Self-Fulfilling Crises: Lessons from 1992/93

A number of media commentators have drawn a comparison between the present debt crisis and the ERM crisis of 1992/93.  Then, the authorities assured markets there would be no devaluation; but the high interest rates needed to defend the peg against sceptical currency traders proved too painful and the government eventually succumbed.   Today, sceptical markets are demanding a high risk premium to hold Irish bonds.   There is concern that the pain of high interest rates and their impact on debt dynamics will, once again, make market expectations self fulfilling. 

I believe it is a mistake to take this comparison too far.   The combination of long average maturity, liquid reserves, and the back-ups of the NPRF/EFSF make a forced default in the short to medium run unlikely.   Moreover, a cost-benefit calculation for sovereign default for a country that clearly has the capacity to repay suggests a voluntary default is also unlikely.  

Even if the comparison is overblown, the lessons from the innovative models developed at the time to understand self-fulfilling currency crises are useful for understanding the current challenges (see, for example, Obstfeld, 1996).     The crucial idea is to model the government’s objective function directly, recognising that it is engaging in a constant trade off of the costs and benefits of devaluation (or default).   High interest rates increase the pain of a defence.   At some point the pain becomes too great and a default ensues.   Thus pessimism can be self fulfilling under certain conditions.   The models also highlight that the government’s objective function – or more broadly the political capacity to engage in a painful defence of a currency (or creditworthiness) – is part of the fundamentals of the economy. 

Reading yesterday’s papers and scanning the morning talk shows revealed a depressing willingness of many to jump to the perceived easy way out of sovereign default.  (The distinction between sovereign borrowing/guarantees and non-guaranteed bank borrowing was often glossed over.)   The prevalence of this seemingly relaxed attitude could be partly behind the market view that Ireland is not willing to do what it takes to pay its sovereign debts.   Again, I think this perception is mistaken.   But it does suggest a need to shore up the reality and perception of our political capacity to avoid default, a capacity that is no less part of the fundamentals than the size of the bank losses or the expected growth rate. 

Some possible capacity building measures:

·         Emphasise the bright line between sovereign default on debt/guarantees and choosing not to bailout non-guaranteed creditors of insolvent banks. 

·         Recognition that a well-specified multi-year budget is essential to regain fiscal credibility, but is also political dynamite.   While opposition parties are understandably looking to force a general election, a degree of cooperation on the broad parameters of the deficit reduction – including a willingness to specify the main details of any alternative package – would enhance perception of the political capacity to put the deficit on a “convergent path.”  The stakes are too high to approach deficit policy purely in terms of party political advantage. 

·         An accelerated move to put in place an independent fiscal council to help insulate the macro stance of fiscal policy from the pressure cooker of day-to-day politics.

·         While I would never suggest stifling debate, politicians, press and pundits should show some restraint in going for easy popularity with loose talk of default.   Unfortunately, it probably does affect perceptions of political capacity, with harmful consequences for the risk premium we must bear. 

 

Obstfeld, Maurice. (1996). “Models of Currency Crises with Self-Fulfilling Features.” European Economic Review, 40 (April): 1037-1048.

 

48 thoughts on “Self-Fulfilling Crises: Lessons from 1992/93”

  1. John
    Hard to argue with 1-2-3.
    4 however is not somethign I can at all agree with. Its up to the govt, you know, the lads with big mercedes and private jets, and all that stuff, the ones we elect and (god save teh mark, trust) to run the country, its for them to do 1-2-3 and then 4 will be obviated.
    As they will do neither 1-2 nor 3, 4 is all that is left. The debate on “should we leave the Euro” was useful as it showed all concerned that even if we should, we couldnt. And the matter rests thusly in the popular media. When the govt persuade the people and the markets that they have some vague idea on the magnitude of the losses in the banks, that they have some sense of how this will be borne by all concerned, when they and the opposition get credible on the budget, then the talk of default will either crystallise or evaporate.
    BTW – from the outside it may seem that one courts popularity by mulling things others deem unsayable; if my mailbox and voicemail is anything to go by, its not exactly popular among the vocal creatures of the grassroots.

  2. Well done. A timely and welcome attempt to tug the reins of the runaway horses in the commentariat – and in the politcial undergrowth. My sense is that, while some uncertainty remains about the cost to the Exchequer of Anglo/INBS and recapitalisation of AIB, the bank system crisis has been contained. I realise you harbour doubts about the single-mindedness of what I call the political and institutional EU in this matter, but I think there is enough evidence that its desire to contain the problem and achieve a work-out over a number of years is as strong as that of the Irish Government’s. There are cans of worms locked away in the bigger economies’ banking systems that, while smaller relatively, are bigger absolutely than Anglo/INBS. It is in everyone’s interests to keep the lids on these cans – and any idea of defaults on bank debts that could impact on the sovereign is verboten.

    It is the future debt service capability of the Irish economy – separate from the MNC export enclave – that is the real issue. And the focus on this is likely to become more severe once the costs of Anglo/INBS and the AIB recap are made explicit.

    And so we are back, once again, to the dysfunctional factionalism of Irish politics – which the UK Guardian recently and charmingly described as “anachronistic”. There is no doubt that there is a clear majority in the current Oireachtas – and probably an even greater one among the electorate – for the measures you outline at the end of your post (and probably for even more radical measures), but, once the prospect of power seems within the grasp of two incompatible factions in collaboration, the public and national interest goes out of the window.

  3. The first issue is not whether the sovereign will default but whether Anglo will default on unguaranteed senior and subordinated debt. This would have to take place through resolution legislation coupled with a split of the bank. These appear to be in train but the legally attractive (because it is simple, final, clean and beyond challenge) route of reaching agreement witht he bondholders is attractive. However, the legal attractions must be priced against the economic benefits of denying any money to these unguaranteed creditors.

    Only after that can we discuss sovereign default. The parallels with the devaluation crisis is that in that crisis we decided that we had to be seen to be put to the pin of our collar before we defaulted on creditors through devaluation. Furthermore, we delayed the inevitable to prepare the market for our action.

    In the present crisis, it is clear that the Mininster for Finance (and probably the DoF and the CB) thinks it is necessary to display the same level of commitment to creditors as shown during the currency crisis in order to maintain credibility. There also seems to be a huge emphasis on avoiding surprising or shocking the market in the present crisis. This appears to be more important this time. The need to stabilise the EU and EMU financial system has been a big factor in that regard.

    However, the parallels may end there. We do not have the neat option of devaluation this time. The world is also a more uncertain place than in 92/93 such that markets are much more risk averse and global recovery looks like it will be anaemic. We might need to show a little more chutzpah this time?

  4. @ Zhou

    highly doubt there will be a “default” even if resolution legislation was brought in to allow – far more likely would be that by raising the spectre of potential “default” via resolution, the senior and subs can be bought back at a decent discount to par.

  5. @Eoin

    That is what it looks like.

    I meant to say “These appear to be in train but the legally attractive (because it is simple, final, clean and beyond challenge) route of reaching agreement with the bondholders is being explored.”

    However, one must at all stages know the value of what one is buying.

    There is a danger that paying the bondholders will not only (a) cost more than the correct value of the risk of implementing the [split + resolution] option, but will aso (b) further spook the market by showing an unwillingness to stand firm in letting unguaranteed debt losses fall where they should.

  6. @all

    good thread …

    @Zhou

    “The need to stabilise the EU and EMU financial system has been a big factor … ”

    Still is, and will be for a fair while – it is the unavoidable overarching influence within which we operate. Without it – where would we be? Without us – where would it be?

    @Eoin

    Do bondtraders play texas hold-em?

  7. @ DoD

    having read about the Bear Stearns collapse, i believe bridge is in fact the card game of choice for many bond traders.

  8. I’ll see your point 2 and lower it to (1) a recent official estimate for the 2010 budget deficit and (2) a recent official statement of the total budgetary adjustment being sought for 2011.

    Right now, 9 months into 2010, we don’t have either.

  9. Senior bondholders are not going to suffer a haircut so really the debate needs to move on from this. Even if the Government decided to impose a haircut on Anglo senior bondholders, the most they could probably save is about €1 billion. For €1 billion, we would be putting our entire banking system under severe pressure as whatever chance the banks have of hitting the market before Xmas for funding would be wiped out. If the move came with explicit EU approval, we would be putting the entire EU banking system on the line. It’s just not going to happen.

  10. @Enda F

    Japan wiped out senior bondholders of a bank recently. The USA have allowed it to happen countless times since the crisis began. Why would the EU come under threat if unguaranteed Anglo bondholders are told to whistle?

  11. @Zhou

    We are not Japan (not familiar with the case you are talking about) and we are not the USA. The US is set up differently because of the use of bank holding companies. The US banks are also not as reliant on foreign funding as European banks. If the EU give approval for a senior debt restructure in a nationalised bank, the market is going to view this as changing the rules of the game. Any other bank in the EU including many German ones that required State support would come under renewed scrutiny. The cost of bank debt would explode for many and the markets would be closed to many others including the other Irish banks.

  12. Zhou,
    a) not sure you are correct in your claim.
    b) In any event Japanese & US loan books are for the mist part funded by deposits-the L-D ratio in Japan is in the 70s and in the US it is around 100 for the regional banks. The WS giant are different-they are wholesale funded. In Europe LDR for most banks are well above 100%. So if you do anything to cut demand for senior bonds or make them more expensive the fear is you will curb economic growth.

    This is why the European CBs have an issue with seniors, they are more vital to bank funding than any other continent.

  13. looks like the AIB M&T deal with Santander could be in danger with Bloomberg reporting talks have ended on the proposed merger

  14. @ David O’Donnell

    There was an article, got to find it, on Der Spiegel, talking about what I would call ‘The Euro lie’. The only reason germany was allowed reunification was their agreement to the Euro…. keyword Mitterand….

    It all comes to a head now…

  15. Help is at hand!

    The Taoiseach, Brian Cowen will launch “a major new integrated plan for trade, tourism and investment tomorrow. The Taoiseach will be joined by the Tánaiste, Mary Coughlan TD, and a number of other Government Ministers who worked on the cross-departmental strategy.”

    We are good with announcements, spin and actionless action.

    The fourth advisory group on innovation research strategy since Dec 2008 was announced by Batt O’Keeffe this morning – – likely in response to the poor response from US venture capital to the €500m Innovation Fund Ireland.

    As regards the specific issue of the thread, it’s rare for people to follow the JM Keynes dictum on response to changing facts. The selective use of facts will always give people who want to bolster a particular argument the opportunity to ignore the inconvenient truths and that is often the case when making comparisons with past events.

    As regards concern about the press and pundits let’s not deal in riddles.

    During the boom, the private economists who were paid boosters of the property industry and providers of respectability to reckless economic mismanagement, had free rein in the media because other economists did not forcefully challenge them.

    There were only 4 at most who mattered! Isn’t it a shame that so few people were allowed cause so much havoc by so many cowards?

    In the Irish Times today, the Business Editor John McManus presents both sides of the arguments for default but concludes Ireland would become a lab rat in some sort of massive macro economic experiment… “And it is worth remembering lab rats don’t tend to survive experiments.”

    In the Sunday Business Post David McWilliams has no doubts and sees Iceland as the template to follow.

    The inconvenient truth of Iceland being dependent on IMF and its Nordic country neighbours for loans is conveniently ignored as is the fact that a reduction in it benchmark interest rate has been triggered by the capital controls which have raised the value of the krona versus the euro by more than 2O% since last November.

    So Ireland can exit the euro, default on its sovereign debt, the banks collapse as ECB support ends, the IFSC folds and the economy just falls apart as foreign companies responsible for 90% of exports, bail out.

    Maybe we wouldn’t even need the IMF and we could all return to a modern version of Sceilig Mhichíl.

    Rather than dance around the issue, why is this economic illiteracy not directly challenged?

  16. @Michael Burke (and sorry to the rest for the long post)
    Since you’re raising the idea of a borrowed stimulus again, the document you reference is from 2001. First, the Irish economy is in a very different place than it was in 2001. We’re in more trouble than we were then, and debt markets are more sceptical than they were then.

    However, onto the next point. The short term multipliers are given in Table 21 in that document (page 72) and are listed as being 0.1 for a tax reduction and 0.4 for an expenditure increase, i.e. a 1% increase in expenditure would lead to an additional 0.4% of GDP.

    A comment on the next page says “According to the simulations, a 1 % of GDP increase in the government expenditure raises GDP in EU countries
    by between 0.3 and 0.7 % in the first year (UK and Portugal, respectively). A significant part of fiscal expansion is thus crowded out (via higher real interest rates and an appreciation of the euro) or leaks abroad through higher imports.”

    The next comments are also interesting and page 73 of that document is worth reading as it stresses that in the long term tax decreases are much better for the economy.

    e.g. “As a very broad characterisation, the results therefore indicate that in the first year of a budgetary expansion, the impact is more important on the expenditure side (feeding more directly into demand) than on the tax side (where a large part is saved). However, in the medium term, the
    impact from the expenditure side fades out (due to crowding out effects) while on the tax side the impact increases over time as supply side effects become more important.”

    It’s strange that someone whose preferred URL is Ken Livingstone’s blog would quote from an EU document that is so strong in preferring supply side tax cuts over spending increases.

  17. @John

    There is no comparison between the two. In 92/93 Ireland was defending an exchange rate against sterling (after its 15% devaluation) on purely nationalistic grounds. Our other partners in ERM ditched us. We were on our own. The devaluation sent the message to the market that, after all, we were only baby sterling. Therefore our interst rates should align with sterling not with the D-mark. That was not the end of the world.

    What is different today is that the EU is solidly behind us. We will only default if the EU pull the plug. In 92/93 international speculators refused to hold our currency and no big daddy came in to catch the dumped punts. Today if international lenders refuse to lend the EU will step into the breach as indeed they have done, big time.

    But I do agree that the government denial is as irrelevant today as it was in 92/93. They would say that wouldn’t they?

  18. @Hugh Sheehy

    Raising the question of ‘stimulus’, as Michael Burke does, is as relevant (if not more so) as the focus on potential ‘kutz’ re the deficit (which became infected with dat_ideological virus): trimming the bad bits from the body by drawing/socialising on the future healthy bits without providing some life-maintaining sustenance to the healthy bits can only have one outcome. In both, the Questions are HOW, who, which, where, and WHEN.

  19. Hugh Sheehy

    John McHale begins this thread by quoting from a 1996 analysis. Analyses are ony invalidated if debunked by subsequent research or some obvious change in the relationshipsanalysed has occured. I have no reason to suppose the reponsiveness of the Irish economy has changed structurally to the measures, beyond the obvious cyclical response which would lead to higher mutipliers for all measures when the output gap is higher.

    These are short-term demand-side multipliers for all the countries cited, in fact first-year only (with offsetting tax increases after 3 years). They are circumscribed by ‘crowding out’ effects which are model assumptions which are palpably false; consumers didn’t rein their spending when the government increased spendig during they boom, they upped it. Neither did they increase their spending when the government cut, they also reduced consumption. Nor did yields fall after the cuts- that only happened in those countres which increased their spending, not here. In addition, the model ignores the effects on private investment when govt. sepnding is cut in a downturn- it has collapsed.

    Finally, the authors say no account at all is made of long-run supply-side productivity gains from increased investment. So the validity of the assertions over which fiscal measure is preferable over the lon run is highly questionable.

    But at least we have some access to a model of this economy which shows multipliers exist in Ireland and that short run government investment is the most effective mechanism. To paraphrase, if we don’t invest in the short run, we’ll all be dead.

    Incidentally, Philp Lane’s own analysis (along with Agustin Benetrix) concurs- but estimates the multipliers from government investment to be much higher.

  20. @ Hugh Sheehy: “The short term multipliers are given in Table 21 in that document (page 72) and are listed as being 0.1 for a tax reduction and 0.4 for an expenditure increase, i.e. a 1% increase in expenditure would lead to an additional 0.4% of GDP.”

    Question: That increase in GDP value. Is that predicated upon new, additional credit (aka: additional debt load) being available to achieve that output value? Or is it due to no new, additional credit and existing debt levels being reduced out of surplus?

    If debt repayments are out of surplus, whence the growth? If your suplus is zero – what are you investing with, credit? I sense a logic deficit somewhere, but cannot put my finger on it. By how much would our G*P have to be just to keep our existing debt load stationary?

    Brian P

  21. @David O’D
    I don’t understand your post. Sorry.

    @Michael Burke
    John McHale quotes from a 1996 analysis, but does not attempt to make quantitative conclusions based on it. You quoted a 2001 report, with numbers. Next, if you’re now rubbishing the 2001 document – as you seem to do by saying that its ability to make long run forecasts is highly questionable – then why on earth did you refer to it in the first place? Then, the report was indeed written in 2001, when the situation was entirely different than it is today. I don’t think I disagree with the general drift of the report, but I wouldn’t attempt to claim its numbers without major caveats. Finally, we’ve been over this before. You’ve quoted reports with multiples of 3 or more, which data is apparently not credible to the people who need to keep lending us money to keep the lights on. I haven’t seen Philip Lane on here agreeing with your claims. Perhaps he could comment on how he sees the situation today.

    @Brian Woods.
    The suggestion Michael Burke seems to have been repeatedly making on this site is that we should borrow more money for the government to spend so that this spending can stimulate the economy. e.g. borrow €1billion, spend it, get €3billion extra activity in the economy of which the govt can then receive about 30% of in tax, leaving the govt with no increased deficit and the economy with €2billion left over. There are probably occasions when this approach works nicely. Personally, I doubt that this is one of them.

  22. @ Hugh Sheehy. Thanks for the prompt reply. I hope I am wrong about this.

    You borrow X to spend and you ‘generate’ 3X activity (or whatever). I’m totally befuddled by this ‘miracle’. So how much credit (aka debt) had to be cranked up to ‘create’ that 3x level of activity + the associated amount of debt (which must be subtracted from the activity level? Yes?).

    Credit creation is a virtual process; debt is a real entity. When you pay down real debt you destroy the equivalent amount of money. We have a massive level of debt. So, how in God’s name is it intended that we pay back the old + the new debt? With virtual money? That’s a good explanation of Inflation. Do rational folk really believe this sort of illogical rubbish?

    Brian P

  23. The Benetrix/Lane research is based on long-run average relationships

    http://www.esr.ie/Vol40_4/Benetrix.pdf

    In that research the multiplier from a one-off increase (immediately reversed the following year) in government investment over 6 years was 4.01, while a one-off permanent increase in government investment has a mutiplier of 4.44 in the first 4 years (and becomes negative thereafter).

    It was published in Winter 2009. It’s hard to see how the long-run average for the economy can have changed so much since then. The current experience is likey to differ only insofar as a much larger-than-average output gap is likely to increase the size of the multiplier currently.

    This ‘miracle’ is one of investment, and the returns on it, which is why companies, individuals and governments do it.

  24. @Hugh Sheehy

    In the Cartoon Series, The Flintstones, Paddy the Sovereign has a walk-in part …….

    Thelma: Hi Paddy — my..my… but are you so glad to see me or what is that large buldge there in the pocket ….

    Paddy the Sovereign: Aw now Thelma, I’ve enough on me plate at the mo …. dat’s only Twenty Billion Euro in loose change that I found lying around before I got the elephant-mobile to swim over….. couldn’t let it lying around in case the serfs started investing productively with some of it …..

  25. @Michael
    We’ve been over this several times already. I don’t think anyone else shares your belief that the Ireland multiplier is today 3 or more. No-one else has volunteered such belief. Anyone? Philip Lane, perhaps?

    Meantime, without Dr. Lane’s personal contribution, the conclusion of the Lane report says “These results come with important caveats. First, the model is estimated over the 1970-2006 period, such that the fiscal multipliers are average effects across the range of economic conditions faced by Ireland over that interval. In particular, the size of the fiscal multiplier surely varies with the level of slack in the labour market and the perceived sustainability of the fiscal position.”

    Now first I don’t think that date from the 1970s is still very relevant if built into a quantitative model from which you want to policy conclusions. Second, while there’s certainly a lot of slack in the labour market, the perceived sustainability of the fiscal position today is objectively terrible.

    Again, a borrowed stimulus seems a dead end today, a view which has support from people far more eminent than little old me.

  26. @ Michael Burke. “This ‘miracle’ is one of investment, and the returns on it, which is why companies, individuals and governments do it.”

    Michael, I presume this was in part-answer to a question I posed above.

    Now I understand the difference between virtual money (credit) and real money (stuff in my wallet). There is a parallel with wealth: both virtual and real. In each case to get the real stuff requires the input of real resources into a production process in order to yield a real product. I sell said product for money (real or virtual) and hopefully I nett a surplus of real or virtual money. I can do a a few thing with my surplus: splurge, save, ‘invest’ or pay down some debt.

    The investing bit. Do I only spend my money, or do I use it to gear up and get a virtual credit multiple of my ‘investment’? If the latter, then I have a bad feeling that this is a Ponzi scheme in disguise. Is that what those Multipliers are: a fancy Ponzi scheme?

    Who ‘owns’ the debt anyway? Its not us ‘little people’. So if us LP default, what’s the beef? Who benefits? Who loses? How can you lose something you do not own? Hmmmm!

    Brian P

    ps: Services do not produce a product. They mostly re-cycle virtual money and someone skims off their commission. Nett is less money. So crank out more credit!

    BPW

  27. @David O’
    Sorry..you’ll have to excuse my obtuseness. My sense of ironic humour was damaged by years living outside our shores.

    Basically, I still don’t get it….unless your point is related to how Paddy Sovereign seems to have a talent for wasting money….in which case I sadly agree.

  28. @Hugh Sheehy

    No need for apologies – good that we now can now find a space for discussion wherein comprehensibility may be found, Paddy the Sovereign having a penchant for wasting money being an acceptable interpretation, one of many – would you like to stay with the Flintstones? – or would you prefer to perhaps graduate to The Simpsons?

  29. That is a good op-ed. The political message is strong:

    1. We need to avoid a general election being precipitated by a budget failure.

    (Is it fair to say that any failure of the Government now would probably be seen as being precipitated by a budget failure?).

    2. The Government of the day needs to credibly outline a multiyear fiscal policy.

    I suggest that the opposition could strike a deal on this now by signing up to such a multiyear policy on condition that an election is held in the spring. The opposition could possibly force this on the Government. The opposition would get the benefit of looking patriotic, reasonable, trustworthy and coherent. The country would get the benefit of a stable Government and the promise of stability into the future. FF would get the benefit of being in a position to address their leadership issues prior to an election.

  30. @Paul Nothing so strategic. The op-ed went in early last week; had thought they weren’t going to use it.

    @Zhou I think that is a very good suggestion. Labour are certainly making the right noises about acting in the national interest. Fine Gael have boxed themselves in a bit with the whole “pairing” nonsense, but that should blow over quickly.

  31. The sharp rise in the cost of government borrowing is primarily a symtom and not a cause of our national malaise. While certainly this rising cost exacerbates the fear of default, which in turn increases the cost of borrowing and so on in the familiar negative spiral, it is our fundamental political failure to make clear our willingness to run this state on our likely sustainable revenue that is undermining our credibility and morale.

    Having bought themselves valuable time with the bank guarantee, the government have wasted two years in the vain hope that this could be avoided. That time has now all but run out. They must finally say to those in receipt of around 2/3rds of our government expenditure (public sector employees and pensioners, and welfare recipients), that their income must now be brought into line with their counterparts elsewhere in the EU-15 -inspiring a dramatic positive turnaround in our debt dynamics and hopes for the future.

    Given the crisis threatening our economic sovereignty, is it not beyond time that our Taoiseach explained to those in Navan, that they must adjust to the circumstances of those in Newry, Nuremberg and Nantes before it’s too late?

  32. @John McHale, @Zhou,

    I don’t doubt the good intentions you advance or the hopes you espouse, but these run slap bang up against the serious dysfunctionality of Ireland’s political factions. Moderate, centrist, competent governance is the order of the day throughout most of the EU’s parliamentary democracies. France, Belgium and Italy may exhibit their own peculiarities, but do not really deviate from this trend. Nor do the Netherlands, Denmark, Sweden, Austria or Hungary; the pressure there is from xenophobic parties – not from the traditional left. And the remaining left-of-centre governments in Spain and Greece are being pushed in this direction.

    Ireland really does stand alone in terms of the extent of executive dominance, factional dysfunctionalism and the severity of its economic and financial crisis. And the three are not unrelated. But the politcial classes are pathologically incapable of even recognising the problems – not to mind to begin to address them.

  33. @John Looby
    It seems that the key challenge in Irish politics at the moment is driven by a realisation that severe cuts in pay, SW, etc,. are quite likely to be needed at some point.

    The key challenge is to become – or stay – the government but not to be the government that has to implement these cuts.

  34. @ zhou_enlai

    “I suggest that the opposition could strike a deal on this now by signing up to such a multiyear policy on condition that an election is held in the spring.”

    In 1932/33 in the US, there was a 4-month interrrengum between the election of FDR and the inaugeration. He refused to cooperate with various plans of the discredited outgoing administration.

    So the general election campaign would run for 6 months?

  35. @MH

    Extraordinary times call for extraordinary measures. If FG or Labour do not intend providing stability or certainty then they should not follow my suggestion. FDR didn’t provide such stability or certainty – he abandoned the Gold Standard to great effect. (Of course, FDR was in charge of what had been the most economically powerful country in the world for a number of years notwithstanding their travails. The same won’t be true of Enda Kenny.)

  36. @Zhou,

    “Extraordinary times call for extraordinary measures.”

    An Taoiseach has become an international laughing-stock. There is a widespread popular view that Enda Kenny doesn’t have what it takes. It’s time for Brian Lenihan to make his move in FF, for Richard Bruton to lead his troops out of FG, for both to agree the basis of a renewed government with Richard Bruton as Minister of Finance that would provide the necessary stability until the spring of next year when this combination would seek a popular mandate.

    This is the only way this country will quickly get the kind of moderate, centrist, competent governance it badly requires.

  37. @ Hugh Sheehy, Brian Woods, Michael Burke et al

    STIMULUS is NOT confined to ‘borrowing to invest’ – whatever the multipliers, the fact that there may be a multiplier is surely worthy of serious analysis ……… sectorally, specifically, explicitly ….

    …. institutional over-haul can also assist in both maintaining and sustaining indigenous wealth creating potential – local rates, capped commercial rents, labour market anomalies in skills, integrated departmental IT systems, regulation of corporate governance with teeth(as distinct from the present draconian penalty of the 19th hole) not to mention a functioning small business bank ….. sectorally, specifically, explicitly …

  38. @ DO’D: Thanks for reply. David, we have a tad of a debt predicament and the crackpot solution is to issue more credit to pay down part of the debt. Like using Credit Card A to pay Credit Card’s B outstanding balance. Dopey.

    I would like to see some competent analyst explain how those Multipliers actually work their magic of more from less. They appear to defy rationality – and certainly violate the laws of thermodynamics.

    Paying down debt out of future income – which we must do unless we decide to default, requires Real money: Not credit – which is virtual money. Real money comes from your surplus after you have sold a desired product and paid off your costs.

    Some citizens have savings (Real money) and have been urged to spend it. They will not, because they are not dopey. So our dopey financial experts advocate that our Gov – which has no savings and a decreasing future income should borrow a few more bucketloads of credit and splurge it – raising a few extra bucketloads of debt! Mindless nonsense.

    Those Multipliers work (I think) because we ignore the debt that is created by gearing up. Works a treat until the debt backs-up! As it now has.

    Brian P

  39. @David O’D
    In general I agree with you. Government investment and government spending can and do increase national wealth and national wealth creating ability.

    However in a context when we’re already spending €20 billion more than is coming in and the lenders we depend on for money are becoming highly sceptical, we cannot have a stimulus unless either (i) we borrow more money or (ii) we hugely cut existing spending so that we can spend some of the existing level of borrowing on a targeted stimulus instead of spending it on what we’re spending it on today.

    So, for instance, if you want to maintain or increase the capital spending budget (which seems like it would be a good thing) to make a stimulus, you have to either borrow more or cut current spending.

    Meantime, I suspect that my own opinions on how extensively we should be reforming the Irish government and state apparatus would not fit within the limits of a blog comment.

  40. @Brian Woods, Hugh Sheehy

    OK – we can move on from the cartoons, the real live version is immanent …. “is the bro… er … truck still open”?

    wrt the treasonous socialisation of cowboy debt and the reversal of the basic principles of republicanism and democracy, I fully appreciate and reasonably understand the consequences of the ill-informed decisons of 24 months ago, and the abject failure of political and regulatory systems ….. largely due to the seriously flawed ideological bent that infested the PD/FF administrations .. and, most of the so-called opposition

    that said, the present ideological roight-wing simplistic agenda will simply finish off the real welfare creating potential of the mess that we find ourselves in ……… the simplistic roight focus on slave-labour – global realists need the institutional foundations to first, survive, and then reach decision on whether to bother or not ………..

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