bubble

2) It cannot seriously, etc etc, that Ireland pursued a very unusual tax-haven policy

3) “French and German investors losing money” here presumably means “French and German investors losing money because the Irish government decided not to pay them, while being bailed out by the French and German governments”.

4) Whatever the flaws of the European banking system, they would hardly be helped by an intentional and disorderly default on the part of its largest offshore centre

5) It cannot seriously, etc etc, that the contagion risk to Portugal and Spain was considerable in October 2010, and that if Ireland had defaulted on its sovereign or bank debt, Portugal and Spain would have been next.

6) The EU has repeatedly expressed willingness to renegotiate the Irish loan rate (and Ireland is in fact not paying 6.7% on the element that has been drawn down).

7) The facts about debt sustainability are what they are. The Finance Ministry’s figures on public debt service are accurate. Ireland has a problem with private sector debt, not public.

Everyone, including the current government of Ireland (and Fintan O’Toole and Mick Fealty, and all the other left-wing Irish commentators who you have snide remarks about), agrees that the previous government of Ireland carried out very bad economic policies and is responsible for the current mess. The European institutions are helping and ought to be gaining legitimacy. And here you are, with seven flavours of “not our fault, everyone else was doing it too, and anyone who suggests otherwise is a racist”.

Over time, there does have to be a difficult debate of how the Irish banking system can be managed down to be less of a threat to the eurozone, and how much external help can be given to keep it functioning for the benefit of the Irish economy. Please don’t join it.

126

Henry 05.16.11 at 4:13 pm

shay – if you really want to keep insinuating that dsquared is an anti-Irish racist, you will very rapidly move from being a not-especially-insightful commenter to a not-especially-insightful-and-now-comprehensively-banned-former-commenter.

127

Alex 05.16.11 at 4:20 pm

a difficult debate of how the Irish banking system can be managed down to be less of a threat to the eurozone

Put it another way, if your nuclear reactor goes all Fukushima Daichii, you should expect the neighbours to ask you a lot of difficult questions right after you finish borrowing fire engines.

128

Daniel 05.16.11 at 4:29 pm

I’d be more tempted to analogise it (oh God, here comes another one, I *know* this is going to turn out badly) to the management of floods – basically, what the IMF was suggesting (allegedly) in November was that Ireland could open the locks and send some of the floodwater in Germany’s direction, while everyone else argued more or less forcefully that this would be an extremely bad idea as the canals couldn’t handle it. And in fairness to Cowen and Lenihan, when push came to shove, they did actually do the right thing even though it cost them their political careers.

129

Kevin Donoghue 05.16.11 at 4:50 pm

Daniel: Krugman also thought that [quite a few American banks were too big to save] though and he wasn’t right.

This is news to me; details please?

In the blog-post I linked to he is defending himself against a charge of inconsistency, in that he argued in favour of the US saving banks and against Ireland doing so. As he very reasonably says: “putting taxpayers on the hook for 5 percent of GDP is one thing; putting them on the hook for 60 or 70 percent of GDP, something quite different.”

130

Daniel 05.16.11 at 5:00 pm

Sorry, it looks like I was wrong there – Stiglitz thought US banks should be allowed to fail, but PK thought they should more or less all be bailed out.

But his numbers are tonto here – you get to 60-70% of GDP by adding the guaranteed and NAMA debt to the government debt. But this ignores the NAMA assets – they’re not great quality, agreed, but they’re definitely not 100% worthless. If you look at the Irish Times editorial he’s citing there, the actual loss figures (as estimated by Morgan Kelly) are more like 30% of GDP, which is roughly the cost of the much-admired Swedish bailout.

131

john b 05.16.11 at 5:06 pm

…and not radically dissimilar from the addition to UK public sector debt created by putting NR, LBG and RBS on the books. Notably, including the Irish exposure (not Irish government guaranteed) that RBS and LBG ran up. Maybe the UK government should get Germany and France to pay that off and all.

132

Kevin Donoghue 05.16.11 at 5:22 pm

But this ignores the NAMA assets ….

Don’t figures for sovereign debt normally exclude assets? If you want to net off assets, Leinster House and the army’s artillery range in Wicklow are worth a damn sight more than most of what’s in NAMA. If Krugman is departing from normal practice you have a point, but I don’t think he is.

Anyway I brought his views into the discussion in response to your remark about Ireland’s stupider citizens. How many Nobel prizewinners are lining up alongside Ireland’s banking intelligentsia? Maybe Krugman is wrong but I can’t see that you’ve presented much of a case.

133

Shay Begorrah 05.16.11 at 6:47 pm

Henry@126

shay – if you really want to keep insinuating that dsquared is an anti-Irish racist, you will very rapidly move from being a not-especially-insightful commenter to a not-especially-insightful-and-now-comprehensively-banned-former-commenter.

Understood, this is your community and I am just passing through.

134

dsquared 05.16.11 at 6:54 pm

Don’t figures for sovereign debt normally exclude assets?

Yes but they also usually exclude guaranteed liabilities too and although the government presumably isn’t planning on selling Leinster House yet, NAMA is explicitly set up to be a run-off agency. Morgan Kelly gets it right in the article Krugman cites that the correct measure is the expected losses.

“Stupidest citizens” was a random jibe on my part when I was (I think justifiably) annoyed, so I apologise for anyone (with one exception, he knows who he is) who was insulted by it.

135

Shay Begorrah 05.16.11 at 7:28 pm

dsquared@125

Everyone, including the current government of Ireland (and Fintan O’Toole and Mick Fealty, and all the other left-wing Irish commentators who you have snide remarks about), agrees that the previous government of Ireland carried out very bad economic policies and is responsible for the current mess.

My criticism of both Fealty and O’Toole comes from the international left, not Ireland’s milquetoast variety of revisionist liberal. O’Toole is ten years too little late to the anti-capitalist party, and it would not be Fealty’s kind of crowd.

As for Lenihan and Cowen, they were first fools for the PDs, then dupes to the banks and finally cowards in front of the ECB and European commission; it is thanks to the Irish political classes reflexive submission to whatever line the current EU elite thinks is the most politic that we renewed the bailout again and again and never confronted the false narrative that European solidarity is chiefly about protecting the market from itself.

One more time: No free movement of capital without free movement of losses.

136

piglet 05.16.11 at 7:58 pm

Peter 67, I’m not convinced that the case of Greece as a “worst case” proves anything much about the EU. But leaving that aside, my concern is that the true extent of austerity in the US is being severely underestimated because nobody really keeps track of what is happening at the sub-state level. My impression is that the reassurances we have been hearing from Krugman to the WSJ (see ref at 30) that things will never get as bad in the US because of the fiscal union blah blah blah are whistling in the dark. Even at the time when everybody was talking about the “Obama stimulus”, massive cuts in public infrastructure financing, education, transit, etc. were happening across the US. E. g. In a report on February 3, 2009 (Rider Paradox: Surge in Mass, Drop in Transit), the New York Times highlighted service cuts, layoffs, and fee hikes
enacted by transit authorities across the nation, despite greatly increased demand for public transportation services. This has gotten much worse since, it is happening across the US (not just in this or that state), and nobody seems to be talking about it.

As the New York Times reports on October 25, 2010 (Agencies Lack Money to Mend Public Housing), 150,000 public housing units have been lost over the past 15 years; $22 to $32 billion are needed to rehabilitate public housing; tenants face year-long delays on necessary repairs. USA Today reports on Oct 29-31 2010 (Public workforce slashed at local level) that state and local governments, especially cities, counties, and schools, reduced their workforce by 258,000, or 1.3%, since the recession. It would be interesting, just for perspective, to find out the comparable figures for the EU.

137

Alex 05.16.11 at 8:50 pm

For the absence of doubt, Shay’s contributions have BACAI for some time. Not so much chalk dust as Cantona-leaping into the front row.

138

Shay Begorrah 05.16.11 at 9:09 pm

Alex@137

For the absence of doubt, Shay’s contributions have BACAI for some time. Not so much chalk dust as Cantona-leaping into the front row.

I am genuinely sad that you felt the need to say that Alex.

139

IM 05.16.11 at 9:39 pm

What does BACAI mean?

140

Shay Begorrah 05.16.11 at 9:56 pm

Probably “Being a **nt about it.”

It was new to me too but I quickly got the hang of it, apparently.

141

Alex 05.16.11 at 10:22 pm

138: Fetch the oscilloscope, I think I make out the world’s tiniest violin?

142

Chaz 05.17.11 at 5:56 am

1. As soon as you start doing this, short term financing seizes up for the Irish banks because the interbank market doesn’t want to be a creditor at step 2. At this point, somebody has to meet the financing roll; unless you can persuade the ECB to do this, it has to be the Irish government.

I can see your point. As I said, the ECB being helpful is important to my plan. I would think that if things were seizing up they would be inclined to step in, if able, but who knows?

2. “Domestic depositors only” not consistent with the treaty of Rome, and you have now definitely annihilated the short term interbank credit.

That’s the clause I have been alluding to in my various condemnations of the EU banking system. The one Britain used to march Iceland to the hangman. Iceland, as far as Iceland was concerned, had never guaranteed those deposits, but there was that ridiculous treaty everyone signed and forgot about. I see deposit insurance as a part of the safety net, something a government does for the benefit of its citizens, and not as some moral responsibility a state has to foreign depositors of whatever bank happens to be legally established in their jurisdiction. If bailing out the foreign depositors is very burdensome, then I would say flout the rule, and let depositors be rescued by their own nations. Of course this would inspire a hostile reaction abroad, and make it harder to ask for help, so I can understand why it was not done. Still, I see that as simply bullying and squabbling, rather than proper obedience to the law: in this case the law is too absurd to command respect.

4. What you are describing here is a Europe-wide (more likely, global) financial crisis, potentially much more disastrous than September 2008 was. As I keep saying, there is nothing particularly nefarious about the fact that the ECB, Sarkozy, Merkel et al would rather Ireland not do this.

That’s really the key. This is a Europe-wide crisis, so why is Ireland being asked to carry the whole load? If Ireland forces losses to be passed on to the rest of Europe, the other nations simply have to do a bailout/restructuring as well. There is no reason to expect Ireland to take a bullet to save them this trouble. And while it’s not nefarious for the ECB/Sarkozy/Merkel to prefer Ireland spare them the burden, it’s not exactly generous. It fits with the argument that they are not actually trying to help Ireland, but just giving Ireland the minimum aid necessary to keep it cooperative. It is the attitude of the nationalist: Sarkozy protects French interests, Merkel protects German interests, and they leave any worrying about the Irish people’s welfare to Ireland. That is not an attitude appropriate to a political union, even if the Irish themselves took it in the past.

5. The issue here is that the treaty establishing the ECB really does not give it this role. The ECB’s legal powers are pushed to the limit going as far as it has done. Since the money you are pumping into the Irish banking system is basically lost for the ECB, it needs somebody’s fiscal authority to indemnify it against the loss – this is how the Fed and Bank of England do it.

Because the ECB isn’t quite set up technically in the same way as other central banks, Euroland recently created a special fiscal fund to do the kind of job you’re talking about. The EFSF is the mechanism set up to express the European solidarity that you’re talking about, and it’s lent EUR87bn to Ireland. That came on terms and with conditions, but it has to be so, doesn’t it – the Fed doesn’t have the problem of lending to sovereign countries that can do what they like with the money, and Ireland currently isn’t even volunteering to stop raiding the French and German corporation tax base.

That explains pretty well why my scenario is unworkable. Can it really be that NO ONE had the authority to print up more euros, until the EFSF? I just find the Treaty of Rome completely maddening. Why did anyone sign that monstrosity?

Your arguments make sense. I can see why things have turned out as they have, and you may be correct that the Irish have played their hand as best they can. But still, the whole thing stinks. The other euro members could be a lot more helpful if they wanted to, and I would say they have a moral responsibility to do so. Ireland has a moral responsibility to not be a blatant tax haven, too, but if we’re going to bring that up we should be talking about Luxembourg, Liechtenstein, and the Netherlands as well.

Also, people keep mentioning that Ireland has a high GDP per capita. I think it is worth pointing out that, according to Keiran (I think it was Keiran?), Ireland’s GDP is overcounted by ~20% precisely because of it’s role as a tax haven. For instance, every copy of Windows sold in Europe is officially counted as an Irish export, despite the large role seemingly played by workers in Redmond, WA.

143

Daniel 05.17.11 at 6:43 am

there was that ridiculous treaty everyone signed and forgot about

No I can’t accept this; the equal treatment of foreign (actually EU; you could screw US accounts as hard as you liked) and domestic depositors is a pretty fundamental principle of the Single Market, and Icelandic banks would never have been allowed to set up in the UK in the first place (and certainly not to have set up as branches which didn’t pay into the UK scheme) if they hadn’t agreed to it. Though I am not sure that the Irish banks had all that many guaranteed deposits overseas which would come back to the Irish deposit scheme – AIB UK is a British bank, as are the UK operations of BoI.

This is a Europe-wide crisis, so why is Ireland being asked to carry the whole load?

Ireland isn’t really being asked to carry the whole load; it’s being asked to carry the Irish bit. Which is large, but that’s because the Irish financial system is large. But I can’t think of any other basis on which to arrange things because the EU is actually not a political union – Ireland is a sovereign state which makes its own decisions about banking regulation and tax policy, which it’s hard to ask France and Germany to underwrite. It is certainly possible to see a future in which the burden was fully shared in the event of crises, and in which decisions on the Irish budget and the development of the Irish offshore financial sector were made co-operatively across Europe, but this would require exactly the sort of new treaty which Henry (I think correctly) points out would be almost impossible to pass in Ireland at the moment.

It fits with the argument that they are not actually trying to help Ireland, but just giving Ireland the minimum aid necessary to keep it cooperative

I think you really are underestimating how large “the minimum aid necessary” here is – it is EUR87bn after all, and the interest rate really isn’t all that outrageous (particularly since it is risk capital for France and Germany and the Irish newspapers are openly talking about defaulting on it!). Ireland would be much, much worse off if it didn’t have the EFSF helping it.

Can it really be that NO ONE had the authority to print up more euros, until the EFSF?

Yes, unfortunately, and what’s more everyone knew that the Euro didn’t have a lender of last resort, but they thought this didn’t matter as the prudence and conservatism of the ECB would mean there were no bank crises. I was at the BoE at the time and we were literally aghast. I am profoundly glad that the UK didn’t join.

The other euro members could be a lot more helpful if they wanted to

They couldn’t be that much more helpful, realistically – they have their own budgets to make and the sums of money involved are big. What they could do is negotiate the rate on the EFSF loans down, and they have said they will do this. But it is going to involve a transfer of political power out of Dublin (Lisbon, Athens, etc) and into the EU technosphere and this is also going to be unpopular.

144

Peter 05.17.11 at 6:55 am

piglet 136, Interesting. I suspect that what’s been happening here is something like this: You’ve been worried that describing austerity in the EU really harshly would yield the impression that austerity in the US hasn’t been that bad. And I’ve been worried that describing austerity in the US really harshly would yield the impression that austerity in the EU hasn’t been that bad. (Or something like that, anyway — I trust you see what I mean.)

If I’m right in this, it’s rather interesting and strange, isn’t it? I strongly suspect, you see, that you and I have quite similar political views. Yet, our different geographical starting points (you hail from the US, don’t you?) have led us to stress different dangers. In the process, we may well have started to believe that we hold strongly conflicting opinions. In fact, however (or so I strongly suspect, at least), we’re both badly dismayed by swingeing cuts in public spending — whether they take place east of the pond or west of it.

It’s almost certainly the case, furthermore, that both and I are strong opponents or right-wing economic policies more generally. Actually, let me back up here and try to to clarify something. That is, I want to underline the importance of distinguishing between austerity policies on the one hand, and right-wing economic policies more generally. Of course, austerity policies usually take a right-wing form (under current capitalist conditions, anyway). What I’m getting at, though, is that many countries have pursued right-wing economic policies — nasty, retrograde, reactionary, hugely inegalitarian policies — that were neverthess not, in many cases, AUSTERITY policies specifically. By “austerity policies”, namely, I simply mean policies which have an contractionary effect on aggregate demand.

For example, the policy pursued in the US under Dubya was reactionary and nasty. But that doesn’t mean it was austerian. This doesn’t mean, incidentally, that the public sector wasn’t being starved during that period. It simply means that the OVERALL effect of taxes and public expenditures on aggregate demand wasn’t (during much of that period, anyway) contractionary. Thus, the public sector was starved — but the overall economic policy still wasn’t contractionary (since taxes were being cut, bubbles blown up, and the like). For a lefty, of course, policies of this kind are execrable. But that doesn’t mean they’re austerian — at least, not in the sense that economists usually have in mind when they talk about austerity policies (i.e., policies which have a contractionary effect on aggregate demand).

In any case, if I ever gave you the impression that I wasn’t severely critical of the overall shape of economic policy in the United States, I very much regret it. After all, I’m a former Californian, a resident of Sweden, and a card-carrying member of a socialist party. A soft attitude towards prevailing US economic policies doesn’t go together with that job description. Given where I live, however, it’s natural that I’ve absorbed many of the concerns of the Swedish left about the EU. The predominant attitude towards the EU on the Swedish and Scandinavian left, namely, is extremely critical. (This is especially the case if one defines the left rather narrowly and rigorously.) Indeed, they tend to find the EU quite threatening. You might find their arguments to be interesting. Most of their writings on this subject are in Swedish, of course; but at least some of them are in English. You might try checking the websites of the Left Party (www.vansterpartiet.se), the Left Party’s youth league (www.ungvanster.se), and No to the EU (www.nejtilleu.se).

In sum, I suspect that our respective responses, in the course of our exchange on this thread, been strongly conditioned by the issue of which threat we experience as uppermost, given our different geographical starting points.

145

Kevin Donoghue 05.17.11 at 8:22 am

Daniel: … it is risk capital for France and Germany and the Irish newspapers are openly talking about defaulting on it!

This is misleading. Only the lunatic fringe talks of defaulting on debt to IMF/EU institutions. Economically literate commentators arguing for default have a ranking in mind: depending on how bad things get, the creditors should take a hit in something like the following order: (1) unguaranteed bank bonds; (2) bank bonds guaranteed by the state (which would probably mean large depositors also); (3) government bonds.

AFAIK there is no legal justification for discriminating between (2) and (3) — but IANAL — but there is a strong moral argument that people who bought government bonds, before the bank guarantee was issued have been treated shabbily.

Colm McCarthy’s complaint about the interest rate on EU lending is precisely that the lender has IMF-style preferred creditor status. (Granted there are legal issues with that claim.) Talk of the risk they are running sits awkwardly with the fact that they want the private sector to start buying Irish government bonds in 2012. They are asking the private sector to step up in the same breath as they are highlighting the (lesser) risk they themselves are running.

146

dsquared 05.17.11 at 8:45 am

The ordering 1, 2, 3 makes sense, although clearly it needs to be handled very carefully, as doing 1) could put you on a slippery slope pretty quickly. I don’t really agree that people who bought government bonds before the guarantee was issued have been treated badly – they must have known that the Irish government (like any government) was on the hook for its financial system.

The legal issues are probably a red herring here, but the risk that the EFSF creditors are taking is Irish political risk, which has to be regarded as substantial at this point. I think there is an extent to which the initial rate was set high in order to provide a basis for negotiation on other points, but one can’t rule out a purely punitive motive too – from what I’ve heard, the Cowen/Lenihan team’s reluctance to admit there was a problem and their attitude toward the ECB becoming the sole liquidity provider to the Irish banking system didn’t win them any friends.

147

Alex 05.17.11 at 8:50 am

I see deposit insurance as a part of the safety net, something a government does for the benefit of its citizens, and not as some moral responsibility a state has to foreign depositors of whatever bank happens to be legally established in their jurisdiction.

You do realise the Icelandic banks weren’t accepting deposits from British savers out of charity? They were doing it to make a profit. I mean, it wasn’t as if Icesave was some sort of weirdo split-cap up my arse whizz bang investment. It was a fucking deposit account. I think it is a fairly minimal expectation that if you put your money in a bank account that the bank should give it back to you when you ask them. It is not some sort of special privilege. In fact it is the opposite – it is an enormous privilege to be trusted with other people’s money and it comes with special responsibilities. It is an absolutely minimum feature of any reasonable society that your savings do not just vanish randomly into thin air unless you deliberately choose to go gambling with them.

Given all that’s happened, I’d be tempted to go with that 1930s Senator from North Dakota who thought the answer was that the NYSE was a gambling hell and should be padlocked, but I am aware that this is a controversial view:-)

If the Icelandic government didn’t want to guarantee the deposits, perhaps their banks shouldn’t have been accepting them. If you don’t want to accept deposits from foreigners and take on the responsibility that goes with *just holding on to people’s money – not doing nine-way CDO-of-CDS hedges – just deposit taking*, stop doing it.

148

Walt 05.17.11 at 9:16 am

Can the ECB really not act as lender of last resort? They can make collateralized loans, so what’s to stop them?

149

dsquared 05.17.11 at 9:27 am

It’s the responsibility of the national central banks. It was kept out of the treaty establishing EMU precisely because the Germans didn’t want the money creation of the euro area to be held hostage to dodgy peripheral banking systems. It was a design error that everyone knew they were making.

150

Shay Begorrah 05.17.11 at 10:33 am

I understand at last.

It is quite simple really, through a complex series of legal interactions and perfectly normal and justifiable political manoeuvrings investors have been made whole at the cost of the state.

Nothing at all untoward, it is almost an unfortunate coincidence, it is just just that the flaws in the current system, somehow, and I do admit that this does seem to keep happening, involve the transfer of wealth from the public to the private sphere. Ah well. Mustn’t grumble. The system remains intact, and that is the important thing.

Rest assured if with was all managed by European technocrats with out even the vestiges of popular democratic control or accountability, things would have been entirely different – regulatory capture would have negated the need for political coercion, which has the mob excited.

We all feel sorry for Ireland, but it is collateral damage, as it were.

I feel a Ewan McColl tune coming on.

Its all perfectly legal…

151

dsquared 05.17.11 at 10:39 am

investors have been made whole

They of course haven’t. Equity holders have been close to wiped out and the bonds are currently trading in the 60s.

152

Shay Begorrah 05.17.11 at 10:56 am

dsquared@150

They of course haven’t.

You are of course correct, not all classes of investors have been protected.

153

Kevin Donoghue 05.17.11 at 11:19 am

… they must have known that the Irish government (like any government) was on the hook for its financial system.

There’s a fair amount of space between being on the hook for the financial system as a whole and being obligated to pay off AIB bondholders, never mind the likes of Anglo.

I sense a generation gap here. Many of the most interesting moments of my generally dull working life were caused by banks going belly-up: Bankhaus Herstatt, Franklin National Bank, Continental Illinois and some whose names I don’t even remember. I know things have changed, but I presume there are still analysts who advise senior management on counterparty limits. Traders still get sacked for breaching those limits. What’s the point, if governments are liable anyway? In that case the only limits that matter are country limits. Whatever became of capitalism?

If that’s really what banking has come to, then economies of scale dictate that Ireland should get out of banking completely. We don’t try to compete with Airbus and Boeing, even though they are far less effective than banks when it comes to high-speed shredding of taxpayers’ money.

154

Shay Begorrah 05.17.11 at 11:39 am

Kevin Donoghue@153

I sense a generation gap here <….> What’s the point, if governments are liable anyway? In that case the only limits that matter are country limits. Whatever became of capitalism?

I wish I had said that.

155

ajay 05.17.11 at 12:03 pm

I presume there are still analysts who advise senior management on counterparty limits. Traders still get sacked for breaching those limits. What’s the point, if governments are liable anyway?/i>

Governments aren’t liable for backstopping the financial commitments of everyone in the market, just some of the commitments of some of the players. If you have a swap with, I dunno, Delphi or someone, and Delphi goes under, then you lose out.

156

Shay Begorrah 05.17.11 at 1:07 pm

And dsquared, I am sorry for insinuating that you were a racist. That was a hurtful thing to imply.

157

dsquared 05.17.11 at 1:31 pm

What’s the point, if governments are liable anyway? In that case the only limits that matter are country limits. Whatever became of capitalism?

Unfortunately, nobody’s really come up with a solution to this one since Walter Bagehot first made a version of the point in the 19th century.

Thanks very much Shay; I similarly apologise for being snotty to you.

158

IM 05.17.11 at 1:54 pm

>Bankhaus Herstatt, Franklin National Bank, Continental Illinois and some whose names I don’t even remember. >

In your lecture to us young whippersnappers you forgot one example: Lehmann Brothers. I could add an old one: Darmstädter- und Nationalbank. In both cases capitalism did run it’s course.
The results were suboptimal.

159

piglet 05.17.11 at 3:42 pm

Peter 144:

You’ve been worried that describing austerity in the EU really harshly would yield the impression that austerity in the US hasn’t been that bad. And I’ve been worried that describing austerity in the US really harshly would yield the impression that austerity in the EU hasn’t been that bad.

Maybe what I am wary of is the “everybody knows” attitude. “Everybody knows” that fiscal union blah optimum currency area blah blah PIGS blah blah blah deficits, but nobody seems to be much interested in the actual data. Let me add that the whole enterprise of US-EU punditry is highly loaded. People are so heavily influenced by all sorts of preconceived notions. Maybe it’s naive to think of data as an antidote but I have no better idea.

160

Peter 05.17.11 at 4:40 pm

piglet 159: “Maybe it’s naive to think of data as an antidote but I have no better idea.”

Well, it’s a naivité I share, at any rate. And I certainly can’t think of any better antidote. It’s certainly true, though, that in the contest between data on the one hand and preconceived notions on the other, the latter seem to win out most of the time …

I don’t mean to say, though, that interpreting data is a simple or straightforward matter. Often it’s tricky and ambiguous, of course. Still, the bloody data have got to count for something in their own right — somewhere along the line. If they don’t, all we’ve got are a bunch of eloquent storytellers, and no better reason to choose between their different tales than simple preference — like choosing between flavors of ice cream. (Geeze, what a depressing thought. What if that really IS true? What if a choice between different flavors of ice cream is all that we’ve got? Ughhhh … )

As for the field of US-EU punditry — indeed, it appears to be highly loaded. But I confess I’m having trouble figuring out the different ways in which it is loaded. The picture here seems to be extremely complex; I need some kind of map of the debate. WITHIN a given country — let’s take Sweden here — the nature of the debate and the line-up of the contending camps may appear fairly straightforward. However, if we consider the debate within several different countries, the picture that emerges is highly splintered. I’ve followed the debate on the EU here in Sweden quite closely; in the US and the UK to some fair degree; and in Spain, France, and Greece a little bit. And switching between these various debates, I often feel like I’m going through the looking glass. There doesn’t seem to be any common narrative about the nature of the beast. Almost all of the different political camps are divided on the matter, as far as I can see. Some right-wingers say: “Cut back the dreadful welfare state! Therefore, support the EU!” Other right-wingers say: “Cut back the dreadful welfare state! Therefore, oppose the EU!”

Ditto with the left. Some lefties say: “Defend our cherished welfare state! Therefore, support the EU!” Other lefties say: “Defend our cherished welfare state! Therefore, oppose the EU!”

Trying to make sense of this all is enough to give one a headache. Still, I haven’t given up hope quite yet.

161

Kevin Donoghue 05.17.11 at 6:03 pm

The results were suboptimal.

If you’re expecting optimal, try some other planet. If you think the Lenihan solution dominates the Paulson solution, please check your work.

162

Shay Begorrah 05.17.11 at 7:35 pm

Discuss: There is a guaranteed net social benefit to having a private banking system that still needs to have a full government guarantee.

There would have to be several dense theoretical works on this, seeing as how we bet Western civilization on it, right?

163

Chaz 05.18.11 at 1:51 am

You do realise the Icelandic banks weren’t accepting deposits from British savers out of charity? They were doing it to make a profit. I mean, it wasn’t as if Icesave was some sort of weirdo split-cap up my arse whizz bang investment. It was a fucking deposit account. I think it is a fairly minimal expectation that if you put your money in a bank account that the bank should give it back to you when you ask them. It is not some sort of special privilege. In fact it is the opposite – it is an enormous privilege to be trusted with other people’s money and it comes with special responsibilities. It is an absolutely minimum feature of any reasonable society that your savings do not just vanish randomly into thin air unless you deliberately choose to go gambling with them.

If the Icelandic government didn’t want to guarantee the deposits, perhaps their banks shouldn’t have been accepting them. If you don’t want to accept deposits from foreigners and take on the responsibility that goes with just holding on to people’s money – not doing nine-way CDO-of-CDS hedges – just deposit taking, stop doing it.

You seem to be conflating the Icelandic banks with the Icelandic government. The Icelandic government did not take any deposits. Maybe you think the government is responsible because they allowed Icesave to operate abroad. I would ask you, is there any government, anywhere in Europe, that prohibited its banks from accepting foreign deposits? When the idiots all got together and signed the Treaty of Rome, were they planning on having 30-odd separate, national banking systems?

Since Icesave was essentially a British and Dutch operation–Icelandic depositors only being a small fraction of its capital–who was best placed to regulate it? The government of Iceland, population .25 million, or the Bank of England, based in a large country home to the world’s biggest financial center? Was it reasonable for the British, whose institutions possess more financial expertise than Iceland’s, to assume that tiny Iceland could guarantee all those deposits? Hell no. Every European country instigated this mess the second they signed the Treaty of Rome. They are just as responsible as Iceland.

If you still insist on blaming the Icelandic government for not having perfect regulators, then I must add that you are also conflating the Icelandic government with the Icelandic people. Is it reasonable to expect the Icelandic people to take on vast British losses because they, who know nothing about finance, elected some guys who appointed some guys who were not excellent regulators?

And finally, no matter who you want to blame, is it a sound plan for Gordon Brown to say, “Iceland will bail out every British depositor without limit,” even though they’re obviously too small to do so? Is that a mature way to behave?

You say, “It is an absolutely minimum feature of any reasonable society that your savings do not just vanish randomly into thin air unless you deliberately choose to go gambling with them.” As I said above, I completely agree with that. But the society British people live in is the United Kingdom.

——————

Peter, I’m not sure if you meant to, but you seem to be implying that the situation in the U.S. is just right-wing action and not austerity. That was true under Bush, but not now. As piglet said, local governments are being forced to make drastic cuts. State politicians are using that to push right-wing agendas but austerity is the theme of the day. Still, while the cuts to local services are quite devastating, the direct economic impact is not nearly as great as what’s happening in Greece and Ireland.

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Chaz 05.18.11 at 1:54 am

My comment is awaiting moderation. Since when does that happen on this site, and why?

165

Substance McGravitas 05.18.11 at 1:56 am

If you use the word “socialism” your comment might get held.

166

Substance McGravitas 05.18.11 at 1:57 am

Heh. The cheat.

167

Chaz 05.18.11 at 2:20 am

But, why am I cheating? Did they add a swear filter recently? I’ll just repost:

Alex: You seem to be conflating the Icelandic banks with the Icelandic government. The Icelandic government did not take any deposits. Maybe you think the government is responsible because they allowed Icesave to operate abroad. I would ask you, is there any government, anywhere in Europe, that prohibited its banks from accepting foreign deposits? When the idiots all got together and signed the Treaty of Rome, were they planning on having 30-odd separate, national banking systems?

Since Icesave was essentially a British and Dutch operation—Icelandic depositors only being a small fraction of its capital—who was best placed to regulate it? The government of Iceland, population .25 million, or the Bank of England, based in a large country home to the world’s biggest financial center? Was it reasonable for the British, whose institutions possess more financial expertise than Iceland’s, to assume that tiny Iceland could guarantee all those deposits? Of course not. Every European country instigated this mess the second they signed the Treaty of Rome. They are just as responsible as Iceland.

If you still insist on blaming the solely the Icelandic government for not having perfect regulators, then I must add that you are also conflating the Icelandic government with the Icelandic people. Is it reasonable to expect the Icelandic people to take on vast British losses because they, who know nothing about finance, elected some guys who appointed some guys who were not excellent regulators?

And finally, no matter who you want to blame, is it a sound plan for Gordon Brown to say, “Iceland will bail out every British depositor without limit,” even though they’re obviously too small to do so? Is that a mature way to behave?

You say, “It is an absolutely minimum feature of any reasonable society that your savings do not just vanish randomly into thin air unless you deliberately choose to go gambling with them.” As I said above, I completely agree with that. But the society British people live in is the United Kingdom.
—————————
Peter, I’m not sure if you meant to, but you seem to be implying that the situation in the U.S. is just right-wing action and not austerity. That was true under Bush, but not now. As piglet said, local governments are being forced to make drastic cuts. State politicians are using that to push right-wing agendas but austerity is the theme of the day. Still, while the cuts to local services are quite devastating, the direct economic impact is not nearly as great as what’s happening in Greece and Ireland.

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Chaz 05.18.11 at 2:27 am


Reposted without Alex’s curse word, again awaiting moderation. I do no understand why I need a cheat in the first place. I could take your word for it and blindly convert every post to Unicode, but I would feel silly.

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Substance McGravitas 05.18.11 at 2:37 am

I do no understand why I need a cheat in the first place.

My belief – which could be complete bullshit – is that the forbidden word contains within it the trade name for a certain pill.

170

Chaz 05.18.11 at 2:53 am

You’re just fucking with me aren’t you?

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Chaz 05.18.11 at 2:57 am

Unicode, why the hell not. Alex: You seem to be conflating the Icelandic banks with the Icelandic government. The Icelandic government did not take any deposits. Maybe you think the government is responsible because they allowed Icesave to operate abroad. I would ask you, is there any government, anywhere in Europe, that prohibited its banks from accepting foreign deposits? When the idiots all got together and signed the Treaty of Rome, were they planning on having 30-odd separate, national banking systems? Since Icesave was essentially a British and Dutch operation—Icelandic depositors only being a small fraction of its capital—who was best placed to regulate it? The government of Iceland, population .25 million, or the Bank of England, based in a large country home to the world’s biggest financial center? Was it reasonable for the British, whose institutions possess more financial expertise than Iceland’s, to assume that tiny Iceland could guarantee all those deposits? Hell no. Every European country instigated this mess the second they signed the Treaty of Rome. They are just as responsible as Iceland. If you still insist on blaming the Icelandic government for not having perfect regulators, then I must add that you are also conflating the Icelandic government with the Icelandic people. Is it reasonable to expect the Icelandic people to take on vast British losses because they, who know nothing about finance, elected some guys who appointed some guys who were not excellent regulators? And finally, no matter who you want to blame, is it a sound plan for Gordon Brown to say, "Iceland will bail out every British depositor without limit," even though they’re obviously too small to do so? Is that a mature way to behave? You say, "It is an absolutely minimum feature of any reasonable society that your savings do not just vanish randomly into thin air unless you deliberately choose to go gambling with them." As I said above, I completely agree with that. But the society British people live in is the United Kingdom. ————————— Peter, I’m not sure if you meant to, but you seem to be implying that the situation in the U.S. is just right-wing action and not austerity. That was true under Bush, but not now. As piglet said, local governments are being forced to make drastic cuts. State politicians are using that to push right-wing agendas but austerity is the theme of the day. Still, while the cuts to local services are quite devastating, the direct economic impact is not nearly as great as what’s happening in Greece and Ireland. If this posts I will be annoyed.

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Substance McGravitas 05.18.11 at 3:00 am

HA.

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Peter 05.18.11 at 4:42 am

Chaz 171: Yes, I meant to say that it was under Bush that the “right-wing but not austerian” point applied. As for the situation now, austerity is indeed being applied in vast areas of the US, above all at state and local levels. I certainly didn’t mean to imply anything else. However, even where the present situation is concerned, my argument was that it’s a reasonable supposition — on account of the structural differences between the EU and the US that you mentioned in 22 — that the degree of austerity being applied in Greece right now is more severe than that which is being applied in California right now. (However, I don’t have any directly comparable figures which demonstrate this — piglet was quite right about that. All I have here is a reasonable supposition.)

As for the distinction between austerian policies in particular on the one hand, and right-wing economic policies more generally on the other — well, my point in stressing the distinction so strongly was that I didn’t want to give anyone the impression that I thought US economic policies — taken in an OVERALL sense — have been anything other than well to the right of those followed almost anywhere in Western Europe (at pretty much any point over the last 40 years or so, say). The US welfare state, needless to say, is famously sparse and thin; US trade unions are famously cowed; the health-care system, as all the world knows, is … (I don’t need to spell out the misery here; you know the list.) And the question of austerity accounts for just a small slice of this larger overall picture. Indeed, US economic policies have rather often been, as compared with those applied by many West European countries, fairly non-austerian. But that doesn’t mean they’ve been anything other than well to the right of the latter — in an overall sense, anyway — for quite a long while indeed.

In sum, I thought the discussion would benefit from a clear distinction between right-wing economc policies in general, and austerian economic policies in particular. It’s perfectly possible, for instance, for a country with public-sector spending of 20 percent of GDP to be much more expansionary (or much less contractionary) with regard to aggregate demand than is a country with public-sector spending of 50 percent of GDP. It’s one thing whether a country’s economic policy has (overall) an expansionary or contractionary impact on aggregate demand; it’s another thing whether said country has a large or a small welfare state, whether its trade unions are strong or weak, etc.

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IM 05.18.11 at 6:46 am

Kevin,

I do indeed prefer the later Paulson solution – rescue – to the earlier Paulson solution. You seem to prefer the policies of Hoover, Mellon and Brüning. You an austrian or what?

And if accept the great depression because life is never optimal, I think there is not much left to discuss.

Chaz,

of course the treaty of Rome – so idiotic that it worked well for decades – said nothing about banking. The common market in financial services in europe is indeed pretty new. And the principle is indeed that the home country of the bank should regulate. That was something that countries like the UK demanded so they could expand to Germany. But some common rules had to be instituted. One is that you have to treat all citizens of the EU like your own countrymen. Another that there should be a minimum of deposit insurance around 20,000 €.

When Iceland joined the EEA, it did get access to the markets of the EU, but had to play by the rules of the EU. So foreign depositors have two claims:
a) To get at least 20,000 € back
b) To get as much back as icelandish depositors.

The government of Iceland tried to pay all domestic investors in full and stiff the foreign investors. If you really want to argue that Iceland doesn’t have the money – dubitable because they got the assets of the banks after all – there should have been a cut to icelandish investors too.

175

dsquared 05.18.11 at 7:26 am

Discuss: There is a guaranteed net social benefit to having a private banking system that still needs to have a full government guarantee.

There would have to be several dense theoretical works on this, seeing as how we bet Western civilization on it, right?

There are, but IMO few of them are an improvement on “Lombard Street”, Walter Bagehot’s original work. The basic problem is that if you look at the history of state-owned banks (and even more so that of municipally-owned banks), they are really terrible too.

176

dsquared 05.18.11 at 7:30 am

Just on the subject of Icesave, I would recommend the Icelandic government’s report of the inquiry into what happened, which does make it clear that the British FSA used all the regulatory powers it had to try to stop Iceasave from expanding so quickly – but that it had no legal status to do so, and indeed was repeatedly told to back off by the Icelandic government which thought that the UK was being protectionist.

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Kevin Donoghue 05.18.11 at 7:40 am

You seem to prefer the policies of Hoover, Mellon and Brüning. You an austrian or what?

Scroll up a bit and you’ll find me telling dsquared that Krugman is right about the folly of the Irish bank rescue. So yes, smart-arse, you can place me in the Krugman branch of the Austrian school.

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Alex 05.18.11 at 8:54 am

163: The Icelandic bank should take the responsibility because it gets the profit. The Icelandic government should take the responsibility because it gets the taxes on the profit (and in fact the two entities were joined at the hip – the boards were lousy with politically influential people and the banks were constantly lending them money) and further because they promised to take it, they wrote it into the laws of Iceland that they would take it, and the depositors put their money in the bank on the understanding, spelled out in the terms of the contract between them and the bank, that they would take it.

How hard can it be to grasp that if you get the benefit, you should also accept a share of the cost when the job goes to ratshit? Also, as I said to D^2, can you not see why this pisses people off?

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Martin Bento 05.20.11 at 8:01 am

Chaz, just a meta thing: soc|al|sm does trigger the moderation filter here because it has the substring c|al|s. Some of us wish this would get fixed, as it is probably the leading moderation trigger in these parts, but no one is fucking with you on this.

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