Ireland vs Iceland

The bondholders that need to be protected are presumably quite local….

Anglo is truly systemic, though it just hasn’t been spelled out in black and white exactly why.

@Kevin
Very useful comparison.

Mutatis mutandis, but Iceland also lauded its knowledge economy aspirations and frequently lauded the number of overseas students it attracted to its shores.

Clearly, if we are comparing the divergent paths taken by Ireland and Iceland since the global banking crisis broke in September 2008, then 2008 Q4 is where we should start. Growth rates prior to that are irrelevant in relation to whether or not Ireland should have followed Iceland in regard to dealing with the fallout from the global banking crisis.

Between 2008 Q4 and 2010 Q2, GDP fell by 4.7% in Ireland, compared with 11.6% in Iceland. Maybe my eyesight is gone at this late hour, but I make Ireland the winner there. Quite a difference. However, this ignores the fact that Ireland’s growth performance has been improving, while Iceland’s hasn’t. The figures for the successive six-month periods since 2008 Q4 for GDP are:

between 2008 Q4 and 2009 Q2: Ireland -2.9% , Iceland -3.2%
between 2009 Q2 and 2009 Q4: Ireland -2.8% , Iceland -4.6%
between 2009 Q4 and 2010 Q2: Ireland +1.0% , Iceland -4.3%

So:

between 2008 Q4 and 2009 Q2, Ireland did 0.3% better than Iceland
between 2009 Q2 and 2009 Q4, Ireland did 1.8% better than Iceland
between 2009 Q4 and 2010 Q2, Ireland did 5.3% better than Iceland

Clearly, Ireland is pulling away from the slump, Iceland isn’t. Ireland’s GDP seems set to rise in full year 2010. Iceland’s GDP seems nowhere near rising. So far in 2010, Ireland’s GDP has risen +1.0%, while Iceland’s has fallen -4.3%. As I explained on a different thread, because of net trade, there is a very high probability, although not a certainty, that Ireland will record a hefty increase in GDP in Q3.

If we use GNP for Ireland, the gap is narrower, but the trend is the same. Using GNP for Ireland, but GDP for Iceland, the figures become:

between 2008 Q4 and 2009 Q2: Ireland -5.9% , Iceland -3.2%
between 2009 Q2 and 2009 Q4: Ireland -2.7% , Iceland -4.6%
between 2009 Q4 and 2010 Q2: Ireland -1.4% , Iceland -4.3%

So:

between 2008 Q4 and 2009 Q2, Ireland did 2.7% worse than Iceland
between 2009 Q2 and 2009 Q4, Ireland did 1.9% better than Iceland
between 2009 Q4 and 2010 Q2, Ireland did 2.9% better than Iceland

In relation to the old Morgan Kelly joke, which went: “What’s the difference between Ireland and Iceland?”, the punchline does not appear after all to be ‘6 months’, as told in the original Morgan version, but ‘5.3%’ or ‘2.9%’, depending on whether your preference for the punchline is GDP or GNP. Boom. Boom.

On the subject of odd things Mr. Lenihan says (and so not completely off topic 🙂 ), his enthusiasm for “the glory days of AIB” is a bit worrying. If AIB had glory days, they must have been after its foundation in 1966 and before its dealings with Charles Haughey in the late ’70s – so a far off and fairly brief Golden Age at best. This isn’t just cathartic bank-bashing either. If the Minister is under the false impression that AIB had glory days in the ’80s or ’90s then it’s likely to have a bad influence on his selection of (rejoice!) new board members and top executives for AIB.

@ Zhao enlai

“The Minister came across as very passionate and convinced”

Did you every see the film Kelly’s Heroes. The Donald Sutherland character seems to think that every problem in they encounter can be solved by thinking some ‘positive waves’.

Confidence has some importance for an economy, but the minister seems to follow a faith based approach to economics that, if we all just believe then the economy can walk on water.

@Dreaded_estate

No JtO we should start when Ireland’s depression started since much of the decline is unrelated to the global economic recession.

JTO again:

Then, do the same for Iceland. Makes little difference to the comparisons.

In particular, it doesn’t affect the fact that Ireland’s growth rate is much better than Iceland’s in recent quarters.

In 2010 Q1: Ireland GDP +2.2%, Ireland GNP -1.2%, Iceland GDP -1.2$
In 2010 Q2: Ireland GDP -1.2%, Ireland GNP -0.3%, Iceland GDP -3.1%

If the path Iceland has followed is so good, and if their changing the government is such a good idea, how come their growth rate shows no sign of improving, while Ireland’s clearly has? Perhaps those, who want Ireland to follow Iceland in its handling of the banks, could answer that? Maybe Kevin will have a go later.

@JtO
As ever you both ignore the argument being put to you and then set up a straw man. It’s the old politician’s trick of wrapping a big lie around a kernel of truth. Interviewer: what do you think should happen next to the economy/banks/whatever? Politician: ‘Miriam, I think it’s important to state, right at the outset, that we should move the peace process forward’. In your part of the world it’s the shinner single transferable answer strategy.
Kevin O’Rourke was making the simple point that the minister has set Iceland up as the bogeyman; a cataclysmically awful experience that we would have followed had we done anything differently to what the minister did. Your numbers and O’Rourke’s both make exactly the same point: while there are some small differences, there is no chasm between the path followed by Iceland or Ireland. To date at least.

@ Kevin O’Rourke

Maybe it’s just me but the hyperlinks in your post don’t seem to work. Try adding rte.ie before the /news part and removing the javascript part.
Otherwise, great post. The cabinet ministers’ aversion to statistical evidence is too often allowed to slide.

NCB Irish PMI fell to 48.4 in September. Amongst the grim highlights, firms cut their workforce at the highest pace since Nov. 2009.

@simpleton

It was not me, but Kevin O’Rourke, who thought up the idea of comparing recent growth rates in Ireland and Iceland. I was minding my own business watching a preview of the golf on tv, when Kevin’s brilliant post appeared, full of statistical comparisons of recent GDP growth rates in the two countries. I checked out all his figures and they are all 100 per cent correct. I merely took his excellent analysis a stage further by checking out how the growth rates have diverged in more recent quarters, if at all. So, while Kevin is spot-on in highlighting the fact that Ireland is only marginally ahead if 2007/2008 is taken as the start-point, in more recent quarters Ireland is way ahead. This is important information in view of the fact that 99.9% of posters on the site think Ireland should have done what Iceland did in relation to the banks. They should come up with some explanation for this unwelcome development.

@JtO
Far be it from me to try and speak on others behalf, but what I think O’Rourke was trying to say was that the minister argues that there was no alternative to what he hid. Because, says the minister, any alternative would have led to an Icelandic experince, rather than the vastly superior outcomes that we have generated.
One possible alternative would have been to copy what Iceland did. But there were lots of other alternative policies that could have been followed. And plenty of people on this site argued for them – by no means did 99.9% of commenters argue we should copy Iceland.
We did what we did, we did not copy Iceland, and we ended with with an Icelandic experience. Thems the numbers.

@JtO, Mr. Bond

As best I understand it, Kevin O’Rourke’s argument wasn’t that Iceland is doing better than Ireland, but the much less specific claim that Iceland isn’t doing so much worse than Ireland that the mere mention of Iceland! is an automatic clincher in the Irish banking debate: “we’d be drinking pints while they’re chewing at an aul’ herring”. You’re quite right that there are important measures by which we’re doing better than Iceland (GDP and GNP at present and back to Q4 2008) and significant ways in which the comparison is unfair to Ireland (Iceland’s devaluation – paging David McWilliams!) However it seems that there are also important measures by which Iceland is beating us (unemployment aand …) and there’s a stack of significant ways in which the comparison is probably unfair to Iceland (I promise not to bore you with them unless it becomes necessary). I certainly know which model I think is looking better myself, but it’s a question which would call for some further discussion, at least.

@simpleton,

can I edit, if the starting point is…

@Niall
“Can anybody explain (in short) what happened in Sweden, (i assume they devalued and reduced interest rates which we can’t do)?”
Yes, there was a large initial devaluation and a continuing slow decline. Inflation rose, wages stagnated.

The minister was quite wrong to say that Sweden nationalised all their banks. Only two banks were nationalised. Of these only Nordbanken was significant in size (amounting to about 23% of the banking system in Sweden, rather oddly, the same proportion as Anglo is of the Irish banking system).

The bad assets from the two nationalised banks were transferred to two bad banks – Securum and Retriva. These made an, approximate, 50% loss in constant currency terms.

The main banks were not nationalised, did not have their assets bought by a state bad bank, set up their own internal bad asset management vehicles, got equity recapitalisation and worked out their problems over time.

While the banks’ liabilities were guaranteed, the move to fix them happened quickly with shareholders and shareholders alone being diluted by new private sector money. It was that or nationalisation. The Swedes would have nationalised BoI and AIB and not put useless preference shares into them.

Some more here:
http://www.riksbank.com/templates/speech.aspx?id=2935

Much more on that website and elsewhere.

The Minister would do well to read up on the banking crisis in Sweden. Perhpas then he will be able to talk about it accurately.

@tull
This is more a jesuitical thread than a practical policy discussion: I’m simply arguing with people who set up straw men, introduce non-sequiturs and generally dissemble to convince us that we are (a) doing very well and (b) there were no alternatives.
A fun exercise but pointless.
But in the spirit of could have, would have and should have done….
Karl W long ago argued that nationalisation, from a pragmatic not idealogical standpoint, should be considered. Not least, it would have done away with the need for that slow train to NAMA land. Now, adding up the weighted government shareholdings of the banking system, I reckon we have (or soon will have) a 52.4% government owned banking system. We ended up, de facto, where, Karl W and others suggested we start. And, here’s the thing, we lost 2 vital and critical years in the process. Was it really worth fighting the good fight?

@Paul Hunt

Speaking of torrents of cold water, the Minister & Co, have made a great effort to spin the bailout cyclone as affordable – ‘manageable’. The current line is that the interest repayments on the bank injections are ‘only’ €1.5 bn per annum for ten years. Funny thing is that when most people borrow money they have to repay the interest and the principal. Where is the money to repay the principal to come from for (a) the bailout and (b) the losses that NAMA will make? Answers on a postcard to ‘The Creche, Kildare St, Dublin’.

Aside: Lenihan used the heretical term ‘bailout’ in his interview with Vincent Browne on TV3.

http://www.guardian.co.uk/commentisfree/2010/oct/01/ireland-economy-editorial

@finfacts

It says a lot more fish are moving into its waters because of global warming.

They should have declared it a security measure in the War on Terror. I’m sure Gordon would have got the joke.

The Iceland story is a lot more nuanced.

Watching the developments from the Icelanders themselves gives a much better insight:
Iceland – The story continues….
http://www.thepropertypin.com/viewtopic.php?f=19&t=27176

They are bedeviled with crony capitalism, a calcified political system, debt, price and wage inflation from the bubble years and the fallout from a financial system gone rogue. Sound familiar?

But they’ve taken the banks out of the equation.

We’ve left the banks in situ. We’ve used NAMA to take the hit upfront but the debt remains. It’s simply been socialised – which is what the Japanese did over a longer period. The Japanese fed their economy to the zombie banks.

Japan – What we have to look forward to…
http://www.thepropertypin.com/viewtopic.php?f=4&t=20380

We’re not going Japanese. We’re not going Icelandic.

We’re going Japlandic!

I think Tull is right. All of the senior debt holders are escaping from Anglo under the cover of the guarantee.
By the time a new government gets into power there will be no one left to burn and we will be completely boxed in economically.

@ Aine Ui Ghiollagain

Iceland has an IMF and Nordic area facility.

It has a domestic bond market.

Btw…

*IRISH RETAIL SALES RISE 1.3% IN AUG. FROM YEAR EARLIER

growth and unemployment rates aside, our method of dealing with our crisis has left us with a stand alone 50 billion euro bill stretching into the future. has icelands approach left them with a similar bill

Just re Sweden – as I understand it, Sweden had a NAMA style ‘bad bank’ to deal with their property/banking crisis. However, unlike NAMA, it was staffed properly:

(“Bad banks needed to be properly resourced to take control of bad assets quickly and “to stop the bleeding”, said Mr Kvarnström. Securum had a staff of 500, while another bad bank he ran from 2002 to 2006, created from German bank Dresdner, had 400 staff to manage loans of €36 billion. Nama has a core staff of 40 which will rise to 80 this year. source: http://www.irishtimes.com/newspaper/finance/2010/0602/1224271674462.html).

This meant that it was able to reach it’s conclusions much more quickly, with a much shorter period of uncertainity. So it’s entirely disingenious of that Mr. Lenihan to say that we are following Sweden’s example. We are also talking about a different scale of crisis to Sweden’s. Sweden is a popular political red herring often used by Irish politicians to make their policies sound more thought-out.

I think Brian Lenihan is a brilliant barrister – he is more than capable of making arguments vehelemently that he knows to be nonsense – this is part of the job of the barrister. It’s also the cardre of people being bailed out, according to some of David McWilliam’s analyses.

Fine Gael are clearly shambolic in many ways, but at least both of their last two finance spokespersons, R. Bruton and M. Noonan have had a good deal of financial acumen.

Thanks Karl et al for providing this blog.

@Michel Hennigan
“Everyone knows that devaluation always leads to rising exports!

Just say it often enough and it’s true!”
Yes. If you have devalued your currency, it is a little silly to look in current money terms at the amount coming into the country from exports. In terms of a basket of foreign currencies, chances are, while you might be selling more stuff, you are gaining a far lower amount. If you have a balance of payments problem, this does not really help you, as you have made imports more expensive in local currency.
http://www.statistics.gov.uk/cci/nugget.asp?id=194

Despite the repeated calls for an increase in consumer spending, achieving a balance of payments surplus (i.e. retaining wealth in the country) requires an increase in exports and/or a reduction in imports. In the UK, as in Ireland, most consumer goods are manufactured externally (Ireland’s position being far worse in this regard). It is not enough to increase exports if imports are rising as quickly.

How you achieve this in an era of free trade, I don’t know. I do note, though, that China and India retain significant barriers to entry of finished goods and now export of raw materials (which China imposing an administrative ban on the export of rare earth metals to Japan). Mercantilism appears to be a less than zero-sum game, except to those who are practicing it.

Vincent last night asked the Minister why “speculators” who bought senior bonds in Anglo should be bailed out by the taxpayer. Did anyone else notice the reply that they “were not speculators, they were justy the same as depositors”.

The obvious follow-up (which was not made) was that they were “investors” and investors have to balance risk and reward. Sometimes they get it wrong, but in any case why would these investors not be holding the bonds as part of a diversified portfolio to reduce stock specific risk?

Were they too mean to pay for investment advice, or was no competent advice available?

The interviewer made a mistake by using the derogatory term “speculators” and I wonder whether others who are arguing along the same lines might avoid its use unless clearly justified.

Having said that have a look at this on subordinated from the Telegraph:
http://tinyurl.com/3xy6l9p

The historic GNP comparisons on Irish Economy generally take the peak year or quarter numbers as their base. In retrospect, these numbers were misleading since they included as output the equivalent of building above- ground holes. Would anyone care to make comparisons taking a relatively normal base year when house prices were not absolutely astronomical and when building and construction accounted for a relatively normal proportion of GNP, say 2003 (8.5%)?

Ireland could do with a few large brooding volcanoes to stoke the community spirit like they do with the Icelanders.

Real comparisons between Ireland and Iceland would need to take account of the natural landscape, population density, education system, quality of life, degree of sovereign control, infrastructure etc. etc. Pointing out fluctuations in past-looking figures such as GDP and GNP only tell a small part of the story. Many Icelanders have had dramatic changes in their personal circumstances in the last three years but they appear to be on the way up again and anybody who has visited Iceland since 2007 will not have seen any great evidence of a devastating recession.

European tourists, and Germans in particular, have been flocking to Iceland since the devaluation and their Meditteranean-like summers of the last few years have helped also.

Lots of information at http://www.statice.is

I’m perplexed as to why Brian Lenihan and the government are so adamant in ensuring that the senior bondholders do not have to meet some of the cost of recapitalising our banks.

These investors looked at the business model and other data of Seanie’s bank and they decided that they liked the strategy pursued and invested on the basis of gaining a return on that investment.
Subsequently the business model and lending policies of Seanie & Co were found to be delinquent – therefore the investors decision to invest was incorrect.

Bad decision making by the investors should not be rewarded by the taxpayers of this country.

I think we need to know the identity of the bondholders because I cannot understand how wrong decision making on their part, requires them to be left unscathed while the Irish taxpayer pays the tab.

@ Niall
Agree 100% –
@grumpy
“The Minister again stated that legally, senior bondholders needed to be treated the same as depositors. Is there any basis to this statement?

Even if there is which has been well debated here – not quite conclusively – that is surely an argument for burning the depositors to the extent they were not covered under the original guarantee – rather than extending a blanket guarantee
@tull
“The unwritten rules of the club of which we are a member-the EU-do not permit a haircut of senior bonds”.

I’m tempted to quote the old adage about unwritten agreements (rules?) not being worth the paper the are written on but .. the main question is why – if such an implicit guarantee existed anyway the minister felt the need to make it explict – without any get out clauses thus ensuring we can’t escape.

It reminds of the old Paddy joke where after the Scot and Brit had escaped execution because of a faulty guillotine – Paddy looks up when his head is on the block and says “I see what’s making it stick” .

should be – “No longer a low tax economy”

Sorry should read

If as BL says some of them can hold us to ransom; then we hand them the cheque and thank them for their co-operation. Others should be considered on a case by case basis.

@AMcGrath

That is Neil’s quote, not mine.

You have to distinguish between bondholders who bought pre-guarantee – buying an unsecured senior bond, and those that bought later – a quasi-sovereign.

As for the depositors, many are interbank, commercial etc. Deposits had fled the bank by late Sept 2008 – that was the “liquidity” part of th bank’s problem.

You cannot reasonably treat those depositors now with large funds at the bank, in the same way as those who would have lost out had the bank not been bailed out – because they are only there now because there is a government guarantee on their deposits. Without that the deposits would be removed almost overnight.

Perhaps you could try to find out the exact deposits as at 28th Sept two years ago and specifically remove the guarantee on those only, but I doubt that would be practical.

It was however possible to identify which senior bonds were issued pre-guarantee.

Investors have an important role within the system – to allocate capital efficiently. When did they get excused from risk management? Same time the banks did?

It is the “risk doesn’t matter” attitude, thanks to the wall of money (debt not equity – which might have brought about more caution) from the banks, that allowed the property bubble to be enthusiastically indulged.

@vinny

Well said. I would like him to be a barrister acting for me but as a politician I would not trust him as far as I could throw him. Notice the way he said in one of the interviews that bank nationalisation was a central component of the government’s bank strategy

@Ray
“And the criminal investigation is going at a snails pace and is possibly petering out.”

Here is my suggestion as per my blog entry on Economic Recklessness. Offered up knowing that it has no chance in hell of being implemented in any share or form.

Through greed, incompetence and negligence a few hundred people have set this country back a decade, or more, in economic and social terms. In the few cases where “sanctions” have been applied, they have amounted to big pensions and fat payoffs instead of sanctions and punishments.

Notwithstanding the magnitude of the crisis, we still see no plans for a comprehensive public enquiry and we know that proving white collar crime can be extremely difficult due to complexity, wriggle room and “lapses of memory”.

Given the scale of the economic and social devastation, it is inconceivable that any further painful remedial measures will be accepted by the nation unless firm lessons on “moral hazard” are seen to have been applied.

This could be done by designating economic recklessness (alongside the existing crime of reckless trading) as a crime and setting up a judicial or Dail-based investigation to identify the most culpable organisations within the public and private sectors based on public testimony of experts. The Honohan and Regling scoping enquiries would be relevant inputs regarding developments prior to September 2008.

Having decided which boards and groups of administrators should be examined in detail, the investigation should proceed with public questioning of relevant individuals leading, where appropriate, to files being passed to the ODCE or DPP. The level of proof for economic recklessness convictions should be the civil rather than criminal level to take account of the difficulties associated with prosecuting “white collar” crime.

Penalties for economic recklessness should include lengthy prison sentences, massive fines (linked to the wealth of the convicted) with significant scaling back for those who admit complicity or become whistleblowers.

@Niall

Why should you know who the depositors in Anglo are no more than B of I or AIB , INBS etc ? Do you want to know what I had for breakfast also ? I never heard such rubbish in a long time. The State decided to Guarantee the liabilities of all of the Irish Banks including Bond Holders and Depositors and the Anglo ones are no different to those in other Banks.

It seems to me that politically Iceland is in a much better place, having thrown out the politicians that had bought by the bubble manufacturers.

If I were an Icelandic parent, I would be much more confident of my childrens’ futures.

@ TRP

Nonsence, you mustn’t have listened to much in the last two years. Cheapest bailout ever etc.

It seems more stupid to sign blank cheques without asking who these people are. I’ve read someone that 20 – 25% of deposit in Anglo are from Isle of Man banks. If this is true we’re using tax receipts to bail-out tax dodgers.

Following on from the Roubini remark in the original post, an interesting discussion could certainly be had on the morality of the whole transfer from future taxpayers to current (and previous) depositors and investors in the banks. It’d be a sterile discussion since law applies and morality doesn’t, but still.

Although a long-ago Pope declared that socialism was immoral, didn’t some more recent Pope declare that tax evasion was immoral too; That paying your taxes was a moral thing to do?

How would a Pope address the morality of asking children (or other innocents) to pay taxes to pay back a debt that they had no hand in accumulating; to take money from the comparatively poor to make the comparatively rich whole?

Would a Pope be brave enough to enter that debate, these days?

@tull
I’m aware of the potential consequences of not paying. That wasn’t my point, and I do kinda resent the “if you’re smart enough” remark.

I guess my interest is more in how, or whether, a moral position on taxation can be reconciled with the current situation where tax will be taken from the comparatively poor (and innocent) to give to the comparatively rich (and reckless) – at an unheard of scale.

Similarly, I wonder what would the public impact be if a morality leadership figure like a Pope (and please, don’t accuse me of being a fan) came out and said that these taxes and payments were immoral and that – for instance – the depositors and bondholders should both be left unpaid; if someone like a Pope essentially said that the only moral thing to do was to overturn the contractual obligation and to “burn the bondholder”.

You may correctly gather that whatever about the legal position, I’m inclined to believe that the most moral option is to do exactly that.

It’d certainly be an interesting public policy conundrum if a major religious figure came out and said, essentially “This state’s policy and these taxes are immoral”. Whatever about the public impact of Joe Bloggs’ feeling that the situation is somehow immoral, figures like the Pope still do have a fairly powerful bully pulpit to speak from.

Tull,

what on earth are ‘senior non risk bearing bonds’?

Ahura,

they are not risk bearing. you may think they are but the ECB does not share your views.

Tull,

as far as I’m concerned this is the incredible spoof sold during this crisis. In effect it says that banks have soft capital support from the parent sovereign on risk above tier 1. This makes senior bonds, interbank loans, deposits, covered bonds and securitisation unnecessary.

@ Eoin
Whereas we have a purely red herring market 😉

@Paul

“something is bogey”

Can I refer you to the new tread about Chelsea FC at http://www.irisheconomy.ie/index.php/2010/10/01/chelsea-billionaire-upset-about-losing-on-inbs-subdebt/#comment-79234

I wonder if Manu are big holders of Anger bonds?

@all
This what Charlie Munger vice chairman of Berkshire Hathaway – has to say on bailouts:

“Charles Munger, the billionaire vice chairman of Berkshire Hathaway Inc., defended the U.S. financial-company rescues of 2008 and told students that people in economic distress should “suck it in and cope.”

“You should thank God” for bank bailouts, Munger said in a discussion at the University of Michigan on Sept. 14, according to a video posted on the Internet. “Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies.” ”

http://www.bloomberg.com/news/2010-09-20/berkshire-s-munger-says-cash-strapped-should-suck-it-in-not-get-bailout.html

Essentially the same message as we are getting from our betters in the financial industry and their government cohorts but just delivered without the tedious jargon that we have to suffer!

You guys and your facts!!!! Perception is reality. Not one of you will find a solution to the problem.

@Brian Flanagan

I have made this point before on this blog. The ‘cheque’ from the bank to the developer usually passed through one or more ‘management’ companies. A bit of salami slicing here and there for a rainy day. Is anyone investigating how money was actually handed out, and I am being deliberately literal, from the banks to the developers? The government appears fixated on the recalcitrance of taxpayers across the spectrum to cough up while at the same time avoiding pressing official Ireland to stump up a few incriminating facts.

BTW: Does anyone outside of a few developers, legal types and friends of the government actually know how NAMA goes about its business?

The Alchemist

Just so! The investigations by the NAMA and Assignee in bankruptcy will need full access to

RECORDS!

@Eureka
The mass of a concrete block is not dependent on what you feel about it. The temperature of boiling oil does not depend on how you perceive it.

Similarly, the moon is either there or not. What you or I feel about it is indeed really what you or I feel about it, but has no impact whatever on whether it’s really there. Even when everyone thought the world was flat and that malaria was caused by bad air, the earth was still round and malaria was caused by a parasite.

The aim of our senses is to detect reality as best we can, not to create hallucination, although optical illusions are a nice illustration that they’re easy to fool.

The value of something in a market is nothing more than a reflection of the various agreements between people on how much one person will pay another person for it, and that changes across time and place for a variety of reasons.

However, ultimately the “reality” of market value is nothing much more than a measurement problem not a philosophical problem. The objective facts in a market are still simple to observe. That person paid that other person that much money for that asset or service. Simples.

I just heard Mary Hannafin on the radio saying that the idea of defaulting on senior bank debt and then going to the market to ask for money for a new bank was not a runner because one could not refuse to pay a debt owed to a bank and then ask the same bank for a loan for a new venture. This is similar to the MoF’s statement that one could not default on the market and then go back to the same market for money. These analogies scare me.

The nature of everything* is that different rules apply at different scales. The misapplication of lessons or principles from one level of scale to a different level of scale is the recurring cause of human error at levels of responsibility where one expects better. The adherence to the Gold standard is one such example.

If our leaders allow their thought processes to be clouded by their inappropriate life experiences then we could end up goosed altogether. The most dangerous part of the misapplication of a principle valid at one scale but invalid at a greater scale, is that it is not only accepted by many others but garners passionate support from the similarly ignorant.

I do not blame the Ministers for what they say. They are caught in the duality of their role. On the one hand they must look for the optimum solution. On the other hand, persuading and manipulating the population and the markets are tasks necessary to this task. However, all to often we find that people actually aren’t as smart as we hoped and do believe what they are saying. This is particularly so when people are tired and need to put an end on their thought process, a decision as it were.

==============

*
e.g.

Gravity applies between planets but not between marbles. Newtons laws of motions apply between everyday objects but not between electrons and atoms. Electrons are not like little planets circling the nucleus sun as occured to all young boys studying science. Quantum mechanics are a whole new rule set again.

Similarly, the way a country is treated is different to a business. There are millions of businesses, there are less than a hundred mature western countries. A bank must treat a debt of €100m different to a credit card debt of €5K. A debt fo €1bn is totally different again and debts of €100bn are another level up altogether.

The laws of macro-economics operate in a counter-intuitive way as Krugman has so eloquently argued (leaving aside his abuse of Ireland by using us as an out of context speaking aid for his own agenda).

@Zhou:

“I just heard Mary Hannafin on the radio”

– “we find that people actually aren’t as smart as we hoped and do believe what they are saying.”

Is there a link? 🙂

Zhou,

Your post is very long and I find it difficult it to discern what exactly you are saying. My understanding though is that you are suggesting that a default on senior bank bonds and possibly a default on sovereigns would have no implications in terms of i) access to markets ii) price of credit iii) quantum of credit. Moreover, I would also discern a disbelief on your part that there would be no impact on other bank liabilities- i.e corporate deposits.

@Eureka
Aaah, I see what you mean. You’re not talking about reality, but about marketing.

After all, everyone needs to spend 3 months salary on a diamond engagement ring, to have such-and-such brand, etc. My life isn’t complete without item x.

Market psychology is a mix of that, herd instinct and fears that are sometimes as irrational as a fear of spiders in Ireland.

Anyway, I heard Hanafin on the radio. I suspect it means an election is coming fairly soon. FF have long been trying to don the mantle of a principled party prepared to do the right thing despite the political problems..to “take the hard decisions”. Hanafin’s stridency and aggression tells me that the election is coming. Labour will go with woolly compassion, FF with “hard choices”. FG will be left out in vague-land, where they’ve been all along.

@Tull
Your argument seems to be that we can pay, therefore we should. That’s a big call, but an honest one. It explictly accepts the macro and micro consequences of repeated fiscal contractions over the next four (at least years). It explicitly assumes that this is all feasible: that those repeated fiscal contractions will not impact the broader economy such that fiscal contraction becomes all but impossible – it assumes revenues will rise and spending will fall, if not in line with plans, then fast enough to satisfy those who need satisfying.
It assumes that revenues rise and not fall in the wake of higher tax rates and that spending will not stay stubbornly high despite the setting of the capital budget to near zero.
There are lots of assumptions and forecasts embodied in the view that we should pay because we can.
All of this, I’m afraid Tull, is risible nonsense. There ain’t an economic model invented anywhere, not even Chicago, that allows for these sorts of outcomes. The only escape valve is some kind of boom in the world economy. Logically possible, but one heck of a role of the dice.

This is an irish economics web-site: could all those Irish macroeconomists out there unite around that one simple proposition: what we are about to try, under fixed exchange and interest rates, is theoretically impossible and empirically unique?

@Tull
It’s a bit more subtle than that. I think it will be proven that we can’t pay when fiscal austerity is seen not to work. Right now, that has the status of a forecast so has the same claim on the truth as your alternative vision.

Your point about not being allowed to default is interesting, but also unproven. Nobody has, yet, said to Brussels ‘I want to default please’.

My economics point is a serious one: I am unaware of any serious model, keyensian, new keyenesian, RE, RBC or DSGE that would say fiscal austerity, on the forthcoming irish scale, along with an unchanged monetary stance (defined to include an unchanged real exchange rate) will work. Mind you, most of those models couldn’t cope with our starting point, let alone forecast where we will end up.

You seem to think that sovereign default has never happened before. Or that when it does, countries diappear, never to be seen again. I suggest you study a bit of history.

@Tull
I guess from your persistent questioning, and its tone, that you think I believe default is both desirable and easy. I think we can both agree that default, particularly of the sovereign variety, can only ever occur as a last resort. Where we disagree is whther or not we have an other resorts open to us.
I sincerely hope that I am wrong and that you are right – believe me, all my own vested interests are lined up that way.
How do we default? Messily, bloodily and with far reaching consequences. Again, I think that we can agree on that much. But it’s down to the alternative.

Back in the day, condemned prisoners used to pay the hangman to jump onto their shoulders just after he released the trap door. That way, the execution would be quick. ‘Dangling at the end of a rope’ is, I imagine, a thoroughly unpleasant experience, particularly if it is prolonged. If something, no matter how unpleasant, is inevitable, it is best done quickly. Sometimes the big calls are also the hardest.

How long do you think the Irish people should be left to dangle?