“everyone in Ireland is an economist now”

Mack referred in passing to the Guardian’s G2 feature on Ireland at the start of the crisis in the Eurozone, but it deserves a bigger mention.  Here’s a key extract

“There were very few of us in the boom who suggested what was going on was nonsense. If you’re against consensus in Ireland, the first phase is ridicule, then it’s violent opposition, and the third phase is universal truth – where everyone pretends they agreed with you all along,” [David] McWilliams says, with a smile.

He has two radical, populist solutions: let the banks go bust, and leave the euro. Individuals’ deposits could be guaranteed while corporate bondholders would lose out, but the markets would not panic, he believes – rather, they would regard the Irish economy with renewed interest, because money once earmarked to bail out the banks could be invested in the recovery. Saving Anglo Irish Bank “is the economics of Stalingrad”, he says. “Throwing all your resources at a symbolic entity signals to the rest of the world that you are a fanatic.”

McWilliams also argues that Ireland’s attachment to the euro, and the EU, is born of the establishment’s traditional desire to eschew the British, who are still Ireland’s biggest trading partner. If Ireland left the euro and returned to the Irish pound, its currency would take a hammering. Let it, says McWilliams: if it fell by 40%, suddenly Ireland’s wages would be 40% less than its rivals. Investment would flood into Ireland; exports would be super-competitive.

More orthodox voices on the right and left will not countenance either letting Irish banks die or leaving the euro. “You can’t let a bank that is half your GDP collapse in the middle of your economy. It pulls the entire economy down with it,” says a government economist. [John] FitzGerald adds: “If the Irish central bank had to go out and borrow tens of billions to replace the euros in the banking system, there is no way they could raise it. There would be a dramatic fall in the currency, a dramatic rise in interest rates, and a complete collapse in the economy. Leaving the euro would be lunatic.”

Of FitzGerald’s predictions that the Irish economy will return to business as usual next year, McWilliams says: “That’s horseshit. The establishment view is what we need is more of the same. The most important thing about crises is it gives you permission to change.”

Read the whole thing.

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  • DC

    Too depressing now.

  • Letting the banks die, or at least a good number of them, is the only reasonable way out of the sovereign debt crisis. I’m quite taken with the idea of a debt-for-equity swap once the guarantee expires – this would push the liabilities back onto the investors and go some way to removing the taint of moral hazard from the banking sector as it recovers.

    Leaving the euro in order to stimulate recovery is a separate issue and I suspect would not be so painless.

  • Greenflag

    The fallacy of composition again eh 😉

    When everybody is an economist nobody is an economist ;).

    Rumour has it that the Irish Passport Office in light of the much deteriorated public perception of the traditional pillars of society is now planning on reformatting it’s application procedure . No longer will it be necessary for new applicants to have their application and signature witnessed and signed in the presence of one of the following ‘professions’- Member of the Clergy, Lawyer , Bank Manager /Assistant Bank Manager or Elected Public Representative .

    A signature by any one of the following will be seen as equally trustworthy – Convicted thief , Prostitute , Paedophile , Burglar , Fraudster or Conman. Please note Convicted Thief’s signatures will only be acceptable if the person has been released from jail and is no longer in custody.

    Economist’s signatures have of course never been acceptable as witnesses on passport forms 😉

    I wonder why ? Perhaps somebody out there knows ?

  • Henry94

    I have no doubt we will either default or dump the bank debt on the bondholders at some stage but for now the important think is to bring current spending into line.

    The enormity of the debt means cutbacks have to be accepted. Once the current account is in (some semblance of) order we will see what the options are.

  • Henry,

    One of the easiest ways to start bringing spending in line is to cut the cost of servicing the existing debt, which is inflated by the extra liabilities on the state balance sheet. It is not an either-or decision.

  • Alias

    Not quite that simple. Of the 440 billion in bank debt that the government guaranteed, they’ve ensured that all the high-risk loans will be retained within the state via NAMA by nationalisation of Anglo and paid off by Irish taxpayers so as to protect the eurosystem from systemic risk, with all of the performing loans and the profits that will arise from then being left for the eurosystem when the bank guarantee is cancelled. In other words, the Irish nation will get to keep all the shit from 440 billion of loans and the lenders within the eurosystem will get to keep all the gold from them

  • Alias

    Typo: “…they’ve ensured that all the high-risk loans will be retained within the state via NAMA and by nationalisation of Anglo…”

  • Itwas SammyMcNally whatdoneit

    Everybody not so long ago was a property developer, now they are economists – spend first and theorize about it later.

  • Alias

    Not everyone – just a tiny minority. The folks who are now being asked to pay off the debts of those who borrowed too much are the folks who couldn’t get a loan, and the folks who are now being asked to work for the rest of their lives in order to ensure that those who have millions in the bank don’t lose a single penny of it are the folks who struggle to make ends meet.

    Raising the bank guarantee from 100k per depositor to an unlimited amount is not designed to help ordinary folks, kid, since they don’t have more than 100k on deposit. It is designed to protect rich folks at the direct expense of the poor.

    Of course, if the rich can persuade the poor that it is their best interest to give them what spare money they have…

  • Mick Murphy

    Life is a shit sandwich,the more bread you have the less shit you have to eat.
    I predict a revolution,the American and Canadian economies lost manufacturing jobs by the millions to the Mexicans who in turn lost their 20 dollar a day jobs to the Chinese.If anyone thinks the Irish workers can compete with Asian countries in manufacturing then they are severely delusional.No Western economy will be able to compete with the Chinese for generations to come if ever,what we are witnessing is a seismic shift of power and wealth from the West to the East,the biggest since the Industrial Revolution.For Western countries just to survive ,feed ,house and clothe their populations in the very near future is going to involve innovative radical mind shifts,the old Capitalist model no longer works for them.Unless you are a resource based economy like Canada or Australia the future is bleak.

  • Mack

    Mick – who are the Chinese going to sell their goods too? It’s a two way street, it only makes sense for them to keep the currency undervalued if it helps them sell into our (valuable) markets. If our markets are less valuable – because they are hollowed out, then that strategy doesn’t work so well.

  • Greenflag

    Mack ,

    With a population of 1.3 billion and with increasing incomes and disposable incomes the Chinese will be able to repeat what the USA did in the period 1935 through 1980 i.e become a huge internal economy . The UK in the mid to late 19th century went through an earlier form of the same .

    The crux of the matter again goes back to the simple fallacy of composition .While it’s possible for one or several economies worldwide to achieve economic growth rates of 5% plus for a while it’s not possible for all of them at the same time . Eventually at least under the old order of economics growth slows down to a 3 to 4 % long term trend and even lower than that for developed economies with aging populations .

    I would think that the last concern of the current Chinese policy makers is the ‘future’ of the west . Their main priority has to be improving the living standards of the hundreds of millions of Chinese who yet have to make the transition to not just an industrial society but maybe even to a post industrial civilisation within the next 25 to 30 years.

    You have seen the way the ‘two way street ‘ supposedly worked in the West’s financial services sector this past decade or more . There is’nt any two way street in the world of dog eat dog -as Gordon Gekko might have said .

    Mick Murphy’s points above are well made but they are not being answered by our ‘masters of the universe’ be they elected politicians , governments , economic policy makers or churchmen . And it’s not because they don’t want to -it’s because they simply don’t know .

    There is a mindset out there among some members of what I would call the technically optimistic branch of the Friedman school and that is that ‘innovation’ will provide an exit from the growing economic imbalances within western societies . They forget that the growing economic imbalances between an increasingly super wealthy few and the emisserated middle classes and the yet to be eviscerated old working class has been as a result of such innovation .

    No I’m not a Luddite but there is an inherent socially destructive core at the heart of the Friedman ‘solution’ to economic growth and that is the ability of elected politicians to be able to ride the tiger of continuous ‘creative ‘ destruction without losing their grip and falling off and being ‘consumed’ by said tiger .

    Mick’s point above re the future is going to involve radical mind shifts seems . If the old capitalist model cannot deliver the economic and political stability that the vast majority of any western country’s population require and need to survive then how will the powerful minority in those societies who can live with permanent ‘economic’ and ‘political ‘ security hope to maintain their position ?
    Ultimately they will be swept away and be replaced by the totalitarian left or right -imo .

    China and other rapidly emerging economic giants will find it easier to survive ‘politically’ . After all their system of ‘capitalism’ is more properly called ‘authoritarian’ state capitalism and brooks no serious opposition .

    In some ways China in the modern era evokes memories of Britain’s industrial revolution prior to the passing of the electoral reform act in mid 19th century . From 1750 through 1830 the British State and Empire Britain was effectively ruled by a powerful economic elite for their own interest. Any benefit that the mass of the British population derived from that rule was via the drip down ‘reagonomics’ method . As we know from the social and economic historians of the time the ‘drip down ‘ often came to a full stop at times and millions died or were forced into emigration to the colonies in search of a better life .

    In todays world their are no ‘colonies’ and some 75% of the worlds oil reserves are now controlled by States who are not bedfellows of free market capitalism as being the be all and end all of economic history.

  • Mack

    Greenflag –

    I don’t accept there is a fallacy of composition in global growth rates. Poorer countries can grow very fast, by copying Western (or other advanced nations’) technologies and (selectively) processes – in order to catch up. In doing so they are constrained by their infrastructure (typically much worse than in the West – China is probably surpassing us now), education levels (typically much lower among the older generations) and civic institutions. Emerging countries that make the right investments can emerge very rapidly and at high growth rates. This isn’t a zero-sum game – new wealth can be created.

    Imports ordinarily have to be paid for by exports, this in itself offers some protection to domestic economies facing intense competition from overseas. Ordinarily they have to earn the money to purchase the imports. The China-USA relationship is unusual (and unstable) in that the Chinese are lending the Americans the money to purchase their products. If they weren’t the USA would probably have a larger manufacturing base.

    I agree the probablity of revolution, towards the mirage of the ‘certainity’ offered by totalitarian solutions of the left or right is far from non-zero at the moment (I was pretty much shocked by the level of far-right extremism in England the last time I was there). Recommend George Soros’ writings on the Open Society. No-one group has the absolute truth, and solutions that pretend they do (whether free-market idealogues in the USA – which Soros’ compares with the Nazi and Soviet totalitarian regimes he has lived under, at least in some respects) are no solution at all. Anyhow, we’re in the midst of some sort of a shift ‘left’ wards away from free-market extremism. Certainly in Europe, under German influence, higher taxes, stiffer regulation beckon.

  • Mack

    I put ‘left’ in inverted comma’s as I don’t quite see the liberal economic baby being thrown out with the financial deregulation bathwater. If the European model is regarded as to the left of the American model, that is probably where we are headed..

  • Mack

    Guess who is on the other end of the trade on the hedge funds Euro shorts?

    http://www.businessinsider.com/sorry-but-the-story-about-china-dumping-eurozone-bonds-makes-no-sense-2010-5

  • Greenflag

    Mack ,

    ‘Poorer countries can grow very fast’

    Some can . Many are constrained not just by lack of infrastructure but by corrupt governance and a lack of material resources . Haiti being one example , Zimbabwe another and there are dozens more around the world in the same boat . These unfortunate countries pose little or no risk or systemic threat to the rich west other than the possibility that such ‘failed’ states become like Afghanistan , Yemen , Somalia , etc so numerous as to ‘trip ‘ their neighbouring states into systemic failure also thus adding increasing politcal instability to international terrorism as more rods for the western back .

    New wealth can be created. Full marks for the obvious but it’s how that wealth ends up being distributed is what will determine political stability in the western developed economies . If the imbalance becomes too large and large numbers within the ‘middle ‘classes are emisserated then support for what we call ‘democracy’ will totter (we are all in this stage now imo as evidenced by increased alienation to governments and economic elites in the west ) and ultimately give way to a new ‘order’. On the way ‘scapegoats’ will be found no doubt .

    I agree ‘totalitarian solutions’ are in historical hindsight no solution or an even worse one . But we recall there were many Germans pre 1933 and Russians pre 1917 who pointed out to the disenchanted and alienated masses in their countries at that time in history that both communism and fascism would bring destruction on their countries .

    They were not listened to because the the largest section of the German middle class i.e the lower middle class had just experienced their hard earned ‘wealth’ disappear overnight and their pension earnings devalued to a pittance that could’nt buy a loaf of bread . The Russian ‘serfs’ had had enough of centuries of slavery and had so they thought nothing to lose from ‘revolution’ apart from their chains .

    While I don’t want to convey the impression that I believe the entire western political and economic order is primed and ready for revolution and a new order I believe we are entering a time when the ‘answers ‘ of our politicians to the questions being put by their societies re their economic futures are no longer credible to many , disbelieved as asinine by more than a few, and seen as downright evasion and lies by an increasingly vociferous minority .

    When one reads of President Obama ‘promising ‘ Green jobs for the USA ‘when one knows that most of the investment and jobs creation in green technology has been taking place in Germany this past decade and when one reads of the new British Government’s huge innovation in education coming down to changing the name of schools to academies of learning , then not a little rolling of the eyes and hard nosed skepticism has to be the result .

    If you want to ‘remain ‘ economically positive on the longer longer term I recommend Matt Ridley’s excellent article on ‘Humans Why They Triumphed’ in the last Weekend Journal of the Wall St Journal. I haven’t yet read his latest book ‘The Rational Optimist: How prosperity evolves ‘ but it’s on the list 😉

    I agree we are in a shift away from the ‘free market extremism’ of the 1980-2007 period. The unanswered question is will stiffer financial sector regulations help address the wider economic growth issues or will they hinder them ? As for higher taxes being necessary anyone who sees the effect of a generation of lower taxes on American infrastructure will know they are inevitable .

    Death and taxes as the man said are inevitable . Nowadays that pithy adage could be much more than any individual death but rather the death of an economic system which it seems cannot survive it’s maladaptive politician’s multiple economic policy failures of the past two decades or more .

  • Mick Murphy

    Great writing by last two posters Mack and Greenflag and thanks for the links and tip on Ridley’s book and article.