A left view of the economic crisis

Michael Burke has an analysis of the nature of Ireland’s economic crisis in the Socialist Economic Bulletin which is a blog published by Ken Livingstone. His account of how we got into our economic crisis is by and large a coherent one (an unfortunate typo suggesting that NAMA proposes to pay €54bn for assets worth €77bn notwithstanding) although one can quibble with some of his judgements. For example, his claim that the April 2009 budget was regressive is not supported by the results reported by Tim Callan using the ESRI tax-benefit model on this blog. One point he highlights to which I had seen little reference before is the implication of the collapse in domestic asset values for our net external debt position, given that much of this borrowing was financed by foreign bondholders.

In contrast to the detailed analysis of past history, his proposals for responding to the crisis are little more than sketched out and are thus less convincing. Competitiveness is not seen as a problem despite his clear analysis that a big contribution to our current trade surplus is the collapse in imports of investment goods and that our relatively good export performance is heavily influenced by the special circumstances of the dominant chemicals sector. One proposal is to delay fiscal adjustment because of its deflationary consequences (a demand already being made by the trade union movement). Another is to “take control” of leading property and construction companies presumably in order to restore economic activity in construction, although why this would make sense given the substantial over-capacity that exists in both residential and commercial property is not clear. He also proposes nationalisation of the banks and repudiation of some or all of their accumulated debts, policies which have been debated and which have found some support on this blog.

22 thoughts on “A left view of the economic crisis”

  1. I have a question for the strident critics of NAMA on this site:

    Let’s say the Green Party rejects the Programme for Government on Saturday and NAMA dies.

    What do you anticipate will be the economic consequences for Ireland?

    Do you think there will be an immediate increase in borrowing costs for Ireland?

    Or do you think that bond markets will take a favourable view of the demise of the ‘fraud on taxpayers’ represented on NAMA?

    I think it will be interesting to see predictions on this, because we could well be in a position to determine how accurate those predictions were on Monday.

    Personally, I think if the Green reject the programme, we will see a huge immediate increase in borrowing costs for Ireland.

    Hopefully, I will be proven wrong….

  2. @ CoC

    massive increase in CDS and yields on Irish govt debt (+50bps on 5yr within a few days, maybe more). Collapse in share and bond prices of Irish banks. Wouldn’t at all be surprised that’s why the NTMA decided to do the bumper €7bn 15 yr bond this week ahead of it. Imagine it’ll be next to impossible for AIB and BoI to continue issuing bonds outside of the guarantee, so we’ll actually be increasing our exposure under the g’tee by derailing NAMA. Huge renewed talk of ECB/EU/IMF rescue programme being brought in. Decent chance AIB/BOI nationalised within a few weeks, and ISEQ at 2500 pretty quickly. Just my forecast, though obviously i’ll be taken to task for scaring the horses…

  3. @CoC

    It depends on what you mean by economic consequences of not supporting NAMA:

    -Share prices of Irish banks will likely fall. Economic consequence for Irish society? I’d say none. Risk capital is risk capital no matter who the investor is.
    -Collapse in bond prices for Irish banks? Depends on which prices. If it is on issued bonds then buy backs of those bonds will reduce the cost of saving the financial system for the Irish society. Economic consequence? Good for the Irish society.

    -Change in yields for Irish govt debt? IF it will happen it depends on whether or not bond traders are rational or emotional. If they are emotional rather than rational the cost of borrowing might increase. That is for a short period until the emotional bond traders are replaced by rational bond traders who are making better business decisions.

    On the whole? Good for the Irish society, bad for emotional bond traders & bad for bond traders who underpriced risk.

  4. @ Concubhar O’Caolai

    I think this may be a misleading comparison (though I could be completely wrong!). If we view borrowing cost as a measure of risk then when we drop a policy which had a degree of certainty and know it will be replaced with an alternate policy -which has yet to be decided (we don’t even know which govt. will be in power) – then I imagine the ensuing period of uncertainty would increase borrowing costs for a time anyway – even if the alternate policy was superior?

    So while I think a prediction that borrowing costs will rise is probably accurate I’m not sure we should interpret it as markets prefernce for NAMA – but rather for certainty. A rejection of NAMA may change governement and may change NAMA – so is injecting considerable uncertainty.

  5. @ Jesper

    you ever heard the phrase “markets can stay irrational far longer than you can stay solvent”?

  6. @Eoin

    No I haven’t. Who said that and in what context?

    Is that phrase intended to be used as an argument against paying LTEV?

  7. @ Jesper

    John Maynard Keynes

    actually its a phrase intended to be used as an argument FOR paying via LTEV. The Irish state is the only entity which doesn’t have to mark-to-market its ownership of the distressed banking assets held in NAMA. As such, its the only entity on this island which might be able to ride out any irrationality inherent in the markets right now. At the moment, most of the focus is on the banks and whether they are capable of remaining solvent. NAMA helps to solve that problem. However, if the focus shifts from the banks to the state itself, which it would if the banks were declared insolvent, then even its ability to ride out the storm will be put under severe pressure.

  8. @Eoin

    Should I interpret you as saying that what is happening now in the property market in Ireland is not a correction but an irrational event?

    I’d say that property prices have further to fall and anyone trading in that business will have further losses and that the fall is a correction of an unsustainable market.

  9. It seems that attention switches to NAMA on every thread where it might have the slightest relevance. I think it was John Fitzgerald who pointed that that NAMA, to a considerable extent, flows from the blanket guarantee – which mightn’t have been the cleverest decision – so we are where we are and the focus probably should be on making the best of it. (In passing I can’t see the Glasrai jumping ship.)

    I think this post is highly relevant – even if some posters might see it as taking us too close to politics.ie. My sense is that there is a considerable and growing constituency in Ireland that is attracted to this left-wing/progressive stance. Part of it is due to the deft political footwork of the Labour leader, but much is due to the broad consensus on the causes of this financial and economic crisis and the recognition that considerable, and unprecedented, state involvement is being, and will be, required to restore stability and prosperity.

    The key issues are the extent and nature of the state’s involvement and the duration of its involvement. The left/progressive view is that the state’s involvement should be significant and widespread and there is no exit strategy. This clarity is obviously attractive and contrasts with a wide raange of views among those who recognise the need for state intervention, but differ about the extent, nature and duration of this intervention.

    One of the reasons Keynesian economics succumbed (temporarily) in the ’70s is that his disciples failed to see his advocacy of “big government” in a crisis as a necessary deviation from his preference for more market (and individual liberty) and less government in more normal cicumstances. Mission-creep took over and the rest is history.

    I think those on this site (and I suspect it may be a majority) who favour more market and less government need to recognise that this case needs to be made. The economic case is rock solid, but assuming that this is widely recognised would be a mistake. Irrespective of when the next general election takes place, the political configuration is likely to be much less market friendly and more pro-big government than it is now. It would be unwise to allow this view to have more traction than it deserves by default.

  10. @ Paul Hunt

    Without wanting to go down the NAMA discussion again, i would suggest that some people on this site think that overpaying for assets by even one cent constitutes the greatest act of moral hazard in the history of finance/economics. There are then others who view the financial system collapse as proof that free market capitalism is an outright failure and so the financial sector has to be taken under a large degree of permanent government control. I think the answer lies in between – free market capitalism in good times, and strong state support in times of extreme and unusual market turbulence. As i said above, investors and markets are in fact quite often highly irrational and can remain so for long periods. I am all for coming up with measures and levers for fixing the system and making it pay back its dues at a later date, but i think we need to focus on getting through the huge challenges which face us in the next 3-6mths first.

    As i have previously suggested, only the sovereign/taxpayer has the ability and finances to get us out of the hole we now find ourselves in, and subsidising private capital to this end may be the unfortunate decision we have to take to stabilise the financial system and so the short-to-medium term economic outlook.

  11. @Eoin

    You say that the financial system has collapsed. It hasn’t, it is in need of repair.

    The state is the only game in town to repair the financial system.

    NAMA is one of the options. Temporary nationalisation of insolvent banks is another.

    A realist knows that there will be a cost of repairing the financial system. NAMA is said to be a no cost solution. I can understand the popularity of proposing a no cost solution, therefore I believe the proponents of a no cost solution to be following a populist policy.

    Btw, does “I think the answer lies in between – free market capitalism in good times, and strong state support in times of extreme and unusual market turbulence.” mean that you are opposed to cutting in social welfare payments?

  12. @Eoin,

    Broadly agree on NAMA. The time to consider alternatives was before it took shape – and possibly while it was taking shape, but the policy-making process is seriously flawed. In some respects NAMA could be seen as damage limitation following the blanket guarantee. The irony is that the ECB would have ridden to the rescue if it’d had some notice prior to that fateful night at the end of September last year. So we are where we are and damage limitation is the order of the day.

    I also agree with your more thread-related observation “free market capitalism in good times, and strong state support in times of extreme and unusual market turbulence”. The difficulty, I’m sure you’ll agree, is deciding how much market freedom to allow so that the incidence and severity of the inevitable turbulence may be minimised and the nature, extent and duration of state support when turbulence is encountered.

    The dogmatic certainty of the left (minimal market freedom and maximum state involvement) can be very attractive (and comforting) in times of turbulence.

  13. @ Jesper

    re collapse. I know it hasn’t totally collapsed, but some others would tell you that it has, and hence the need for government ownership of it. The Irish financial system is very very sickly though. It needs both government support and private capital to get better.

    Im not in favour of cutting social welfare rates for the sake of it, i simply think levels are far too high as is, regardless of the economic problems. And in nominal terms social welfare explodes during a recession, so im not talking about reducing the nominal amount being given out. The bust has simply made the contention that the social welfare levels per person are sustainable seem foolish when put under analysis. I accept that social welfare is a valuable social safety net and economic stabiliser in times of trouble. However it needs to be much more tightly managed and far more means testing needs to be involved. All social transfers should be under scrutiny after 15 years of boom where no one really cared and not that many people had to claim it.

    @ Paul

    i would rather over egg on the government control/regulation if it keeps private capital ownership in place for the most part (not against a significant state equity stake). I think if we had a banking sector heavily regulated and fully owned by the government, the danger would be that that situation becomes the norm and finance becomes a utility rather than a innovative traded product/service. At least having private ownership up against strong govt regulation should see both sides trying to keep the other in check.

  14. @Eoin,

    Again I have no major disagreement with your points, but my focus would be on minimising the requirement for state equity and boosting regulation both at the national and international level. And this gradation could have significantly different policy implications in practice.

    I’m not saying that the left/progressive stance has no appreciation of these gradations, but the instinct to rely on the state tends to over-ride detailed consideration of the huge body of economic theory and evidence that provides the best means we have of making sensible economic policy decisions.

  15. @Eoin

    While I’m for means testing for state subsidies/support, I do know that it tends to lead to the irresponsible spender/risktaker being supported by the state and the responsible one who manages his/her finances will not get the benefit of the state support. Getting the proper balance in when and who to support is tricky.

    However, if you want to means test potential social welfare recipients then I think it would be fair to also means test the beneficiaries of NAMA.

    The shareholders (the main beneficiaries) could save the value of their investment by putting in new equity capital. They can’t/won’t do it.

    I do not want to nationalise the banks just for the sake of it, I want assets of insolvent banks to be put to good economic use quickly and at the least cost to the Irish society. That is why I recommend temporary nationalisation.

    54bn of spend should always be scrutinised, even more so when times are tough and the money to be spent is borrowed. NAMA does not pass scrutiny.

  16. @Eoin:
    “As i have previously suggested, only the sovereign/taxpayer has the ability and finances to get us out of the hole we now find ourselves in ….”

    What’s this “us” and “we”, white man? Some banks are bust. Some developers are bust. Oh dear. Well well. These things will happen.

    bjg

  17. @Mark

    Indeed, you are right, my confusion between the face value of the loans, their current market value and the government’s estimate of their long-term economic value. Thanks.

  18. @ Eoin

    Just imagine inserting the words “public sector” instead of “social welfare” in your reply to Jesper!

    changed text!
    Im not in favour of cutting public sector wages for the sake of it, i simply think levels are far too high as is, regardless of the economic problems. And in nominal terms public sector pay explodes during a recession, so im not talking about reducing the nominal amount being given out. The bust has simply made the contention that public sector pay levels per person are sustainable seem foolish.”

    Original text!
    Im not in favour of cutting social welfare rates for the sake of it, i simply think levels are far too high as is, regardless of the economic problems. And in nominal terms social welfare explodes during a recession, so im not talking about reducing the nominal amount being given out. The bust has simply made the contention that the social welfare levels per person are sustainable seem foolish

    Wonder which version the “lefts” would agree with?

  19. My god, Alan Mathews… It’s confusing enough without deliberate mistakes like that!

    Of course, 9bn of the 77bn is interest rolled up so you could argue, the assets are really only worth 68bn, give or take… But what’s a few non performing loans between friends… I haven’t read the rest of the piece.

  20. @Concubhar O’Caolai

    Prediction?

    Not passed and government falls next week. John O’D goes back on his word about actually standing for election and gets returned unopposed as he was still CC when it fell. Borrowing costs for Ireland increase. Labour do better than anyone thought they would in the general election and Joan becomes our new finance minister. Unemployment climbs to even worse levels in 2010 and the new (coalition of some kind that even has a Sinner or two in it) government throw huge amounts of money at ‘makey up’ jobs but it fails. Near collapse of banking system. Riots on the streets. Eventually, all hell breaks loose and we get chucked out of Europe and the Euro, leading to Ireland becoming a third world country and those who can, emmigrate in large numbers. Eventually, Ireland is outsourced to China to use as a vegetable garden (maybe the Greens get re-employed?) and a source of fresh water. Becomes a case study in economics 1.0.1 in about 20 years time.

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