Exit, voice, loyalty and – something else

I haven’t read Hirshman’s book, but I’m starting to get tired of references to it. Exit, voice, loyalty, sure, but how about fixing the problem?

There is really no reason why banks should exist any more. Most of their functions can be taken over by government-and-nonprofit-run electronic networks, with maybe some private business services on top. Exit, voice, loyalty are all pretty useless on an individual basis. There’s going to have to a change in how the system works. If people don’t get together to make it happen, it will happen anyways, only more unpleasantly.

Interesting point that the Irish have more “exit” opportunities than most in the Eurozone.

The real mistake Ireland made was for the government to take responsibility for the Irish banks’ debt. That’s what bankrutpcy is for! Should have let the loss fall on the banks’ creditors. Ireland, as an open and small economy, doesn’t even particularly need “Irish” banks. In the wake of the Irish banks’ bankruptcy non-Irish banks would have established branches in Ireland. No big deal. Look at Iceland–they let their banks go bankrupt and are already recovering. . . .

I’d actually be very interested in your co-blogger Dsquared’s views on this. I have the impression he disagrees quite strongly with the idea that the bank loans/ promissory notes shouldn’t continue to be paid off. On the other hand he appears to be no great fan of “austerity” – if he’s in favour of our instead raising the needful by a substantial tax on the wealth which still exists among a not insignificant minority, that gives him a unique set of views among commentators. ( the usual choice being A.cut welfare/ public service/ anything which benefits the poor but don’t de-incentivise the rich/ scare off the multinationals / alienate rest of Europe or B. soak the rich / burn the bond holders/ go back to bhe IR£. I suppose there is a C. of sorts, the Sunday Indo main editorial line which simultaneously blames public service and rest of Europe with the added bleating for the government to reinflate the property market.)

Nice post, and thanks for the links.

Maybe another option would be to read Lenin’s “What Is To Be Done?”

Where are the Irish emigrating to? They used to come to Australia, but like most other countries we are putting up the gates against immigrants without money or a very limited set of skills. Many Greeks hold dual Australian Greek citizenship (Greece has the largest Australian expat population) and anedotal evidence suggests that some of them are expatriating their spare cash to Australian relatives. I guess those who can might also get out if things get worse. But it seems to me that emigration is a far less available option than it once was, given a US recession, increased barriers to migration, and no huge labour shortages in pleasant parts of the world.

“I haven’t read Hirshman’s book, but I’m starting to get tired of references to it. Exit, voice, loyalty, sure, but how about fixing the problem?”

I nominate Rich @ #1 for the coveted Refudiation of the Year award: “Since I haven’t read this, and references to it never seem to describe how it will create Magic Pony Rides for All, why don’t we just skip straight to the Pony Rides!”

What Hirschmann’s book does, par excellence, is describe a system for thinking through various ways committed actors do and do not have for fixing the problem, when those actors have to act in such a way as to affect the inner workings of institutions, and when those institutions have insulated themselves (as institutions do) against having to respond.

But you’d probably have to, you know, read the book to get that part.

I’m glad someone else shares my opinion of who would make the ideal intellectual companion for Rich Puchalsky:

‘So Clay Shirky is like, facts, evidence, argument, yadda yadda yadda. I said to him, BORING, CLAY. NOT LISTENING’.

‘Sounds like he’s a real eliterist, Rich. Did he tell you that you were wrong ‘cos he’d *read the book*?’

‘He totally did, Sarah!’

I have no idea what Dan Hardie is on about. I think that Clay Shirky is still grumpy because I didn’t like the lead anecdote in his book, in which some Wall Street guy righteously harassed a teenager into returning stolen property. But who knows.

In any event, if I wanted to impeach the book, I wouldn’t have said that I didn’t read it. The book, whatever its merits, is a source of references elsewhere that I find particularly ill-suited to circumstances. For instance, this post says that we need a fourth category, “silent screaming”, as something that the Occupy movement is tapped into. Perhaps if I read the book I’d understand why Occupy, which I’ve been involved in for a while now, needs a fourth category of “impotent rage and visceral worry” that doesn’t match my experience of the movement. But that appears to me to be far enough off so that the book, whatever its merits, doesn’t seem to have led to a well-chosen analytical shorthand in this case, or really in almost any case I’ve run into. If the book does do a great job of describing ways in which committed actors do and do not fix problems, then the references it spawns don’t represent it well.

Shorter Rich Puchalsky: ‘This is a post about a book by Albert Hirschman, which I have not read, and about the Republic of Ireland, which I have no wish to discuss, so we shall talk about me and my experiences of protest in the United States. Foreigners, comply.’

Whoops, meant Niamh’s “silent screaming,” of course. Definitely did not mean to evoke the political associations with my mistaken re-phrasing!

If you have such contempt for this sort of thinking, why are you here?

Aww, I have no contempt in my heart for Hirschman or Niamh, and I commented in order to acknowledge that Clay had adopted a much more appreciable framework this time than in that communications technology post back in October. I suppose maybe “The world thanks you” in print sounded more sarcastic and less relieved than it did in my head.

“This is what the Occupy movements are tuned into” refers to Ireland only? OK.

Weirdly enough, the accounts I’ve seen of Irish Occupy protests seem very similar to ones here, and the Irish Web sites have the same tone. Not silent screaming at all. But no doubt you know better.

From what I can see in the Irish Times, more than half of the people leaving Ireland are non-Irish going home, and fewer are Irish going somewhere else.

Of the 65,300 people who left the country in the 12 months to April 2010, 27,700 were Irish citizens. About 19,900 were eastern European; 8,100 were originally from states outside the EU. In the previous 12-month period just 18,400 of the 65,100 emigrants were Irish citizens, while a staggering 30,100 central and eastern Europeans left. So in terms of absolute numbers of Irish citizens leaving, things aren’t as bad as they seem.”

Some of those seem to be young Irish travellers who get temporary work visas for Australia, but they have to go home in 2 years — it’s not a permanent solution. As things get worse all over the EU, intra-Union migration won’t be a solution either. It’s not clear that emigration can be the answer it used to be, but the Irish, like the Greeks and Italians, seem to assume it will be. It seems likely, as Ed said, that this is one reason things might turn out differently.

It really is amazing, the power of a well thought out derail.

One thing I’d like to note, though…That “silent screaming”? That’s a function of a reasonably capable apparatus for disintermediating people from successfully politicking on their own. Hirschmann wrote the book in 1970, right after the civil rights movement, Vietnam, and all that other stuff, and there has been a number of state innovations, both in terms of tech and in terms of social weaponry like av media, since then. I think that it is also important to emphasis that this is also about isolating elites from possible mass support (the tyrant-masses dynamic), so it’s not just the rubes. It’s about eliminating the dynamic of voice in the sense that people negotiate with elites for mutual benefit. Along with debt/health care (US) as a means to block exit, the game is effectively fixed such that explicit and violent rejection is probably going to be the only game in town.

The name of the political game for me, is about two things. Pre-empting revolution, and failing that, installing a tyrant (Chavez being a good example). It’d be pretty bad, but Saddam Hussein types are worse. Pre-empting revolution, i.e., the day when either the generals or the bankers walks into Congress and tells the Republic that the jig’s up, and dealing with any spontaneous violence that might occur, would be the better option. However, any progressive work on that almost *has* to involve at a minimum, expropriative violence, in the sense of strikes, denial of resources, etc, etc (no matter how Eric Loomis might feel for the people made to sacrifice–*few* ever really choose freely, and only a few ever has in such actions)…

Mubarak was brought down by export industry strikes and elite bargaining against international businesses. As one can guess, the only thing that really matters in this process is communications. That’s Voice. We have to have secure coms. We have to be able to broadcast to public at large. What matters is splitting elite consensus away from the bleeping insane, thieving, reactionaries. The 99% works in broadcasting a very simple scream, but it’s not actually a dialogue, and the people at large have a hard time connecting to other people around them and working out what they are committed to, for reasons of access and security. The late capitalist state has many more, and subtle means of punishing dissent than do late communist states so this is a serious challenge.

For example, the difficulties in creating some sort of consent of the governed in Russia, say… alt!Kerensky being forced to exit Russia from WWI for domestic reasons instead of bowing to international pressure to engage in another offensive that the state could not support (or bailing out Irish banks with the EU gun to their heads). That almost certainly would have given patriotic Russians, no matter their inexperience and xenophobia, a better chance at at better Russia than what they wound up getting. That’s Voice, that’s what this sort of power is and can do for us. Constantly rebuilding the consent of the governed.

@28–Could you say more about why “This cost was always going to end up being borne by Irish people, because it was their houses that had the price bubble.” The cost would not be born by the Irish to the extend Irish bank creditors were not Irish. I am assuming many were not Irish if Irish banks’ bankruptcy would have amounted to an attempt to “gain a short term advantage by blowing up the Euro financial system.” I just really don’t understand why a decision to finance Irish real estate through private banks should be treated equivalently to a decision to finance same through public debt. The Irish did the former, yet wound up with the latter. This seems unsound to me.

The cost/benefit analysis of getting a maybe 30% benefit from the non-Irish liabilities of the Irish banks, versus the cost of systemic collapse doesn’t even nearly stack up.
_________________________________________________

Can you say more about why 30% of the cost on the non-Irish would have lead to “systemic collapse” but 100% of the cost on the Irish taxpayer doesn’t? I still don’t understand why banks need to be bailed out more than internet start-ups, particularly when the banks are in small, open economies like Ireland where they don’t really need “Irish” banks anyway. In other words, why would bondholders of Irish banks losing money lead to “systemic collapse” whereas bondholders in Irish tech firms losing money is just part of capitalism? I’m only 3/4 educated on this topic, so am grateful for further thoughts.

Well basically, if we say that the Irish banking system had assets of EUR100bn, Irish deposits of EUR70bn and overseas non-deposit liabilities of EUR30bn (these are rough, order-of-magnitude numbers and I am ignoring capital). It gets into trouble, because the assets have to be marked down to some unknown amount. The government has two choices:

1) Bail them out at a cost of maybe EUR40bn and a guarantee. This means that the measured debt goes up by 40bn and there is a contingent liability of 60bn; meanwhile the government owns a stake in the banks’ assets (mainly Irish mortgages), which is worth … something. So the liability to be born by the Irish taxpayer is 40bn, assuming that the Irish mortgage-payers pay back 60 cents in the dollar over time.

2) Let them go bankrupt! Now, the overseas creditors take a loss of 30bn, but the Irish depositors take a loss of 70bn. If the Irish mortgage-payers pay back 60 cents in the dollar, then the Irish depositors will eventually get back EUR42bn, reducing the eventual loss to 28bn.

Putting this all together, and recognising that “Irish taxpayers”, “Irish depositors” and “Irish mortgage-payers” are basically the same group of people, then it looks like this is a choice between a 40bn bill and a 28bn bill, so let them go bust! But:

1) You can’t assume that the 60-cents-in-the dollar return is the same in both cases. For one thing, people are always more reluctant to pay back debts to a bust bank, because they know that the collection is going to be weak. For another, in case 2, the mortgage-payers have just seen their current accounts disappear!

2) Liquidity matters. Getting 60 cents in the euro back “over time” on your savings is not much use when you have bills to pay now.

3) In 2) I abstracted from the existence of the deposit guarantee scheme which would have meant that at least EUR40bn of the deposit liabilities would have ended up on the state balance sheet anyway.

Banking sector collapses just aren’t costless things. If the Irish government had been able to selectively default only on the foreign liabilities (which is what Iceland tried to do), they would have been in a much better position, but a) this is obviously illegal under EU rules, and b) it would have had very bad long and short term consequences for other countries’ willingness to do business in Ireland, much more so than, say, a 20% corporation tax rate.

I still don’t understand why banks need to be bailed out more than internet start-ups, particularly when the banks are in small, open economies like Ireland where they don’t really need “Irish” banks anyway

This is a classic “in the long run we are all dead” situation. If Ireland was like New Zealand or Portugal and actually did have a majority foreign-owned banking system you’d be right, but the government had spent decades protecting BoI and AIB from foreign takeover, and then building up Anglos as a national champion. You can’t create (or import) a new banking system overnight.

The real issue is about the ‘promissory notes’ with which this has been funded, the Emergency Liquidity Assistance measures.

But those really can’t be seen outside the context of the banking sector assets on the other side of the balance sheet though; I usually have a lot of time for Karl’s analysis but I thought he was all over the place here. He’s valued the IBRC/Anglo loan portfolio implicitly at zero, and he’s ignored the fact that there is a great big double-counting issue here; the notes issued to IBRC are already counted in the national debt. The overall Irish government debt is a big number, and so identifying one part of it (the promissory notes) is also going to be a big number. The way that article is written makes it look like the ELA is on top of the debt, not part of it.

In this analysis by Mehrdad Vahabi, he makes the point that there is a continuum of voices from silence to a scream http://books.google.co.uk/books?id=gVk5WcePqrIC&pg=PA95#v=onepage&q&f=false .

I’m not sure silence will persist for much longer. A democratic deficit means that the rich will exit but it also gives the masses the moral right to engage in non-democratic forms of protest http://www.macroresilience.com/2011/06/29/the-democratic-deficit-in-europe-and-the-crisis-in-the-periphery/

To dsquared – P.O’Neill has noted elsewhere that ‘The Anglo ELA is not a counterpart to anything on NAMA’s balance sheet. Even if NAMA was dumped entirely to the EU, there is still a big pile of government promises to make whole the creditors of insolvent banks’.
https://crookedtimber.org/2011/12/09/euro-kremlinology/comment-page-3/#comment-391565

Ireland as a rich country – yes, it is. But this is not really the point. Asymmetric shock and fiscal distress in a monetary union should have some form of fiscal transfer capability built in at a transnational level. Under current conditions, that would indeed mean that it would mostly be Germany taxpayers who carried a good part of the load. But as others have noted, during the 1990s and 2000s, when Germany was funding its reintegration project (providing huge capital and transfer spending to the East), and Ireland and others were growing very fast, a fiscal union would probably have seen net transfers going the other way.

Was it that the ECB insisted that the government couldn’t renege on its decision to underwrite the banks?

Partly. In my analysis:

1) I still don’t think this was necessarily the wrong decision, as in #33 above.
2) The ECB/EU were prepared to underwrite the solution, but they wanted to be sure that their money was at least partly going to prevent contagion to the rest of Europe.
3) Having built itself up into a financial centre over the preceding ten years, there was a general expectation of Ireland that it would act like one. Even a 12.5% tax rate isn’t enough to attract investment to a country which suddenly changes the rules when they appear inconvenient.

The IMF, in my view, gave really bad advice, and I think it was based on a fundamental misunderstanding of Irish and EU law – they thought that it was possible for the Irish banks to default on their bonds without also being in default on their deposits. This is possible in the USA for a bank under FDIC control, but the USA is unusual in this regard.

‘The Anglo ELA is not a counterpart to anything on NAMA’s balance sheet.

No, it’s a counterpart to IBRC, but Karl just says “it is unlikely that any good assets exist here”. That’s tantamount to yadayadaing a EUR33bn loan portfolio, half of which is actually performing, let alone the collateral. He or his editors also make the actual EUR31bn of EBA which refers to IBRC into “the vast majority” of the total EUR42bn outstanding (the other 9bn is related to AIB and BoI and is very likely indeed to be money good).

And more importantly, it’s double-counted with the national debt.

Has Iceland’s attempt to shaft foreigners actually had this consequence for them?

Yes; this is one of the reasons why Iceland is still trying to get the Icesave affair resolved, now that the new government has given up on the silly Grimsson selective-default plan.

“they thought that it was possible for the Irish banks to default on their bonds without also being in default on their deposits”

I am amazed to read this is not the case. In Greece, deposits are insured by the state up to a point. Bonds don’t have such protection as a matter of law. Where do you base your statement that it would be illegal to default on bonds while protecting deposits?

In Greece, deposits are insured by the state up to a point. Bonds don’t have such protection as a matter of law.

Defaulting on something and having your creditors paid by the state, is very different from “not defaulting”. Also (apologies for the jargon), “deposits” includes corporate deposit accounts and payment system deposits. It’s only retail depositors that are covered by the deposit insurance scheme. Also, as I mentioned above, using the deposit insurance scheme immediately hits the government budget with exactly the liability it was trying to avoid. The case that would have made a difference would be if you could tell the bondholders to take a hike, while still keeping the bank going and using its assets (rather than the government’s) to pay the depositors. That’s not legal in Greece, Ireland or most European countries except Denmark.

@dsquared
I’m a bit surprised to learn that Ireland “still has a median income higher than France” given that the figures in 2009 were 22.4k and 19.8k respectively. Are you sure France isn’t ahead? In any case median income is a lousy measure of wealth. I don’t have any good information on Irish households’ balance sheets but, given the way we got into this mess, they must be in pretty poor shape.

I’d also, contrapunctually, say that median income per head is a pretty good measure of whether Ireland is a rich or poor country; if you’re going to use balance sheet wealth, you end up concluding that Italy is a richer country than Germany.

Isn’t this ambiguity more a feature than a bug?

good point. But it’s not ambiguous that Ireland is a very rich country, albeit one that’s having a nasty recession. And this matters in terms of the viability or justice of permanent fiscal transfers; I think it also partly explains why the level of popular outrage is so much lower than in Spain or Greece. In per capita terms, income is roughly back where it was in mid 2004 – the real work of the post-EMU boom hasn’t been undone yet.

Who is the wealthiest of them all…
Eurostat data on GDP per capita in Purchasing Power Standards might be a good one to look at.
Their latest series, reported in December 2011, is for 2010. Taking EU27=100, we get:
133 Netherlands
128 Ireland (GDP)
123 Sweden
118 Germany
115 Finland
112 UK
108 France
104 Ireland (GNP)
101 Italy
100 Spain
90 Greece
80 Portugal
I include the Irish GNP info here because of the disparity between GDP and GNP (GNI might be better), since GNP is a better measure of the resource base available for distribution and redistribution in the domestic economy.

Is marginal income a good number, when unemployment is the issue that hurts most?

When people talk about devaluation and the Euro etc, there is an underlying assumption that a fall in real wages is preferable to high unemployment. Everybody feels poor when there is high unemployment, even the people who have a job but fear to lose it.

@ dsquared

Usually smart but all over the place here is a comment that can be thrown in both directions.

* Trust me, the IBRC now owes about €42 billion in ELA to the Central Bank of Ireland. This is the €38 billion in Anglo’s half-year accounts plus an estimated €4 billion from INBS. Combining the two balance sheets, total non-equity liabilities are about €59 billion. Quibble about vast majority or not if you want, but it’s clear this IBRC is mainly an ELA-repayment operation.

* In relation to IBRC’s performing assets that you think I’ve ignored, remember that the reason IBRC had to provided with €31 billion in promissory notes is because otherwise they were insolvent. The point made “the balance sheet of the IBRC shows very little in the way of good financial assets likely to yield funds to repay this enormous ELA debt, equivalent to almost €10,000 per man, woman and child in the Republic. IBRC’s principal assets are what is known as “promissory notes” from the Minister for Finance” is correct. There’s a €31 billion shortfall without state help and perhaps more if the remaining assets get written down further. So it’s largely left on the state to get the IBRC’s ELA debt repaid.

* Neither the piece Niamh cited nor anything else I have written has double-counted the ELA as part of the national debt and I’m fairly surprised to see you accuse me of that. The ELA is to be repaid to the Central Bank. The promissory notes are the mechanism that will allow this repayment to happen. The promissory notes count on the national debt (this is the only mention of the national debt in the article) while the ELA does not. If the ELA debts are put on the long finger, then the promissory note can be restructured in a way that substantially reduces the NPV burden of this debt.

* In relation to your comments on depositors getting back 60 cents, I’m assuming this is a temporary failure to remember bank resolution regimes. This might jog your memory http://www.bankofengland.co.uk/financialstability/role/risk_reduction/srr/index.htm

* “The overall Irish government debt is a big number, and so identifying one part of it (the promissory notes) is also going to be a big number.” I’m guessing you can see the logical flaw in this.

Not to worry, you’ve had better moments.

On a technical note, it bugs me that so many discussions of the banking system liability don’t mention the corresponding asset at all; this makes a huge difference to the net fiscal position

I’m with Karl in suspecting that a lot of it doesn’t exist. I mean, the recovery rates on foreclosed houses in the US in this bubble have been pretty dreadful. Also, if you leave an unfinished building for a few Irish winters (or a finished one after the cops move the squatters on and leave the gaff open), anyone who buys it will need to gut it to the foundations to deal with the damp and rot before they make good the inevitable vandalism, replace the stolen copper pipes and wiring, etc.

Plus, there’s a lot of stuff in the wrong place, and the only fix for that is to knock it down. No doubt there’s a fair amount of pure bezzle in there, too. Some of it will be “illiquid”, but that’s another way of saying “it might be saleable at some point in the indefinite future but it’s worth nothing now”, and you can’t accuse someone else of yadda-yaddaing and also rely on that.

@40 – Iceland is doing better than Ireland in terms of the human misery Niamh is writing about – for instance, employment. The argument that Iceland is doing worse has been countered by Krugman, here: http://krugman.blogs.nytimes.com/2011/02/26/iceland-ireland-again/. And I’d like to know the source of the idea that the Icelandic government is planning on reneging on the referendum based repudiation of the program of the government taking over the private bank debt, implied by d2’s comment in 43. Barry Ritzhold has a nice string of references here: http://www.ritholtz.com/blog/2011/11/key-lesson-from-iceland-crisis-%E2%80%9Clet-banks-fail%E2%80%9D/

The idea that time was working against having the Irish banks go bankrupt and be bought by other banks outside of Ireland is, like the idea that the state oughtn’t to simply use its facilities to create an immediate emergency public bank, one that bankers like to wave around. But the time dimension here has to be measured not in terms of bond traders computers, but real people’s future opportunities, which have been systematically sold off in order to maintain a system in which the richest thrive, and the structures that were painstakingly built to create a middle class over the last one hundred years – state supported life cycle goods – are just kicked over.

This seems fundamentally to get one of the questions about the economy wrong: what is the economy for?
In Ireland’s case, it is a rich country – but one with a very thin history of being a rich country. This counts enormously, as well does not simply consist of median income stats over a year’s time, or even a decade, but also infrastructure, the endogenous growth of innovation within an economy (Solow’s residual), etc. In these terms, Ireland has made a terrible mistake in not telling the dead banks to bury their own dead.

Did Ireland ditch the bankers and wipe out its bond holders when it saved its banks?

“Could you please repeat in English?”

That was the best in can do in English. Somehow i tend to understand almost everything written in Englis anyway , i can try German:

Niemand interessiert sich für schwache weit entfernte isolierte soziale Gruppen und sie können sie sind nicht stark genug sich selbst zu helfen, das war schon immer so, ist ganz normal und hat null mit den Sparmaßnahmen aufgrund der Finanzkrise zu tun. Das merke ich gerade selbst im bösen die Irischen Sparmaßnahmen erzwingenden Deutschland (für alle die es nicht Merken aufgrund von ans rassistische grenzender anti Deutscher Wut, der Teil das Deutschland die Irischen Sparmaßnahmen erzwingt war ein Witz).

Or let me try with different English words: Life is not fair, never has been, never will be. That is the case just about everywhere, not just in countries like Ireland that see themself (wrongly) as victims of evil foreign forces like the ECB (which according to general sentiment here in other posts and comments is controled by evil Germans).
For example, im just at the moment expiriencing myself how bad weak social groups are threatend within the aleged crisis winner country that has an evil masterplan for world or at least EU domination.

Hix – thanks!

Please note that ‘Life is not fair, never has been, never will be. ‘ is not an excuse for deliberately choosing bad policy.

re:70

“My question is, and remains—is that a good thing?”

One of the laugh-up-their-sleeves aspects of neo-conservatists and their anti-democratic beliefs is the fact that the electorate (2004 Bush) voted for them! The electorate voted for people who lie to them and despise them. Funny? Not funny?

Look at it another way, the big fat lazy electorate is going to be the final stumbling block to effective action against AGW. “Death Before Discomfort!” is their (implicit) battle cry.

Enough from me, but I don’t want to ignore this from Dan Hardie (good to see you here BTW):

A majority of Irish voters wanted the single currency, which has had such awful consequences for their country, and the rest of the Eurozone. That is something that Irish citizens are going to have to think about.

Lots of us do think about it. There were some things we should have foreseen, for example the way Irish borrowers went wild when they found themselves in a low interest-rate environment. Ireland has form when it comes to property speculation and we should have been ready for that. But a lot of what went wrong was not easy to foresee. Career civil servants had the reputation of being sound, boring people who cared about getting the details right. It wasn’t easy for Sean Citizen to know that the culture had deteriorated so much. Likewise, who knew that the Auditors Reports in the banks’ financial statements really weren’t worth the paper they were written on? Stock market players were rather slow to catch on, so it seems a bit harsh to expect better of the voters.

Some of the worst features of the system have only become evident in the last few years. Economists have only recently woken up to the fact that, in a monetary union, states are vulnerable to the same sort of self-fulfilling panic which has been toppling banks for centuries. Hoocudanode that when that discovery was made the ECB would say: sorry guys, not our problem?

I fear the as-yet undiscovered fourth horseman of “exit, voice, loyalty” could be violent revolution, as Ashwin noted.

When none of exit, voice or loyalty is possible, waiting (or screaming) silently can not be sustained indefinitely. I saw this happen in South Africa, from which another perspective, inter alia
“There is more money to be made out of financial speculation than out of any other activity that one can do with money. This is the crux of the global financial crisis.”
which seems to my innocence an accurate summation.

Qui incipit amare, incipit exire,
Incipit exire e Babilonia.

Well, it would seem that exit would have been the obvious first choice for Ireland, and remains the obvious choice now. I mean exit from any and all debt obligations that compromise the more important obligations facing Ireland, some of which you go over. Instead, what the then govt of Ireland chose was to enter further into the maze, to actually enter into an obligation to take over the bad debt of private banks. And ther present govt sees no alternative but stay on that course

That behavior is what is really strikingly odd about this situation. Instead of choosing, in the face of obvious failure, any of Hirschman’s three options, or either of the two alternates you propose of “silent screaming”, or “waiting in the long grass”; the govt of Ireland chose to enter more deeply into the maw of a financial system that had failed so shockingly. It rejected exit, which is perhaps understandable, but it chose instead to go back for more of the same, which is not understandable. Why would it do that?

The proximate cause of what would otherwise seem to be deeply irrational behavior, seems to have been sheer terror at the prospect of the “contagion” that letting the banks fail would have unleashed. I think that it is a fairly clear error to suppose that the govt of Ireland was impelled to take on the debt by a fear of Europe, at least in the sense of Europe’s formal, open governance structure. Instead, it seems that what drove this was the prospect that the whole web of hyper-leveraged, re-hypothecated to the nth degree, international finance threatened to unravel if the Irish banks’ counterparties were not made whole. We don’t and can’t know the details — exactly which raft of CDS convinced them that not assuming their banks’ loans would bring about Armageddon — because that’s the whole point of what we’ve let our financial arrangements become at the high end, completely opaque. We believe in the Hidden Hand over public governance, even when the former has patently degenerated into hands that like to hide themselves.

I don’t think that Hirschman’s frame of analysis includes this dimension of opacity in power arrangments. Of course no one can voice their dissent with the arrangements and organization that have failed here, because their are no open arrangements, there is no organization, just the Hidden Hand, plus or minus a whole lot of hidden hands, the extent of their contribution varying with your taste for conspiracy theories. Loyalty? To who or what? Not to Ireland. Ireland’s govt has admitted that there is no such thing as a sovereign Ireland that can or should chart ts own course. Ireland, such as it is, is certainly not the system that failed here. That would be the great worldwide non-system of finance.

And there would seem to be no exit, because Babylon is everywhere, a truly global, transnational transgovernment. It has no formal structure or concrete presence, so you might as well call it Babylon as anything else, at the risk of seeming to take public policy advice from Rastaffarians (Safer to attribute the idea to them, because St Augustine is probably in worse odor these days.).

Exit, voice and loyalty are all irrelevant inside Babylon. Babylon keeps going despite its obvious, and obviously fatal, failures, because it is precisely the prospect of its failure that renders its inhabitants too terrified for any other response than fear. Fear is that fourth response you need to augment Hirschamn’s three. But it’s a peculiar fear that is generated by suchg a non-goveement, non-organization that mevertheless seems so much to be the only really relevant or impoortant source of order left. This isn’t really fear of what Babylon would do to traitors (Who could be afraid of Trichet?), as fear that it will collapse, and in its ruin, ruin all of us. We imagine that the continued existence of all sorts of good things rests on its continued existence.

It’s an irrational fear. The governments of the world would be perfectly capable of separating out the wealth that serves real needs, and thus has to be protected, from the excess wealth that has to be allowed to burn off. But those governments, and the people whose will they represent, are almost certainly too paralyzed by fear to start such a bonfire themselves. Fortunately for all concerned, we don’t have to do anything proactive, as Babylon is busy committing suicide. It would have done so in 2008, but we were too afraid to risk life without it, and so interrupted its self-destruction. All we have to do this time around is leave as the fires start. In practical terms, respond to the failure of banks and other financial entitities by resolving them rather than bailing them out. Have Ireland insure that the widows and orphans are made whole, while GS gets bupkis.

Life will go on without the banks. It’s time to leave them behind, as Abraham left Ur.

John B @64

Your point about Ireland ‘being a bit stuffed for natural resources’ is not entirely true. Part of the problem is that what natural resources there are (not on the scale of Norway, granted, but substantial enough) are effectively handed over to multi-national resource extraction companies for a pittance in licences fee and taxes. It’s part of the systemic cravenness towards business interests – domestic and foreign – which is the hallmark of the Irish centrist politician, of all parties. The natural resources we do have could be developed and provide a decent medium to long term revenue stream for the state, but the state has allowed itself to be persuaded that pursuing this would not be worthwhile, just like it allowed itself to be persuaded that guaranteeing the banks made perfect sense.

I should be said that Germany did not insist on all bondholders be compensated. Germany called in effect for a partial Greek default. If you have to blame somebody blame the ECB, for you cannot expect Germany to make good your promise you call stupid yourselves.

If the small depositor is already shielded by an Irish FDIC-equivalent, then bankruptcy mainly falls on the larger investor

but “larger investor” in this context includes working capital balances of corporations. Plus, the small depositor will (eventually) get his money back from the FDIC equivalent, but that doesn’t mean he can get it out of the cashpoint – the bank is bust and can’t operate as a bank.

It is worth remembering that the Euro was a very popular exit in some of these countries. Italy couldn’t move to the Euro fast enough to suit popular attitudes. Ireland, too, loved the Euro at first.

The “optimal currency area” objections, voiced in technical terms, fell on deaf ears, and often did not point sharply at how sovereign currencies provided a means for the internal resolution of institutionalized conflict. Sweden, which has regularly and explicitly used devaluation to correct mistakes in its system of nation-wide collective bargaining over wages, barely avoided committing. The political convenience of French inflation over the years was not appreciated by the mass of Frenchmen.

I don’t think Hirshman’s categories really help with understanding the subtle ways that having a sovereign currency, and being able to abuse it, gave the political system ways and means to solve problems, which arose in the presence of otherwise difficult to resolve conflicts hobbling institutional performance. This was particularly true of fiscal and banking institutions. I suppose people may have hoped that the Euro would bring pressure to reform taxation, in say, Greece or Italy, or commercial banking in Spain. But, instead, without the “out” provided by a sovereign currency regime, those institutions simply broke.

If there were €25 billion in additional losses on non-cash assets, it would be €56 billion.

this would involve every single loan being totally worthless, all the property being totally worthless and all the derivatives counterparties paying zero cents in the dollar.