I’m not a fan of the Ireland Inc line of chat. But the concept has more immediacy and policy relevance since the balance sheet of the main banks has been more or less socialised. Recent discussions about the BOP turn-around, fiscal stabilisation, the rising savings ratio, NAMA, (State purchase of bank assets, risks of over-payment), and about off-balance sheet financing wheezes to sustain construction activity can all usefully be thought about in the context of the national balance sheet.
In addition to fiscal stabilisation, bank re-construction and the restoration of competitiveness, the national balance sheet needs to be shrunken and de-leveraged. By 2007, we had created an economy with an emerging public finance crisis, iffy banks, weakened competitiveness and a balance sheet with too much debt supporting over-valued assets. The balance sheet was in any event too big for comfort, even had the assets (property, equities) turned out OK.
They did’nt, net worth declined sharply in line with asset prices, and credit markets turned nasty. The declining net worth supports a smaller balance sheet anyway, and the nasty credit markets suggest contraction even if net worth was unimpared. So the decline in private sector credit demand, rising savings rate and improving BOP are to be welcomed, and substitution of private with public borrowing to be mourned, in this view. The macroeconomic strategy is to avoid anything that looks even remotely like a return to 2007. This was not a good place to be.
The Canadians had a phrase, in the 1980s, for the national inferiority complex occasioned by the decline in the Can $ versus the real thing. They called it ‘parity nostalgia’. There is a mood beginning to emerge, in policy proposals from opposition parties, social partnership talks, lobby group suggestions and from some economists, that I am going to call ’07 Nostalgia’. Things were better back then – we had higher employment, (incuding jobs for graduates!), higher investment, easier credit. So lets have some job creation, off balance sheet spending on infrastructure, banks that can lend again etc etc. This is 07-Nostalgia.
In three or four years time, if we are lucky, we will have an economy which needs to look very different from 2007, the final year of the first credit-fuelled bubble in the State’s history. It should look like this: (i) Government debt ratios stabilised and sovereign credit spreads back to low levels; (ii) competing banks strong enough to lend (a little); (iii) a competitive economy producing more exports, less houses, and (iv) a smaller and less leveraged balance sheet. This economy will inevitably be smaller than 07 for a while, have lower employment, a smaller construction sector, smaller aggregate bank balance sheet, bigger Exchequer debt, lower public spending, higher tax rates and possibly BOP surplusses for a few years.
All policy wheezes emanating from the commentariat over the next few months should be smell-tested for 07 Nostalgia, and rejected at the merest whiff. We have been there and it did’nt work.