Holding our nerve

At the time of writing, the Irish bank shares have fallen by about 50 per cent since last Friday’s closing price. The last time there was a one-day fall of comparable percentage size was at end-September, 2008 and it was immediately followed by the announcement of a blanket guarantee.

Let’s not have any knee-jerk reaction this time. The bank shares were already worth almost nothing, so there is scarcely any real impact of this price movement on the economy and on incentives.

Instead we need to have a process of confidence-building in the coherence and feasibility of the overall economic policy strategy for recovery. This must include a broad acceptance of the parameters of tax and spending policy, including on public sector pay. (Banking issues are only part of the equation and they will not be improved by sudden or half-baked initiatives.)

Previous posts have talked about public sector pay and restructuring the tax system. Getting a broad social consensus around an acceptable policy approach must surely be the priority. Here too, precipitate action will not be helpful. We need to know not only the government’s intentions; but that they will be seen as sufficiently effective and fair to elicit broad support rather than a general rejection and protest.

5 replies on “Holding our nerve”

Our CDS has also widened to 256.2bps from 220bps Friday.

The government has yet to convince the markets that is able to handle an the fiscal fallout from an economic crisis and a banking recapitalizations.

I think this should be the governments number 1 priority. Otherwise when we need money in 6 months time it just won’t be available to us.

Patrick and James,
What would be the specifics of such a plan? I mean it seems a bit easy to say “we need a plan” that people will buy in to.

For example,

What taxes, if any, should be raised and by how much? How much extra revenue would such changes raise? (assuming for example a 4% fall in GDP)

What spending, besides perhaps the 5% cut in public servant pay (perhaps excluding a proportion on low incomes?) should be cut? What savings are possible/likely here?

What is the largest size deficit that we can run without risking serious reaction on capital markets? What is the desirable size of this deficit, given a potential/likely significant reduction in private sector demand? What should be the balance between current and capital cuts?

What should be done about the banks? It would appear that full nationalisation of the sector is now a serious candidate for the policy choice. Is this a good idea? If so, on what terms? If so, should bad debts be rolled up in a bad bank with the hope of re privatising the banks as quickly as possible? Will this help avoid the drip feeding of public money into zombies? Should the sector be consolidated? If so, what is the best new arrangement?

Saying we need a proper plan is almost surely correct but is of little use, unless you go ahead and propose such a plan, including the details. Such a proposal could serve as a benchmark – i.e. this is what one/two of our leading economists think we should do. Is it acceptable to stakeholders? If not, which parts? Etc.


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