Ability to finance a stimulus - particularly at the massive scale potentially required today - is limited by today’s already bad cumulative fiscal situation. Unless the US manages to welch on one set of debt while almost certainly needing to issue another set there may not be too many alternatives to austerity. It’s awkward and Keynes might be saying different things if he was alive today.

Probably one of the worst things we can probably do is to be uncertain either way. If we pursue austerity then we need to do it properly and actually convince the remaining money that the decline is over and that there are investment and spending monies out there. If we are to pursue inflation then we need to do it fast and nasty and get it over with. If you pursue inflation you screw the prudent and may have longer term bad effects than if you pursue austerity and screw both the imprudent and the merely unlucky.

Either way you need to move the loss of wealth into the past as quickly as possible so that people can work on the future. If we prevaricate then the loss of wealth just continues for longer and has worse effects no matter which way you go.

It seems that past Irish governments (in the 1980s) have had mixed records when adopting expansionary fiscal contractions. The success of the expansionary fiscal contraction in the late 1980s can perhaps be partly attributed to falling interest rates and rising house prices. I do not doubt the effectiveness of expansionary fiscal contractions, in fact, I think that they are suitable policies in certain situations but I am slightly worried about the austerity measures which the Irish people have reacted to rather stoically.

I think I may be right in saying that the success of the current policies in Ireland - cutting spending and raising taxes - shall be governed by confidence & expectations. Remember the point about the late 1980s: house prices were on the rise. This time around, the situation is not only different but very different! The extent of the recent decline in house prices has been immense. The problem here - I believe - is that this negative wealth effect could have profound effects on peoples behaviour, not only in terms of consumption & investment but also their expectations about how they will have to behave in the future. Surely they will be more cautious.

Perhaps the best way to explain this is idea is to compare the behaviour of home-owners (and those who invested in real estate/construction etc) in Ireland today to the behaviour of traders following the 1987 crash. I’m basically talking about the volatility smile/skew.

Ireland has been heralded for being the first to impose austerity measures but if counter-cyclical policies had been implemented with the same quickness maybe Ireland would have been given the same credibility for that too. i.e. did the markets ‘reward’ (if you can say that) Ireland for being the first mover or was it for adopting what are thought to be the best policies? Who is more informed, policy-makers or market participants? This really reminds me of what Roosevelt said in 1937: “I know nothing of economics and nobody else does either!”. It is like Ireland was the first sheep to jump the fence and the markets gave reward just for that. Of course, if Ireland (and other EU countries) had adopted expansionary policies (like the U.S.) and the rigidity of the Maastricht treaty 3%/60% rules had been questioned multilaterally and deemed too strict, time could have been bought to run a deficit in the short run. In the meantime, governments could have pledged to committing to adjusting their fiscal balances over the long run. (Didn’t Rogoff mention a 90% threshold anyway?)

It is probably important to note that, if the policy-makers react to pleasing market participants then effectively market participants are the policy-makers, right? If so, has there been a failure somewhere along the line? Can this really persist?

I’ll wrap this up. The decline in house prices should have long lasting effects on peoples behaviour - like the volatility smile - therefore the expansionary fiscal contraction (which weighs heavily on expectations & confidence) will be less effective than a stimulus involving increased spending & decreased taxes and direct job creation (something like the public works proposed by Keynes in the 1930s).

Lets recall what Keynes said in 1933. He warned about trying to balance the budget at the bottom of a slump stating that: “You will never balance the Budget through measures which reduce national income… look after the unemployment, and the Budget will look after itself”.

“Bottoming out - so it’s time to spend” - March ‘08 - http://www.independent.ie/opinion/analysis/property-bottoming-out–so-its-time–to-spend-1332198.html

“Property market’s no house of cards” - December ‘07- http://www.independent.ie/opinion/analysis/property-markets-no-house-of-cards-123542.html

oh..here’s the battle cry quote..i realise that the reference might not be obvious.
http://www.youtube.com/watch?v=StHwAffUNxo

As for seafoid’s “coterie of brahmins” who said nothing, I never mentioned any such thing and that terminology seems unnecessarily emotive. The folks I knew were not in charge of anything, not banks or countries. They were just people investing money, or deciding whether or not to invest money, and who looked at economies and companies with fear and greed and everything in between - but they looked and they paid attention to what they saw and they talked about it openly. They talked, but perhaps not too many people listened.

On the BP case, I’m afraid it doesn’t require hindsight - or rather there was already plenty of available hindsight - to know that deepwater drilling is difficult, or that there are significant risks, or that it’ll be a godawful mess if something does go wrong.

Although it’s a specific case, the Lapindo case shows that onland drilling can go badly wrong too and Youtube has several blowout videos. However, you mention the practice of drilling a relief well in parallel to a first deepwater well. That sounds like an odd plan. Can you tell me where they do that?

[although it isn't really a yes or no question at all ]

I don’t buy this narrative of a coterie of brahmins who knew that the economy was a doomsday machine and said and did nothing while the rest of the herd was oblivious. It’s similar to the case now. Ireland runs the risk of default but looking at bond yields it is not a certainty. Who can say with certainty what will happen ?

“As for things like the Deepwater Horizon, one thing you can be sure of is that there’ll be problems in a deepwater offshore well somewhere eventually. If you have no back up plan in place you’ll have problems.”

This from the university of hindsight. BP made no provision for a remote shutdown system in case of an accident- obligatory in Norway but optional in light touch regulated US. BP also didn’t bother drilling a relief well at the time of drilling the first well. In April the great Obama himself said “oil rigs today don’t cause spills. they are technologically very advanced”.

How do you quantify the risk of a deepwater disaster or a banking collapse ? Just wait for the brahmins to opine ?

“The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.”

In any case I did some work in early 2006, ultimately for a major European finance house, about a potential investment in a European country that’s facing similar problems to Ireland. The property and banking related risks to the economy and to their target investment area featured in the intro. By that stage it was fairly obvious that the banks were up to the hilt, that the economy and both local and national finances were hugely dependent on construction, that financial companies were extending as much credit as humanly possible, and that any disturbance to financial stability would cause huge problems.

The disturbance that seemed more likely then was a rise in general interest rates causing the credit dependency of the economy to become unsustainable (Euribor was cranking upwards at the time), but the risk was seen as very real and the economy seen as vulnerable.

What happened by late ‘08 was an increasing difficulty in getting credit at any interest rate and the crisis was fully realized.

Now if I’d had any cop on I’d have been figuring out how to short Irish banks and construction companies (Spanish too, potentially some others), and been retired by now, but I didn’t. We talked about it but didn’t do it. More fool me.

http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-post-crisis-miracle/

bjg

“However, the fact remains that there were people who were looking at Ireland, and the Irish banks, and were saying years in advance that the “goings on” were going to end very badly.”

I don’t recall hearing anybody say that their advisers or brokers in Davys or Bloxhams or Goodbody warned them of the problem. I don’t recall anybody saying their mortgage and pension advisers had warned them either.

There is a massive problem with the principal-agent relationship which people understood a year ago but which people are beginning to forget as they get back to their favourite pass-time of attacking politicians.

We would do well to remember the complexities involved in this. I think we should consider having a Minister for European Finance considering how important it is to us that the EU takes the right approach at this time.

My initial analysis of our position two years ago was that our first priority was to tread water until the global position stabilised and thereafter improved. Unfortunately that has not happened. National debate needs to broaden its focus and start looking at things on an EU and global level.

Looking at experience is a really good way of learning. What’s the old phrase..”We learn from our mistakes”?

The problem in this context is the difficulty of forcing people to look at what happened, and who did what, and who’s to blame. Without looking there can be no learning and no memory, and many people in Ireland are uncomfortable looking at the recent past.

More practically, the solutions to the problems we face may only be implementable if we confront and learn from the reality of what went on.

Meantime, we’re still on a small wet island in the middle of the Atlantic whose main natural assets are rain, grass, wind, waves and people. Our economic solutions have to deal with the facts of physical geography too. Ireland’s opportunity is to address reality. “The facts are our friends”. If we deal with reality faster and quicker than other countries we have an opportunity. It may well still be a few painful years, but ignoring reality has a nasty habit of quickly becoming even more painful for even longer.

As for things like the Deepwater Horizon, one thing you can be sure of is that there’ll be problems in a deepwater offshore well somewhere eventually. If you have no back up plan in place you’ll have problems.

Ireland got itself into very deep water all by itself. There was no back up plan. In this case, what’s obvious with hindsight was also fairly obvious during. Ireland and Spain, in Europe at least, were long tagged as dangerous.

If the data had been more widely available perhaps some of the disaster could have been avoided.

No.

As for the demography dupes, they should have been shipped to the Congo, which celebrated its 50th anniversary of independence/misery today, to field test their fantasies.

It did of course bring comfort to Bertie and one of the cargo cultists was appointed to the board of the Central Bank by Brian Cowen.

http://www.thisamericanlife.org/radio-archives/episode/410/social-contract

Did you ever read NCB’s 2020 vision document? Population growth was to drive Ireland’s future and keep everything swimming along nicely. All of the financial players seem to have bought the theory. There was no mention of the fact that the tax base was too narrow , that too much of the tax take was transactional, that the banks were no longer dependent on deposits to fund their loans or that much of the money that propped up the property market was foreign.

Out of all of the current mess could there not at least be some improvement made in the quality of information made public about Ireland’s banks and other financial players including government regarding the sources of profit/income/funding and changes in the same over time. Too much of the cutting edge analysis - eg Ann Pettifor on the global debt crisis- was sidelined. If the data had been more widely available perhaps some of the disaster could have been avoided.

With the exception of the embattled PIGS and the UK, there isn’t what is termed austerity underway in other EU countries.

In the context of ageing populations, France planning to raise the retirement age from 60 to 62 isn’t revolutionary given the big deficit in its pension budget.

The IMF under former French Socialist FM, which led the way in pushing for stimulus spending, now says that getting public finances in order would add to global growth.

As regards vested interests, in my opinion, the professional cartel unions are a much bigger threat to the economy than conventional trade unions.

IBEC represents diverse vested interests, which makes it a eunuch when it comes to reforms and modernisation.

I do regard benchmarking as an actual fraud but its the people who sanctioned payments rather than trade unions should be blamed.

Trade unions have a role in particular in large organisations and given the prevalence of bullying in public education and heath, according to ESRI studies, their role should be acknowledged.

It is unfortunate that despite the illusion of access provided by clientism, it is only collective power that matters in the political process.

So the majority of private sector workers have no pension; most of those who do will be paid peanuts as returns will be low over the next decade or more.

It is a very unjust society, however, in a world where billions of others are aspiring to a similar standard of living, we have to reform or languish.

Today’s Q1 2010 national accounts which show that we can assume we had significant growth in the period by counting in high profits of multinationals. However, these profits have been generated at 1998 job levels while the workforce has increase by more than 400,000 in the interval.

@ seafoid

Ahern, Harney and McCreevy had become national politicians in 1977 when the other period of reckless mismanagement brought misery to many.

Like the Bourbons, they had short memories of that period.

To suggest that a black swan pooed on their parade, is absolute nonsense.

http://www.finfacts.ie/irishfinancenews/article_1019384.shtml

FFS

It was obvious to an outsider visiting occasionally that the housing market was going to crash but what wasn’t obvious was that this would coincide with the greatest global crash since the 1930s with the credit markets just seizing up one day in September 2008. Ireland got hit by one of these low frequency high intensity phenomena (a la the Deepwater Horizon) that just washed away whatever protection there was (regulatory capture having done a lot of damage already) and that left the country so exposed to what subsequently transpired. Even in 2008 there was the assumption that things should work themselves over say 2 years. I am not sure there were many who predicted what actually happened. And who has a clue now about what is going to happen ?

BTW, I am a professional too and I deal with and use plenty of jargon but try my best to restrict it to when absolutely necessary. I believe that the unnecessary use of jargon is a crude attempt - intentional or otherwise - to mark out territory and discourage outside scrutiny by making their work less accessible to outsiders. If you want to reach out to the wider community - rather than self-identifying as a card-carrying member of the inner temple - using less jargon would help.

Every social group, has its own jargon. Some jargon is fashionable. Professionals use professional terms, mostly for good and necessary reasons, but not always.
Check out the Plain English Campaign for curiosity.

This really gets my goat! Why can’t professional economists use perfectly good ordinary English words that exist to explain a simple concept instead of silly jargon. “Disimproving!” For god’s sake! What is wrong with “getting worse”? Or deteriorating?

Ditto other nonsensical jargon such as “upside risks”!

It seems that when you are comparing Ireland with others you are looking at private + public debt (since Italy’s public debt/GDP ratio (though not deficit) is still worse than ours, having already been more than 100% pre-crisis.

But when it comes to Germany you look only at public debt. Since Germany has a current account surplus it’s public deficit must correspond to private surpluses, no?

“The recovery of the economy suggests that less stimulus is needed and hence cuts do no or less harm.”

I guess that depends on what economy you’re thinking of. Certainly the German economy looks OK at the moment (though not sure about the banks after reading Wolfgang Munchau yesterday), but the European one emphatically does not. Certainly thinking only about the national economy is not a uniquely German flaw but is it really viable (or wise) to think this way while also vigorously resisting fiscal federalism and more aggressive monetary policy and introducing unilateral fiscal and financial rules, all this within the context of the monetary union?