Monetary Dialogue Briefing Papers: September 2010

I expect you find it a tad dispiriting when you post a series of papers that are highly relevant to the current situation and the commenting herd ignores them.

I think you make a persuasive case for the secondary role of the so-called global liquidity glut in fomenting the current crisis and your concluding agenda of financial regulation and bank restructuring imperatives remains pressing, if daunting.

There are, of course, other factors that in a short focused paper you could not be expected to address. This week’s edition of The Economist:
http://www.economist.com/node/16990700

highlights research that examines the hollowing out of the middle class in the developed economies. When this is combined with research which shows that the share of labour relative to capital in the developing economies – particularly the Anglo-Saxons – has fallen continuously since the mid ’80s and the policy of “let them eat credit” (pace Prof. Rajan Raghuram) pursued by many developed economy governments as an attempt to compensate for labour’s falling share I think we’re getting close to the full set of ingredients in this lethal cocktail.

I also found the papers dealing with sovereign debt of interest. I know I have been provoking the “keep the ship steady and afloat” and “don’t frighten the horses” brigade on this board by suggesting that the Government go to Ciaran O’Hagan’s Troika and say “We’ve kept this going as long as we can, the mounting debt problem that is looming down the road will bury the economy and we need help.” I know there isn’t a snowball’s chance in hell of this happening, as can-kicking fits the current political cycle perfectly, but it would be good to have the underlying reasoning set out explicitly.

I also recognise that the can-kicking suits the institutional EU and the governments of the major EZ economies – and probably more so than in Ireland. For me nothing highlights the extent to which governing politicians and policy-makers are in abject fear of their voters than the willingness (particularly by those in Germany with their deeply ingrained loathing of inflationary pressures) to allow this tidal flow of ECB liquidity in Ireland’s direction.

From 1977 Ireland’s debt/GDP ratio started to spiral out of control, but it was due almost entirely to domestic political imbecility and incapacity to tackle it until some sanity was eventually restored. This time the full, real economic impact will not be revealed until the ECB starts to unwind its liquidity support and Ireland has far less sovereignty to deal with the impact (indeed EU institutional imperatives will be the governing factor) and is confronting a much more hostile international economic environment than was the case in the ’90s.

Although Brendan Keenan might advise ‘festina lente’ in today’s Indo, we can no longer postpone deep-seated and far-reaching political and structural reform. It is the only way we can work off this looming mountain of debt and it is entirely in our hands. A politically exhausted Government seeking to squeeze out the next 18 months commissioning reviews whose recommendations it has neither the political capital nor the energy to implement just doesn’t cut it.

Micko, the CSO set up a committee to review consumer price indices, it addressed this issue, has reported, and the report is on CSO website.

@ Paul we have to study these papers, homework and it is the weekend!

@ David O’Donnell

I thought that photo was so bizarre I clipped it out before recycling!