Anglo Irish Bank nationalised…

Gavin has the full statement

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  • One down…

  • Dave

    That’s 25 billion of private debt that has now become public debt. This government is deranged.

  • J O’Donovan

    But why are none of the executives up before the Special Criminal Court or having their assets seized? These people – and their spouses – should be getting long jail sentences. The top British bankers are getitng bonuses on the millions and the clown who wrecked Northern Rock is getting tens of thousands of pounds a month compo. Where are Eirigi?

  • Scaramoosh

    Just wait until they start to call in the loans; then the real story of this bank’s profligacy, and those that benefitted from it will come out into the open!

    On a related note; this was an interesting item from the Irish Times;

    “IRELAND WILL see more demolition than construction of houses over the next decade, as the economy struggles to recover from the collapse of the housing market and the emergence of “zombie” banks, UCD economist Morgan Kelly told the conference.

    In a presentation that drew several collective intakes of breath, Mr Kelly predicted that house prices would fall by 80 per cent from peak to trough in real terms.”

  • This is amazing news. With Northern Rock, the UK government had the sense to immediately embark on a sensible windup of the company. They put up their mortgage rates to force everyone to move their mortgage to another bank.

    But with the good old crony-capitalism/pseudo-socialism that we know and love here, one can be sure that Lenihan will keep Anglo running business as usual. That’ll be more stupid loans being given out, digging us further and further in our hole. They’ll use Anglo as a policy instrument, giving the Government total control over the means of production 🙂

    A politically driven Anglo will run up massive losses and take down the other banks with it; why would any business go to a conventional bank with all those forms to fill in, when the local branch of Anglo will hand over that nice loan at a low rate of interest without any hassle (apart from having to have a ‘word’ with the local FF councillor)?

    A nationalised banking system is much much more powerful (i.e. dangerous) than the nationalisation of any other industry.

  • pseudo-socialism. That’s exactly how I would describe a country without a proper national healthservice.

  • Merge Anglo with Postbank perhaps?

  • Mark McGregor

    And why are the shareholders given any concern? They played capitalism, didn’t give a shit about responsibility to others when they gained, why under nationalisation should their greed get them a moment’s notice?

    They had their profit, were part of the system that drove the bank to collapse. Tough titty should be the order of the day for those that seek to get cash from no work.

  • jone

    Morgan Kelly must be rolling around pissing himself tonight having been described as ‘ridiculous’ for suggesting this might happen.

    http://www.independent.ie/business/irish/banking-collapse-economist-was-just-spouting-off-1318359.html

  • aquifer

    Wanna buy an empty apartment? You just did, with no moving in date.

  • Dave

    Let’s see… property developers owe Irish banks 108 billion and property buyers racked up loans of, let’s see, 35 billion in 2005 and 40 billion in 2006 (at peak-of-the-boom prices) adding a couple of hundred more billion to the debt of the banks. Now, as we all know, business is booming for property developers so they’ll have no trouble paying back that debt and property buyers don’t mind paying back mortgages for the next circa 30 years on the 340,000 vacant properties that produce no income, so all is fine and dandy there to. Nope, no risk at all of property developers handing back that odd acre they paid 80 million for or of property buyers handing back the keys to vacant properties that are rapidly declining in value – just as those who had tenants won’t mind if said tenants were immigrants and bugger off to where the work is, adding tens of thousands of more properties to the no-income pile. Nor, indeed, is there any risk of the banks trying to offload the debts as repackaged securities with the taxpayer picking up the tab when borrowers default because, well, Irish banks wouldn’t do such a thing. Nothing to see here.

    As was pointed out to Mr Lenihan at the time he guaranteed the banks, the reason the international banks stopped lending to Irish banks had nothing to do with a credit freeze (said banks continued to lend to other banks): it was because the international banks placed the Irish banks into a high risk group due to its exposure to assets that were subject to rapid deflation in value and, ergo, massive losses to the lenders. Mr Lenihan did not address the underlying cause of the problem: he merely said to the international banks, “If private companies don’t honour their debts, the gullible Irish taxpayers will assume all debts.” In effect, he knowingly and recklessly exposed this country to the greatest danger it has ever faced. And the odds are that he has bankrupted this country in the process.

  • Nomad

    Disagreed with Dave’s arguments when it came to recapitalisation of the US banks. I still think they were too big to fail and the US economy will pick up soon enough. I also think the structured securities will regain value in the medium term.

    With the Irish banks though, I fully agree. Ireland’s concentration of “property development” is such that they should remain on the hook for their ridiculous debts. It might even help things. The state already guaranteed deposits. I think in this case that was enough.

    Ireland just lost a lot more money today.

  • Bemused

    The country is fucked (to give it its technical term). There are some bitter, bitter, bitter years ahead.

  • kensei

    Nationalisation is not necessarily bad per se. If you can take the pain of recapitalisation, then it offers the chance to recoup some of that in the long run when the distressed assets recover a bit, and again when shares are issued. It’s how Sweden dealt with it’s crisis in the early 90s.

    http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html

    But dear god, the first step is to give the shareholders a series haircut or let them take their chances without government support. That does not bode well for me.

  • frustrated democrat

    Maybe the ROI is so destitute it will have to rejoin the UK and then we can have a United Ireland again.

  • Greagoir O Frainclin

    Baton down the hatches folks, save the food rations ….we are all in this together!

    “Now tis the winter of our discontent……..”

  • As Mark has pointed out, the value of investments and shares can go down as well as up. So the shareholders can fuck right off.

  • does anyone remember sinn fein and the socialist party’s mainfestos during the last general election?

    well in the finance part of those manifestos, i think i remember that both parties favoured nationalising our banks.

    well, i think brian lenihan kept copies of those manifestos…..

  • Harry Flashman

    What was that wag’s letter in the Irish Times the other week again?

    “What’s the difference between Ireland and Iceland? One letter and six months.”

  • Harry Flashman

    “save the food rations”

    In all seriousness I have begun to do precisely that, I have stocked up with a (hopefully) month’s supply of basic foodstuffs (rice and noodles, tinned meat etc) and have instructed that two extra bottles of gas and drinking water to be kept on hand, as opposed to buying one when the other empties, as the Bulgarians have discovered to their cost the assumption that there will always be the basic necessities of life readily available is a dangerous one these days.

    Admittedly I don’t live in Ireland and the country I am currently resident in has a tendency to go apeshit every decade or so quite apart from the regular natural disasters and run of the mill power outages. But I have a really rather nasty feeling about what is coming down the pipe in the next few months. I note that world shipping prices are now effectively zero, that means that to all intents and purposes global trade has simply stopped, that is bound to produce some quite interesting results in the rather near future.

  • At a time of financial crisis it would be nice if Ireland were supplying gas through the Irish Sea interconnector to keep Europe warm and the national balance sheet toasty.

    Pity about all those objections in Mayo…

  • Seymour Major

    I have not yet found any comment in the Irish media about the possibility that joining the euro may have been a mistake.

    It might not have been a mistake if the Banks had been adequately regulated so that debt did not build up. However, proper monetary control could also have stopped it.

    I distinctly remember that when Ireland joined the euro, the borrowing rate immediately came down by about 3%.

    Some would say that the UK has ended up in the same boat. Why monetary policy did not work in the UK was because it was not set correctly. The Government set the Bank of England an inflation-control target based on the consumer price index. Had the criteria included property inflation targets, interest rates would have been higher but it would have stopped property prices going “through the roof” and consequently, a lot of the bad debt would not have happened.

    Another comparison is that the Pound is now down against the euro. Ireland’s economic competitiveness has been suffering as a result of inflation in recent years. Being in the euro zone will now make Ireland’s problems worse.

    Meanwhile, there are some in the UK who are now saying that the UK would be better off in the Euro. Perversely, I think that would be right, if the UK joined at the existing exchange rate, but it does not alter the fact that being outside the eurozone it will help the UK to recover from the recession.

    The question I want to raise about the euro is this. Will those countries that are losing out by remaining in the euro (and there quite a number of them) continue to put up with it?

  • Seymour Major,
    Those that are losing out by being in the euro will not be able to fix any problem by leaving it again. Ireland would still owe hundreds of billions of euros, via state and private sector debt, to the rest of the world.

    This debt isn’t going away.

    The public in the South could easily make a decision to switch to sterling without any government approval. Starting in border counties, why would you spend those nice valuable (and effectively appreciating) euros, when you’d be better off spending your sterling? So there could soon be more sterling spent south of the border than the amount of euros spent north of it. This behaviour would quickly spread with Southerners buying things off each other in sterling.

    A similar thing happened in the US during the Great Depression. They left the Gold Standard in 1931, but had to ban private gold ownership in 1933 so the government could build its stockpiles of gold. A similar thing could happen in Ireland with sterling being used by most people to do their business, but with the euro debts (like their gold debts) hanging over our heads. The government might have to ban the euro within Ireland, allowing it to gather up all the euros to itself to pay a little of our debt to the world.

    This might seem drastic and unlikely, but then most of the upcoming decisions will be drastic. We need an urgent large one-off pay cut in order to induce some expectations of price inflation again – thereby encouraging people to spend their euros. The 15% cut that is being talked about now may even be too tame.

  • Suilven

    Aaron McDaid,

    While your theory on Sterling use vs Euros is interesting, I would have thought most of those in border counties in receipt of Sterling, either through salaries or business, would always have spent these preferentially in the North, rather than suffer the bank bid/offer spread on exchange. Besides, most of the recent influx of cross-border shoppers has been driven by the strength of the Euro vs Sterling, as much as the lower prices in the North. Therefore I cannot see any driver for Sterling becoming a significant currency for intra-RoI transactions, at least as long as the government remains wedded to the Euro.

    As regards pay cuts, while the RoI’s already dire budgetary situation, now topped by Anglo-Irish’s undoubted huge losses to come, suggest that public pay cuts should be on the cards, I cannot for the life of me see why you think this would be inflationary? Surely pay cuts imply reduction in aggregate demand, implying reduction in price levels ie deflation?

  • kensei

    As regards pay cuts, while the RoI’s already dire budgetary situation, now topped by Anglo-Irish’s undoubted huge losses to come, suggest that public pay cuts should be on the cards, I cannot for the life of me see why you think this would be inflationary? Surely pay cuts imply reduction in aggregate demand, implying reduction in price levels ie deflation?

    This was what I was about to say. The Republic looks to be in a nasty bind here.

  • Mack

    Seymour Major

    David McWilliams has hinted that leaving the Euro should be considered in one of his latest articles. He’s the first economically credible figure I’m aware of to do so.

    http://www.davidmcwilliams.ie/2009/01/11/fight-for-our-right-to-prosperity

    Also worth reading his late-2008 article on Anglo –

    http://www.davidmcwilliams.ie/2008/12/31/nationalisation-of-anglo-could-actually-be-a-help

    I’m not convinced that being in the Eurozone will make Ireland’s problems worse in the long term. In retail I have nearly always shopped in the north, but groceries have plummetted in price in the south since Christmas – our big monthly shop cost almost half this week, as this time last year.
    Meanwhile the prices on every single item I left in my Amazon.co.uk shopping basket increased over the Christmas break. Presumably as the British importers now have to pay a higher price thanks to Sterling weakness.

  • Suilven, kensei,
    Wages are going to be forced down anyway. If it’s an uncontrolled, fairly gradual, process then prices will slowly drop (except maybe for imports). In that situation, nobody will want to spend any money because they’ll see that prices are only going down in future. The end result will be to restrain internal purchases (this would be bad news). And because people will still feel richer than they should, they might keep importing (we need to be discouraging imports).

    This is where a drastic, one-off, pay cut is needed. This will cut prices suddenly, but people might think “they can’t get any lower, and must surely rise sooner or later; therefore I will start spending.”
    Although, I must admit that could backfire and people might expect further cuts. This is where lack of control over the currency is a serious problem.

    The wage cut will stop imports dead (which would be fantastic news) and trade within the Republic might slowly start happening again.

    I know this whole thing seems a bit weird, but we need to find something analogous to the devaluations of the past. We need people to feel poor (to face the truth). This will help slow importing and start people enthusiastically working.

  • Harry Flashman

    A couple of weeks back a friend of mine was staying in Inishowen in Donegal, he did a bit of shopping in Derry and noticed the price of a packet of corn flakes was GBP1.95 but in Buncrana it was EUR4.85, now given that the pound and the euro were almost parity at that time that was quite a shocker.

    Remember thirty years ago the punt parted company with the pound so now we have the situation where a packet of cornflakes in the North is just less than two old Irish pounds but in the South it’s nearly a fiver.

    Somehow I’m not entirely convinced that this Euro thing is doing the Republic any favours.

  • How about this for a solution: increase VAT and decrease income tax, alongside the austerity measures.

    We need some form of wage cuts in the South because, in the absence of control over out currency, we need some other mechanism to stop us importing and start us exporting.

    We desperately need to avoid deflation expectations flowing from the wage cuts, and this is where VAT comes in. The government could use VAT to keep inflation expectations positive, thereby encouraging some spending (on home made goods hopefully). Some of the extra revenue could possibly be used to cut income tax, which might make the wage cuts more politically acceptable.

    This is just a scheme to attempt to replicate the effects of devaluation, given that we can’t actually devalue the euro.

    Ordinarily I despise VAT as a regressive tax. Note for the future generations: cut VAT right down during the good times, so that it can be increased when we need inflation. The EU needs to allow VAT under 15% after this depression.

  • kensei

    Mack

    Talk of leaving the Euro is madness. Given the current problems, how do you prevent a series run on the new Punt?

    Aaron

    I do not believe for a second that would be the end of it. As pointed out, it would reduce aggregate demand and put further downward pressure. But the budget situation may become so bad it forces little other option.

    Harry

    You cannot compare the price of goods like that on really short term swings like that; the pound has just basically went through a deflation. Over time, that is going to start evening out again. That said, even with 1 pound = 1.5 Euro it is quite a bit more expensive. However Southerns are paid more, on average, so you need ot look at Purchasing Power Parity measures.

  • kensei

    Aaron

    Increase VAT? The net effect of that is to reduce demand. It might even force suppliers to try to keep their prices down in a recession, and increase deflationary pressure. An income tax cut would be expansionary, but but if it is entirely wiped out by an increase in VAT, it is debatable how much it will help.

    What is needed is a stimulus. But the budget situation precludes it. This is a nasty, nasty place to be. I think about the best that can be managed is not making it much worse.

  • We can’t avoid a cut in our standard of living, as we have been living beyond our means for perhaps a decade.

    What I’m trying to do a is make a realistic plan that acknowledges these realities and keeps the economy functioning by minimizing the expectations of deflation.

    To the individual, there is no difference between a wage cut and a VAT rise. Both decrease their purchasing power, and hence are equivalent in many ways. But the latter is easier to sell and, crucially, it means those few people that do have a couple of euro to spend will do so. If people think prices will keep falling, they will hoard what little money they would otherwise be willing to spend; so we need to avoid this particular scenario.

    We’ll probably need a combination of these. VAT rises, and similar taxes, could be used to minimize/avoid deflation and then use the funds raised to go some way towards funding stimulus.

  • Mack

    Aaron, Kensei –

    I’m not convinced living standards need actually fall. We’ve been forced to pay way over the odds for shelter for the best part of a decade. €500,000 for a bog standard apartment or a 20% salary cut and €120,000 for the same apartment? I’d take the later any day…

  • Mack,
    Of course, many people will be better off with falling accomodation costs. But just as it was obvious that buying houses off each other didn’t create a cent of real wealth (just shuffled it around inside Ireland instead) it is also true that falling accomodation costs don’t directly create any real wealth.

    Our trade deficit remains, as do the huge debts we have built up funding this addiction to laziness and imports.

  • kensei

    Aaron

    I’d still argue you have things back to front. A VAT increase affects everyone and their purchase decisions, whereas a public sector wage cut affects only those employed in the public sector. Furthermore it is regressive, and will probably
    hit those on lower incomes the hardest.

    And severe cuts may be required, but there is no way to spin these as inflationary. It’s claiming black is white. You are talking about removing uncertainty, which would help. But there is no way to remove such uncertainty. Ireland is a small, open economy, and its fate is bound with the global economy. There is no guaranteeing things cannot get worse.

  • Conchobar

    It won’t be the first bank to be “nationalised”wasn’t the Northern Bank “nationalised a few years ago.

  • I’m not trying to ‘spin’ cuts as inflationary. We face tough times regardless and I’m suggesting VAT rises as the least worst way for the state to raise revenue because it can help avoid deflation.

    A public sector worker doesn’t care whether his/her salary falls or his/her cost of living rises. Either way, their standard of living falls. Same with private sector workers, it might seem pointless to them that the state is using VAT rises to cut income tax.

    But the advantage of VAT rises is that it can avoid the nominal prices falls that lead to deflation. Deflation is devastating because those people who would be willing to spend will decide to delay in case prices drop even further.

    You can argue that VAT rises are bad for the economy, but then again so are income tax rises and recessions and bad government and incompetent banks and cuts in staff numbers from the public services, and so on … But when there are tough decisions to be made, a VAT rise may be better than an income tax cut when deflation is the threat.

  • kensei

    Aaron

    But the advantage of VAT rises is that it can avoid the nominal prices falls that lead to deflation. Deflation is devastating because those people who would be willing to spend will decide to delay in case prices drop even further.

    I can’t see this. Surely this will be a short term effect? And if average prices are decreasing, you going to see that on the news. I suppose it is possible that businesses could use it as an opportunity to raise prices via rounding up but a higher price level will not sustain the same demand without something else to make it up and you are going to have impacts on employment and production (and subsequent reaction to that) which are potentially complex.

    But then I know little on economics. Is this from some theoretical basis, or are you as blind as me?

  • To increase competitiveness we need, and will get, pay cuts in the private and in the public sector. That’ll allow our exporters to sell cheaper than the competition and we’ll have to limit our imports. That’s no bad thing.

    These wage cuts will also causes price at home to fall a little. This is nice as it means that a 15% pay cut for everyone won’t actually be as bad as we might first think.

    But a very real danger, which Krugman (most recent economics Nobel prize winner) is worried about in the US, is where the public expect prices to keep falling. Then people who have money and are considering an otherwise sensible purchase will hold off just to see if it gets cheaper next month. They’ll keep waiting, bringing demand down further, which will bring prices down even more. We’ll be stuck in a vicious circle. This played a major part in the Great Depression.

    We can’t devalue our currency, so the room for maneouvre is much smaller than in the past. The US and the UK can turn on the printing presses and run as big a deficit as they like to increase prices and wages to their hearts’ content. The Republic of Ireland just cannot once the bond markets are closed to us.

    Obviously, VAT rises look bad. If we have serious deflation (which is possible), then pay cuts and/or tax rises will exacerbate the deflation issue, VAT will not.

    Anybody know what happens to VAT on imports and exports? If we have to charge VAT on our exports, then I will withdraw this VAT idea completely!

    I’m not saying it’s a panacea. I’m saying that now that we’re in the eurozone, the list of tools is shorter and the order we should try the tools may have changed.

  • Harry Flashman

    “Talk of leaving the Euro is madness.”

    Ken, I’d be interested in your take on this article by an admittedly Euro-sceptic writer,

    Monetary union has left half of Europe trapped in depression

  • PaddyReilly

    People who have a strongly established prejudice against XYZ will obviously manage to make the abolition of XYZ the cure for any ill that befalls us.

    Having paper money, and having a National paper currency, gives goverments a quick and easy way to manipulate the economy of their countries, but arguably this manipulation is an economic ill in its own right. It means that all other countries need to be wary of trading with you, because effectively the agreed price of anything is subject to variation. It’s much safer to give a contract to someone in the same currency zone.

    There are other means of controlling the economy, and it is these which need tackling.

    Firstly, the price of houses, held artificially high by planning laws, poorly developed tenant laws and, it sometime seems, sheer insanity, has to come down. By 80% we are reliably informed.

    Secondly the rip-off culture in the 26 counties has to end. Prices for goods should be no higher than their UK equivalents, or at least, no higher than in Brest or Calais.

    Thirdly the minimum wage has to come down.

    All these three depend on each other. Inflation would enable a government to produce a kind of instant solution, but all that would happen is that people would start to put their prices back up, and soon we would be in the same mess again. There needs to be a mechanism whereby prices are driven down continuously by the natural mechanism of competition.

    The answer is thus to adopt the German model in every possible situation.

    Tenant Rights are expanded, meaning that buying to let becomes uneconomic. House prices fall.

    Stricter control on lending means fewer people can get mortgages. House prices fall.

    Easing up on Planning Permission means more people can just build where they want. This causes house prices to fall.

    With falling house prices, you then work on making goods less pricey, and bring the minimum wage down.

  • In Soviet Russia

    Anglo-Irish Bank nationalised you

  • Dave

    “Traders suspect that investors are dumping their Club Med and Irish debt immediately on the European Central Bank in “repo” actions.

    In other words, the ECB is already providing a stealth bail-out for Europe’s governments – though secrecy veils all.

    An EU debt union is being created, in breach of EU law. Liabilities are being shifted quietly on to German taxpayers. What happens when Germany’s hard-working citizens find out?” – Ambrose Evans-Pritchard

    Actually, Harry, I quite like that if it is occuring. If, as is a founding principle of the EU, that we have to share the wealth with other member states in the EU, then let us share the debt too. Let us share and share alike like good Europeans, and let none of the other member states violate a founding principle at this time of ECB-generated crisis.

    Ergo, let the ‘bad bank’ that is to absorb all of the toxic debts be created in the EU and let all of the member states transfer their toxic debts to it.

    How could any fine European object to this supreme act of solidarity among member states and still call himself a European?

  • Comrade Stalin

    David McWilliams has hinted that leaving the Euro should be considered in one of his latest articles. He’s the first economically credible figure I’m aware of to do so.

    Yeah. Like economic/currency independence worked out so well for Iceland.

  • Dave

    It works just fine for, Switzerland and Israel, both the same size as Ireland, with the Swiss Franc and the shekel being among the strongest currencies in the world – both currencies are thriving outside of the Eurozone along with dozens of the world’s other currencies. This propaganda line that small states can’t have independent monetary policies is proffered by those who don’t want them to operate independently of the EU, i.e. Europhiles. A strong Euro is very bad news for those who wish to export to countries outside of the economically backward and slow-growing EU region.

  • Dave

    This toxic debt problem should be seen as an acid test for how serious the Europhiles are about monetary integration and about further EU integration. If they go down the seperatist road rather than follow their founding principles and share the bad along with the good, then the EU integration project is dead, and folks need to observe that and follow the logic of it.

  • PaddyReilly

    the Swiss Franc and the shekel being among the strongest currencies in the world

    Maybe, but the huge subvention received by Israel from the US is not available for everyone, and Switzerland’s unique financial arrangements as a banking centre cannot easily be imitated, as Iceland has found out to its cost.

    Ireland, which has carved out a niche trading with other European nations, needs to peg its currency to those nations. The options of becoming a US subsidised holy land or a an offshore banking mall do not exist.

  • Greenflag

    Dave ,

    It works just fine for, Switzerland and Israel, both the same size as Ireland, with the Swiss Franc and the shekel being among the strongest currencies in the world’

    Does it ? Perhaps for Switzerland with it’s 400 year old neutrality policy and it’s long tradition in banking .But Israel ?

    According to a certain Mr Plocker chief economics editor of Yedioth Ahronoth, Israel’s largest circulation daily newspaper perhaps not . He’d like to replace the shekel with the dollar ?

    By giving up its present currency, the New Israeli Shekel, and replacing it with the U.S. dollar. Israel would achieve this by having its central bank, the Bank of Israel, purchase all shekels in circulation with its dollar reserves.

    Mr. Plocker outlined the advantages of his policy proposal from the Israeli, Palestinian, and American perspectives.

    From the Israeli perspective, Mr. Plocker said, the shekel is a marginalized currency. Not only is there little Israeli pride in the shekel, Mr. Plocker argued, Israelis also want to be part of an economic bloc, such as the European Union. However, the European Union shows no desire to allow Israel to join. Moreover, the enlargement of the European Union and the existence of the Gulf Cooperation Council (GCC) monetary union, which is also closed to Israeli membership, pose an economic threat to Israel. Mr. Plocker therefore predicted that Israel will soon find itself between two monetary unions, resulting in barriers to trade and investment in Israel.

    Mr. Plocker continued to build a case for full dollarization by outlining Israel’s recent economic history. GDP per capita in Israel has stagnated—real per capita income today is only 5 percent higher than it was 10 years ago. As a point of comparison, Mr. Plocker noted that two countries that had adopted the euro, Ireland and Finland, enjoyed real per capita income increases of 74 percent and 32 percent respectively over the same period. Much of Israel’s economic stagnation is a result of its monetary policy that uses high real interest rates to slow down inflation and so prevent a return to earlier periods of high inflation and recessions.

    Mr. Plocker therefore argued that full dollarization would strengthen Israel’s economy by giving it the credibility of the U.S. dollar and the fiscal policy of the Federal Reserve Board. Furthermore, trade patterns between Israel and the United States have created ripe conditions for full dollarization. The Israeli economy is already integrated with the U.S. economy as there is a considerable volume of trade between the two countries, such as in diamonds and technology. Adopting the U.S. dollar, Mr. Plocker argued, would not be economically traumatic for Israel, but quite the opposite: it might double trade between Israel and the U.S. Furthermore, full dollarization would eliminate the transaction costs associated with exchange rates, thus stimulating U.S. investment in Israel. Mr. Plocker noted that there is already dollar “creep” in Israel, with many real estate and business transactions performed in U.S. currency.

    Admittedly Mr Plocker’s remarks were made in 2005 and things have changed somewhat but it seems that the ‘shekel ‘ is not seen as the only solution to Israel’s economic woes . Recently Israel has also had major banking and financial crises like the rest of the world and even the Swiss are not immune .

  • Comrade Stalin

    It works just fine for, Switzerland and Israel, both the same size as Ireland, with the Swiss Franc and the shekel being among the strongest currencies in the world – both currencies are thriving outside of the Eurozone along with dozens of the world’s other currencies.

    My point is that the success or failure of an economy doesn’t seem to be related to it’s participation in the Euro. You might as well add the UK into the mix along with Iceland; it’s not a total meltdown but it’s perilous enough. Ironically, the situation in the UK has reignited the debate on the Euro and whether or not we should be in it.

    I agree that Switzerland and Israel are doing relatively well, but I don’t think that is because they have their own currencies. Our problems in the UK and Ireland are to do with our insane fixation with property investment, not the ECB.

    This propaganda line that small states can’t have independent monetary policies is proffered by those who don’t want them to operate independently of the EU, i.e. Europhiles.

    Indeed it is, because we think in the long run it’s likely to be better and we’re not driven by ideological right-wing fantasies about the EU institutions.

    A strong Euro is very bad news for those who wish to export to countries outside of the economically backward and slow-growing EU region.

    Straw man – where do the majority of Ireland’s exports outside of the UK go to ?

  • Greenflag

    Dave ,

    ‘A strong Euro is very bad news for those who wish to export to countries outside of the economically backward and slow-growing EU region.’

    Complete and utter nonsense the usual crap spouted by the short term mass media anti EU economic pundits of right wing British media. Germany became the world’s biggest exporter not by having a weak currency but by having a strong one . In absolute terms Germany exported more to the world than the USA despite the latter’s ‘relatively ‘ weak currency .

    The faster developing world outsde the EU are strengthening their economies and currencies and are able to afford western imports . All of this will of course be affected in the current downturn but longer term for any country in today’s world having a continually weakening currency is a no win situation longer term . This policy has always been used to help countries avoid the worst effects of their own financial policy mismanagement .

  • Greenflag

    paddy reilly .

    ‘Maybe, but the huge subvention received by Israel from the US is not available for everyone’

    Its a wonder Dave has’nt thought of suggesting that the Republic should rejoin the UK with it’s sterling currency ‘independence and then like NI we could ask HMG to bail us out to the tune of say 15 billion pounds a year ( prorated for population vis a vis Northern Ireland ). Somehow that might be the straw that would break Mr Brown’s financial back 😉

    Both Israel and Northern Ireland benefit from having ‘sugar daddy ‘ sponsors in terms of financial sponsorship and political underpinning from outside to a degree which cannot be replicated for other small european and indeed non european states around the globe . Without this support both States would have long since passed into history or would be far poorer than they presently are . The fact that around the world there are increasing signs of regional integration e.g in South America – Asia and Africa means that the EU will be nmore the model to follow than the 1,500 ‘nation’ state which Dave and the extremist ‘nationalist ‘ sovereignty above all merchants seem to favour .

    ‘ and Switzerland’s unique financial arrangements as a banking centre cannot easily be imitated’

    Easily ? Can’t be . There is only one Switzerland .

    ‘Ireland, which has carved out a niche trading with other European nations, needs to peg its currency to those nations. The options of becoming a US subsidised holy land or a an offshore banking mall do not exist. ‘

    As over 70% of our trade is with the Eurozone that makes sense . Longer term despite Dave’s prognosis I can only see the Eurozone widening to take in more members from Iceland to the Balkans and hopefully the UK .

  • Dave

    “Maybe, but the huge subvention received by Israel from the US is not available for everyone…” – Paddy Reilly

    Don’t wet your pants over that “huge subvention” to the Israeli economy as it amounted to a mere 240 million USD in 2006 under ESF. On the other hand, Israeli GDP is 164 billion. Do the math on that, kid, and then come back with a percentage. 😉

    As for toxic debts that infect the Eurozone, there is no subprime exposure among Israel’s banks as Israeli government, unlike the governments in the Eurozone, wasn’t stupid enough to delegate its monetary policy to third parties.

  • Glencoppagagh

    Dave
    “wasn’t stupid enough to delegate its monetary policy to third parties”
    Surely you meant to say banking regulation which remains in Irish hands.
    The Swiss banks did get themselves exposed to sub-prime. UBS chairman was forced to resign last year as a result.

  • PaddyReilly

    it amounted to a mere 240 million USD in 2006 under ESF. On the other hand, Israeli GDP is 164 billion.

    They must have found clever ways of disguising it, or Israel has benefited from such huge subsidies in the past it no longer needs them. Long experience has taught me the unwisdom of accepting statistics from that quarter.

    Mr. Plocker noted that there is already dollar “creep” in Israel, with many real estate and business transactions performed in U.S. currency.

    Yes when I was in Israel and Palestine last year I could only curse my stupidity in bringing shekelim. Dollars are the only useful currency. Equally English is the only useful language spoken: Hebrew seems to be a military code for use by the army.

  • kensei

    Harry

    Ireland new what it was getting when it joined the Euro: a strong, stable currency. Strong and stable currencies do not devalue in the fact of a downturn. Countries that want to run down this route are modelling themselves on Italy, which would continually devalue the lira to try and stay competitive. Is that the future we ought to be aiming for? No, it bloody well isn’t.

    The Euro offers Ireland a new of advantages. That stable currency is helpful when looking for inward investment, and it reduces transactions costs with Ireland’s major trading partners. It is also likely that Ireland has got a better credit rating than it otherwise would have by association with it. The downsides are being made clear now.

    There is maybe an argument that this case is so extreme that a currency devaluation is the only way out. Perhaps, but I’d like to see things a lot worse before that might fly. I want to see the country adapt, take the pain, raise productivity and move forward. If Ireland can manage that it will be in a much better position than simply devaluing the currency. Dell went to Poland; but there is no future in trying to get them back, and the necessary devaluation to even make is competitive with them would be extreme.

    I also wonder – European economies have been a bit out of sync since the Euro began; whereas the US state economies tend be much closer (though there is never perfect alignment). Do we need through these to get properly in sync? Just speculating.

  • Greenflag

    paddy reilly ,

    I don’t know where Dave is getting his info on Israel ?

    e.g

    ‘as Israeli government, unlike the governments in the Eurozone, wasn’t stupid enough to delegate its monetary policy to third parties. ‘

    Apparently they did’nt have to . Their private sector finaciers did it for them as per this recent Jan 14 th report from Bloomberg News

    Billionaires Burn Israeli Savers on N.Y., U.K. Deals (Update1)

    By Tal Barak Harif

    Jan. 14 (Bloomberg) — Israeli pension funds helped diamond mogul Lev Leviev snap up Manhattan real estate, including the former New York Times building, in 2007. Now they’re sharing in his losses as property prices plunge, dragging down the value of corporate bonds that backed the deals.

    Fellow billionaire Yitzhak Tshuva has the same problem after the foray by his Delek Real Estate Ltd. into British property and roadside restaurants helped force its bonds down 73 percent. Pension funds and individual investors lost about 20 billion shekels ($5.1 billion), or a quarter of what they had invested in corporate bonds, as yields fell in the four months to November.

    Now, under threat of a strike by Israel’s biggest union over pension losses, the government is proposing a bailout to help close the savings gap for people near retirement age. Concern that some companies could be wiped out helped drag the Tel Aviv Stock Exchange TA-25 Index down 44 percent in the past year.

    “These real estate tycoons imported the global financial crisis to Israel,” said Gill Beeri, managing director of Ramat Gan, Israel-based Ayalon Financial Solutions Ltd. Its Smadar fund lost 14.1 percent in the first 11 months of last year. “There’s increased concern that these companies may default.”

    Israel is the latest country to suffer from the collapse of the U.S. subprime mortgage market, which led to an economic crisis in Iceland, currency devaluations in Russia and street protests in Greece and Kuwait. There may be even more fallout as the economies of the U.S., Japan and the countries of the European Union contract in 2009.

    Kensei is hitting the right notes for now in his post above . We should trust the Bundesbank before either the Federal Reserve and the Bank of England – Historically over the past 35 plus years both the former have indulged in ‘devaluations ‘ to make up for their failure to attack structural defects in their economies . The Germans have been more disciplined in their approach and what the world now needs is a dollop of confidence . Hopefully we’ll begin to see the beginnings of confidence restored when Obama takes over and starts his reforms .

    The USA is when all is said and done still the prime driver of the world economy even if in relative decline compared to the rising giant Asian economies .

    Gresham’s Law is still inforce -Bad money drives out good and you can replace ‘money ‘ with capital, human , investment or industrial or technological and it’s still true . Who would invest in China today if it’s currency was expected to devalue by say 30% over the next few years . The dollar is a bit exempt given it’s world reserve currency status but even that has it’s limits as the new Obama administration seems to acknowledge .

  • Dave

    Glen, the monetary policy of the ECB was designed to promote expansionist demand-side economics by supplying credit cheaply with the intent that people should borrow it and spend it to prop up faltering demand in the consumer society.

    When you delegate that power to third parties, you delegate control of your economy along with it. It is a primary tool for controlling the economy. It’s very much cause and effect: loan money cheaply, and consumers will borrow it. The problem is that they will borrow it under an expansionist monetary policy that holds that spending it stimulates the economy. Ergo, the act on simply borrowing and spending it is seen as by the policy moguls in the ECB as creating wealth in the economy instead of simply creating debt.

    Keeping interest rate too low for too long meant that people borrowed too much money. It was the policy of the ECB that they should do that. Do you really expect the banks to question the wisdom of the ECB? No, they’ll assume – like everyone else – that those unmitigated jackasses actually knew what they were doing. They transparently did not know what they were doing unless the ECB actually intended to bankrupt the monetary system with its policies.

    On the other hand, Israel kept interest rates as high as it needed them to be and moderated them as it needed to moderate them. For example, at a time when the ECB had its rate at 2%, Israel set it at 9%. The result was that Israel had very high growth rates with high interest rates, so folks only borrowed money if they had a solid plan to invest it. In the Eurozone, money was supplied cheap and easy so folks borrowed it for the purposes that the ECB intended them to borrow it for, e.g. new conservatories, new jeeps, sofas, holidays, property speculation, etc… and all the trinkets of the consumer society. Now you have the results of those two contrasting sets of monetary policies in that Israel has a solid growth economy and no toxic assets in its banking system and folks in the Eurozone have massive debts (nice jeeps, sure, but massive debts). The Federal Reserve and the Bank of England all kept interest rates too low for too long. Therefore you see the inevitable shared outcomes of shared policies in those afflicted regions.

    Blame the banks for that if you wish, but they were simply following the policies of the political elite. As I said before, the monetary system didn’t fail. The monetary policy worked exactly as it was supposed to work: the agencies who controlled the supply of credit intended people to borrow it and to invest in the trinkets of the consumer society. While it won’t be done with any glee, Israelis will not suffer due to the policies of the ECB. As you suffer bankrupcy, the prudence and independence of Israel will see its wealth far outstrip the EUs as the EU slides into economic ruin.

  • Dave

    “They must have found clever ways of disguising it, or Israel has benefited from such huge subsidies in the past it no longer needs them. Long experience has taught me the unwisdom of accepting statistics from that quarter.” – Paddy Reilly

    I was wrong about Israel’s GDP. It is 715.8 billion shekels ($185 billion), and not $164 billion. However, the figure for US aid to Israel in 2006 is, as I stated, $240 million.

    You are wrong to describe 0.013% of aid as a percentage of GDP as a “huge subvention.” I suggest you stop getting your ‘facts’ from An Phoblacht or similar ill-informed rag.

    “FY 2006 Program: Improve Economic Policy and Governance ($240,000,000 ESF). The FY 2006 Appropriation Bill is expected to provide $240 million in economic support funds as a cash transfer to the GOI. It will be used to repay debt owed to the USG, including refinanced Foreign Military Sales debt, and the purchase of U.S. goods and services.”

    http://www.usaid.gov/policy/budget/cbj2006/ane/pdf/il271-001.pdf

  • Comrade Stalin

    Glen, the monetary policy of the ECB was designed to promote expansionist demand-side economics by supplying credit cheaply with the intent that people should borrow it and spend it to prop up faltering demand in the consumer society.

    That’s been the economic policy of the British, American and Irish governments for the past decade or more. Hell, it’s pretty much been the attitude of the G8.

    Looking at the Irish government and its very obvious attitude towards property investment and credit, there is no basis upon which to claim that the lending regime would have been any different if the interest rates had been set in Dame Street.

  • PaddyReilly

    Well Dave as I said, long experience has taught me to ignore Israeli statistics. I certainly don’t read An Phoblacht: it requires a subscription. The words American subsvention Israel lead inter alia to an article from the New York Times:-

    http://query.nytimes.com/gst/fullpage.html?res=9E0CE1D91E38F930A15751C0A964958260&n=Top/Reference/Times Topics/Subjects/F/Finances

    “An Israeli policy of refusing to make the territorial compromise necessary for peace has also required enormous American subvention. …”

    Another interesting source states:-

    “US largesse to Israel may go well beyond what Mearsheimer and Walt estimate. Apart from $3 billion of annual aid usually cited, Israel, according to a study by former Foreign Service Officer Richard Curtis, annually absorbs another half billion in grants from a variety of agencies plus $2 billion in loan guarantees, which handily get forgiven as they come due.[9] From 1949 to 1996 per capita U.S. aid to Israel amounted to 15 thousand dollars. For every dollar the U.S. spent on an African, it gave $250 to an Israeli, and for every dollar it spent on someone from the Western Hemisphere outside the US, it spent $214 on an Israeli. “America’s $84.8 billion in aid to Israel from fiscal years 1949 through 1998, and the interest the U.S. paid to borrow this money, has cost U.S. taxpayers $134.8 billion,” writes Curtis. “Or, put another way, the nearly $14,630 every one of 5.8 million Israelis received from the US in 1997 has cost American taxpayers $23,240 per Israel.”

    This is from “Logosjournal”:-

    http://www.logosjournal.com/issue_5.2/jacobsen.htm

    But this does not take into account the sort of money private individuals are putting into Israel. So the point is, Israel has an income from being a holy land, to which pious individuals will retire taking their money in the performance what they believe to be a mitzva. Ireland does not have that advantage, and so would be foolish to behave as if it did.

  • Harry Flashman

    @Ken

    “Ireland new what it was getting when it joined the Euro: a strong, stable currency.”

    The Euro strong and stable? We’ll see how that works out in the coming twelve months, I hope for everybody’s sake your confidence is not misplaced.

  • Greenflag

    kensei ,

    ‘Strong and stable currencies do not devalue in the fact of a downturn. Countries that want to run down this route are modelling themselves on Italy, which would continually devalue the lira to try and stay competitive. Is that the future we ought to be aiming for? No, it bloody well isn’t.’

    Yes it bloody well is at least in the UK and thus NI has to row along 😉 Assuming you are a resident of NI you will not be delighted to know that the forecast for the pound sterling is somewhere between one pound = 1.20 dollars with some commentators predicting pound dollar parity by the time the ‘truth’ fully emerges. The Euro is about as rock solid as you can get with the Yen and US Dollar close behind . The latter simply due to it’s reserve status .

    Expect a large dollop of ‘faith ‘ restoration in the US dollar following installation of the new American administration but further out it’s future as world reserve currency looks somewhat fragile. Gold is too expensive and topped out -so hold onto your hard assets even if the equity is diminshing seems to be the best heads down position .

  • kensei

    Harry

    The Euro strong and stable? We’ll see how that works out in the coming twelve months, I hope for everybody’s sake your confidence is not misplaced.

    A caveat: the Euro has been posisbly overvalued for a while. Some decrease would not surprise me.