What do markets want?

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I have posted links to this piece in the comments section before, but never on the front page. This seems like a good time to do so, given that the question of what markets want is beginning to exercise people (see for example here, or here). The essential point is that markets understand that governments face political constraints, and take this into account when assessing the credibility of their economic policies. (And, moreover, market participants tend not to believe in tooth fairies or negative fiscal multipliers.)

We’ve known all along that fiscal adjustment here would be contractionary, and that our economy thus needed substantial export growth if it was to avoid falling into the hands of the IMF. That in turn requires a buoyant European economy; hence my alarm regarding austerity measures in countries like the UK and Germany. One of the key insights of Barry Eichengreen’s work is that you have to analyse international monetary arrangements as systems: it makes little sense to analyse policies in one country at a time as if countries are isolated from each other. Ireland has no choice right now concerning what policies to pursue, but other countries do, and if those with fiscal space (as measured by the interest rates at which they can borrow) choose to embark on contractionary policies now, for what appear to be nothing more than ideological reasons, then that is profoundly irresponsible from the point of view of the fragile system that is the European economy.

90 Responses to “What do markets want?”

  1. Keith Cunneen Says:

    The west cannot engage in fiscal and monetory expansion again – we have lived through the greatest inflation the world as ever seen for at least 5 decades.
    Capital needs to be revalued upwards.
    You cannot expect to spin debt off debt to infinity.
    The capitalism of old spun debt off money and had some grounding in reality.
    The problem lies solely with the ECB which need to remonetise Gold to rebuild capital, not increase consumption to infinity.
    Unless they find another few Saudi Arabias to run down this experiment is over.

  2. David Blake Says:

    It cannot be said of any sovereign country that it has “no choice” about what policies to pursue. Ireland could leave he Euro, it could restructure its debt, it could say it is letting the banks go.
    It may be that all these options are worse than what is being done. But they are options.

  3. seafoid Says:

    Martin Wolf has been writing about this for a while. If everyone wants to get their economy out of a hole by exporting, who will buy the exports ? The UK seems to be doing the austerity thing to keep its borrowing rates down.

  4. Paul Hunt Says:

    Many thanks for providing valuable and enlightening distraction from the excessive navel-gazing that is going on – and particularly from the charade in the Dail. Ireland is but a very small, sick fish in a very large pool populated by sharks.

    However, I think your belief that contractionary policies are being pursued purely for ideological reasons may be off the mark. There has been a marked shift in popular sentiment thoughout Europe in favour of smaller, moderate, competent government – despite the unfortunate rise of xenophobia. Most governing coalitions are formed of the centre and centre-right. Those that aren’t – Spain and Portugal – are being compelled to behave as if they are. In the UK, for example, the coalition is tapping into a popular sense that, under Labour, the state became too big and inefficient, too intrusive, too controlling, too clumsy, too centralised and prone to tolerating gouging by special interests. That HMG’s approach might chime with the instincts of unreconstructed Thatcherites is neither here nor there.

    Germany is pursuing its strategic objective of being a high value exporter – in particular to the BRICs – and is intent on dragging the willing within the EU along. But everyone is expected to be more like them. Germany has traded its desire for more EZ fiscal stringency to get France on board to amend the TFEU to allow orderly – and lawyer-proof – debt restructuring down the road. Frau Merkel wishes to continue the economic reforms which Schroeder pursued up to 2005 – and which she was forced to abandon while in grand coalition with the Reds – and she also needs some fiscal slack to cope with the impact of debt restructuring (which might surface before she next meets the voters in Sep. 2013).

    This is the world we’re in and Ireland had better get used to it. But all we get is political posturing putting faction before country, incompetent governance, the protection of special interests and the penalising of those who are either productive or vulnerable.

  5. Brian Woods Says:

    @KO’R: “Ireland has no choice right now concerning what policies to pursue, but other countries do,”

    I believe I could adduce a rational argument, that a sovereign, could indeed take unilateral, drastic, economic and financial action to protect its citizens, if the alternatives (there’s always more than – “its the only option in town” garbage). You just frame the result you want in an appropriate form – and have the courage, or foolishness, to go ahead. Hopping about, whilst it gives the appearance of decisive action, is quickly seen for what it is – and you get punished anyway.

    Better to have let the Irish financials (as they are currently structured) be crushed by ‘The Market’, rather than the majority of our citizens be punished first, then impoverished. The former would have been very difficult until the State was able to re-structure one or two of the domestics into a bank that would serve the people.

    Not too late. But our legislators have framed themselves into a very bad predicament, so exiting by allowing the banks default, (the State it NOT the banks, despite nonsense to the contrary), becomes a more and remote possibility.

    If the usual suspects accuse the government of betrayal, treachery or whatever – the Gov says “Tuff titty! Now get lost!” – framed in the most polite polspeak of course!

    Brian P

  6. jules Says:

    The financial markets want to make money.

    Our country gave huge pay rises to the public service, increased their number, increased the number of managers in the HSE so that now we have the Department of health managing the HSE managing the remains of the old regional health boards managing the local hospital managers who aren’t allowed to tell €150 k consulants to work more than a day a week and stop using public facilities as their own. They set up multiple VECs somtimes in the same city, multiple Third level institutions in small towns . They then built motorways to nowhere.

    They then found the local gamblers who had enriched themselves selling land to the motorways and gave them 50 bn. They set up a NAMA paying lawyers to fight over transfers from one departmen tof the government ot another.

    Put it this way would give Ireland a brass cent. No because unless you can get greater sucker to take your worthless bits a paper the chances are you wont get your euros back.

  7. Gregory Connor Says:

    The latest evidence, for what it is worth, is that small open economies do in fact have negative fiscal multipliers. Philip Lane just put up a link (see his recent blog entry). See this quote from the paper’s summary of its findings:

    “Openness to trade is another critical determinant. Economies that are relatively closed (whether due to trade barriers or larger internal markets) have long-run multipliers of around 1.3 to 1.4, but relatively open economies have negative multipliers. In economies with large proportions of trade to GDP the multiplier is statistically different from zero and from the multiplier in open economies at any forecast horizon. The multiplier in open economies is negative and significantly lower than zero both on impact and in the long run.”

    From “How Big (Small?) are Fiscal Multipliers?”, E. Ilzetzki, E. G. Mendoza and C. A. Végh, NBER working paper, October 2010.

    Admittedly these VAR-based estimates seem extremely unreliable.

  8. Adrian Kelleher Says:

    @Paul Hunt

    In the UK, for example, the coalition is tapping into a popular sense that, under Labour, the state became too big and inefficient, too intrusive, too controlling, too clumsy, too centralised and prone to tolerating gouging by special interests.

    I agree Labour was felt to be “too intrusive, too controlling, too clumsy, too centralised”. In fact I’ve a sneaking regard for Cameron for this very reason as well as for his having campaigned on a ‘hard road’ cost-cutting manifesto.

    Cameron’s is a new kind of politics and he deserves praise for facing down his more small-minded party colleagues and for being in essence the first logically consistent small-government politician of modern times.

    The cost-cutting still has a massive ideological component, though. The coalition is willing to risk a double-dip to carry it out and has exaggerated the short-term budget risk.

    What even Warren Buffett understands that UK Conservatives and US Republicans don’t is that there’s a huge difference between 30 years of Reaganism and 50 years of Reaganism. Social mobility has vanished and entrenched social exclusion has reached the point where it is even damaging the quality of the work force.

    The risk is that the mistakes of the Russian, German and Austro-Hungarian aristocracies will be repeated — that, in trying to hold onto everything, the wealthy of the US and UK will instead lose it all.

  9. seafoid Says:

    @Adrian Kelleher

    Great last 2 paras. I just can’t see the plutocrats knowing when to stop.
    In Galway this is known as “tearing the arse out of it”.

    This quote was in the Guardian this week :

    ” Longtime hedge fund manager Mike Masters, who has worked with WDM, said: “Because there is already much more capital available in the world than hard commodities, speculators can increase the price of consumable commodities, like foodstuffs or energy, much higher than traditional consumers and producers can react.”

    I believe there are $50tn in invested assets chasing an above average return. And nothing is off limits. The greatest challenge to modern stability , imo.

  10. anonym Says:

    By the way, it seems we had another midnight visit from the bond fairy. I wonder just how indirect was the transaction this time.

  11. aiman Says:

    Jules is right. Markets want profit, as much as they can make. Markets are not necessarily smart and, with remarkable frequency, get things badly wrong.

    Unfortunately their prey, in aggregate, tend to get outperform them marginally in the getting-it-wrong-stakes.

  12. Hugh Sheehy Says:

    @aiman
    People want profit. Markets simply are a place where people buy and sell.

  13. Cormac Lucey Says:

    More important than the question “what do markets want?” is the question “what do markets expect they will get?” Markets probably (and who knows for sure?) expect:

    a. the EU to continue to aspire to goals which it cannot pay for (e.g. monetary union in 1991, the EU rescue fund in 2010). Sub-par performance is pre-programmed as the political class tries a King Canute using orders and “moral suasion” (i.e. other people’s money) to achieve what they refuse to pay for themselves.

    b. the Irish political system to aspire to goals which it cannot pay for (e.g. the Croke Park Deal). Sub-par performance is again pre-programmed as hard realities are first denied, then belittled and, finally, faced up to.

    c. further deep drops in Irish property prices which will put further huge pressure on the balance sheets of Irish banks and of Irish citizens.

    Ireland’s choice is simple. We can have chaos by leaving the Euro or we can have deep, deep deflation within the Euro. Under either scenario, there is a severe risk that lenders to the Irish government will not be fully repaid. That may not be what markets want. But I think, judging by their behaviour, that it is what they expect.

  14. Mick Costigan Says:

    @ Kevin

    This is exactly the right conversation to be having, with the news that the Greek deficit is larger than expected despite their cost-cutting, i.e. contraction in government spending is causing the economy to shrink so much that the “benefits” to the deficit of the cost-cutting are wiped out. As other commenters have pointed out, Martin Wolf has been saying the same thing for months to no avail, but perhaps now that we are seeing real empirical data coming in (with respect to the limited models Gregory wishes us to consider) minds might shift, though I fear that once minds are set, they will be hard to turn. Keynes explanation of the motives for such a hardening of the mind spring to mind:

    “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.”

    @Paul Hunt
    Persisting in such a course of action in these circumstances – where what you’re doing not only has the desired effect of reducing the deficit but actually has the opposite (as well as imposing great social costs) – therefore meets my definition of ideological. Your point about a larger political shift away from big government may be correct but I think the ideology being referred to in this is in the economic sphere, not the political one. Keynes again:
    “The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight—as the only remedy for the unfortunate collisions which are occurring.”

    @Brian Woods
    “Better to have let the Irish financials (as they are currently structured) be crushed by ‘The Market’, rather than the majority of our citizens be punished first, then impoverished.”

    I don’t think this was ever really an option. If we have learned one thing from economic history, it is that the crushing of the financials definitely punishes the larger population. We can curse the failure to rein in the financial sector in time and argue about precise decisions made in the act of saving (e.g. why Anglo?) but there’s a Austrian-style failure of logic in assuming that not intervening in support in a major way was ever a viable economic or political option not to . (Aside: given that the collapse of the Austrian banking sector was a catalyst for both the Great Depression and the Depression of 1870s, you’d think they’d have learnt something? See Keynes on ideology above for why they didn’t)

    @Hugh Sheehy
    While you are entitled to your own individual preferences, the evidence is far from clear that over the long run what most people want is profit. Read Karl Polanyi or Donald MacKenzie to understand the artificiality of markets, their absence in most of human history and the crucial choices that have been made, mainly by governments, in constructing the markets in which we now live.

    So where does this leave us all? Coming back to Kevin’s point about the need to think of the European system, I think Ireland really does have very little choice about what it does now. I believe that the austerity paths that have been by the major EU economies will in time lead to a major crisis, at which point the “benefits” of all our efforts to date will be wiped out. In the meantime we must be seen to “play the game” and so we will.

    The focus should however be much more clearly on making the kinds of structural reforms Paul Hunt has been advocating for a long time, protecting the weakest in our society as much as possible, and engaging in a genuine grown-up national conversation about the choices we face as a society about what government should and shouldn’t do. Apres la deluge, we will need that kind of national consensus to avoid the re-emergence of our worst political tendencies (cf Kevin’s previous highlighting of the rise of reactionary parties across Europe).

  15. Brian Woods II Says:

    The primary reason for having stable government finances is not to please bond markets. At the present time that may be Ireland’s immediate concern.

    But in general governments cannot sustainably run large deficits. Thus the UK has a totally unacceptable deficit and although it has “the fiscal space of borrowing at low interst rates” that does not mean it does not have an imperative to get its deficit down to acceptable sustainable levels.

    The premise of the opener seems to be that so long as bond markets are prepared to lend at reasonable rates it is irresponsible not to fill your boots.

  16. ObsessiveMathsFreak Says:

    The markets want money for cocaine and prostitutes. I am deadly serious.

    Most people don’t realize that “the markets” are in reality 22-27 year old business school graduates, furiously concocting chaotic trading strategies on excel sheets and reporting to bosses perhaps 5 years senior to them. In addition, they generally possess the mentality and probably intelligence of junior cycle secondary school students. Without knowladge of these basic facts, nothing about the markets makes any sense—and with knowladge, everything does.

    What the markets, bond and speculators, etc, want right now is for Ireland to give them a feel good feeling, nothing more. A single sharp, sweeping budget would do that; a four year budget plan will not. Remember that most of these guys won’t actually still be trading in four years. They’ll either have retired or will have been promoted to a position where they don’t care about Ireland anymore. Anyone that does will be a major speculator looking to short the country for massive profit.

    In lieu of a proper budget, what the country can do—and what will work—is bribe senior ratings agencies owners and officials to give the country a better rating. Even a few millions spent on bumping up Ireland’s rating would save millions and possibly save the country.

    Bread and circuses for the masses; cocaine and prostitutes for the markets. This can be looked on a unethical obviously, but since the entire system is unethical, unprincipled and chaotic anyway, why not just exploit that fact to do some good for the nation instead of bankrupting it in an effort to buy new BMWs for unmarried 25 year olds.

  17. hoganmahew Says:

    I think it is the wrong question.

    What does the country want? More to the point, what does it need? And once those have been assessed, how do we go about getting them?

  18. Hugh Sheehy Says:

    @Mick Costigan
    You don’t have to assume anything about my “individual preferences” to accept that it is people who are behind the search for profit. It certainly isn’t the linoleum or the marble of the market floor. If the people leave a market then it’s not going to do anything by itself.

    People may also want other things as well, but for most people profit is something they want.

    As for the supposed absence of markets from human history, markets arose at the same time as civilization and well before decent plumbing. War, however, was ever-present in human history even before the rise of civilization. On the basis of your argument we should be for war and against decent plumbing. This seems unlikely to be a solid basis for argumentation.

    We could also look at texts on the anthropology of the mind and understand why many people struggle to understand things like markets and Newtonian Mechanics. Our brains evolved in a world lacking many things we have today. Just because our minds don’t intuitively understand something doesn’t mean it’s not true or correct.

    And, as has been said many times before, the first rule of any market in any modern state is that the state permits the existence of the market. There may be additional rules and standards, but the first rule is permission. The second is probably protection. Other regulations come later.

    However, I agree with you that structural reform is what we need. I hope we do not have to go through la deluge to get to a point where we can start building a state based on liberty, equality, and fraternity.

  19. Adrian Kelleher Says:

    @OMF

    I’m fairly sure you’re right. In late Jul 1914, Austrian bonds were trading in London at 87% of their theoretical value. The implied assessment of the war risk turned out to be a little wide of the mark, and just a week or so later these were worthless paper.

    Anyone who’d accepted financiers’ advice over the last decade would have lost his shirt. Anyone who patiently analysed matters based on fundamentals would have cleaned up.

    What they never ever understand is that in finance, as in horse racing, the greatest returns go not to those who best analyse the form but to those who best understand the erroneous prejudices of the other market participants.

    How much do the market movers understand of the 81-83 recession, I wonder, when monetarism failed to work as expected on its first outing? How many know of the first hysterical rush for corporate-raiders’ stocks in the late 60s/early 70s that ended in economic disaster amid a flurry of fraud trials? My bet is that memories of the emerging markets fiasco of the late 90s is already fading from memory, as are those of the illusory ‘new paradigm’ economy.

    After each occasion, the same theories were dusted off and reality was held to have failed.

  20. colm mccarthy Says:

    Kevin: Ireland is not in a fixed exchange rate regime, more’s the pity. Ireland does not have a currency. This may not make any difference to multipliers but it certainly constrains the policy options.

    It would be nice for us if the UK, Germany et al were to borrow more. They have concluded that it would not be nice for them and it’s their call. Whatever about Germany, the UK has decided not to proceed with a double-digit deficit. It is at least arguable that, had the new government announced a five-year plan of high deficits, the gilt market would have collapsed. Whether they have chosen the least-deflationary policy is a judgement call.

  21. seafoid Says:

    “then that is profoundly irresponsible from the point of view of the fragile system that is the European economy.”

    One clear outcome of the latest financial crisis is a breakdown of international consensus and the emergence of an every country for itself philosophy. You can see it in the talk of a currency war and in the rows at the G20 over Geithner’s surplus limit plan. Within the EU there is no coherent narrative being followed by all of the players as to how to respond to current circumstances. Is that profoundly irresponsible or just a dose of Realpolitik ?
    What strikes me is how brutal the lie of the land is now . We were never told about this before the last Lisbon vote ! It was supposed to be about jobs!

  22. Mick Costigan Says:

    @ Hugh Sheehy

    “…markets arose at the same time as civilization and well before decent plumbing.”

    I want to respond to this, despite the risk that it pulls the thread off topic. As I said, go read Polanyi. He clearly establishes, with detailed historical evidence, the absence of competitive local and national markets until their emergence in 17/18th century England. Prior to that time, the only markets that existed were “long-distance” markets for scarce and precious goods and slaves (difficult to source locally for social stability reasons), of the kinds described in Kevin’s excellent Power and Plenty (correct me if I am wrong, in making that connection Kevin).

    Until that time the history of civilization did not include competitive local or national markets in the sense that we understand them today. A minimum of 80% of people worked in food production (and therefore had practically no participation in markets) and 80% of “incomes” in urban areas were “spent” on food. Governments everywhere, conscious of the permanent threat of famine, and its destabilizing effects, controlled the small urban food markets that existed to ensure that there was no hoarding by producers, though such hoarding would have made capitalistic sense (sell high when scarcity occurs). The markets for other goods were strictly controlled by the artisans and guilds who manufactured them in that urban area to limit competition, especially from producers elsewhere.

    You lose me on most of the rest of your post about war and the mind. I also am not hoping for la deluge and believe we can start building a true republic despite the challenges. I fear one is coming though.

  23. seafoid Says:

    @Hugh Sheehy

    You should go to rural Chhattisgarh in central India for a month and report back to us on how well advanced neoliberal markets are in a largely rural area of the third world populated by tribal people and sharecroppers. The conditions there today are similar to how Europe would have been in the Middle Ages.

  24. Gregory Connor Says:

    @Kevin,

    Personally I do not buy it either that the fiscal multiplier is negative, especially not in the short run. Their structural VAR-based methodology does not work for this estimation problem in my opinion. But that is what their evidence and estimation methodology finds in the open-economy case.

  25. Ciaran O'Hagan Says:

    @ Kevin,
    Not for the first time, we see facts differently.
    I may have been away, but I can’t find any negative action of late by Fitch on the Kingdom of Spain (you refer to an action “late last week” in the eurointelligence article). And if there was one, it would not have been justified uniquely in terms of medium run growth prospects. Rating agencies are concerned by ability and willingness to repay. Many factors contribute to a rating, and their reports are far from naïve. That is in part why investors and issuers are ready to pay them so much dough for access to their research. Have you read many sovereign ratings reports?
    .
    As for the 1990s, you write “the speculation {around the EMS}did not stop. The lesson of the EMS crisis is that low inflation, low deficits and low government debt are not, it turns out, enough on their own.” My memory is that the widening of the bands, followed by responsible fiscal policies, did work.
    .
    @ Mick Costigan
    Let’s get the tenses right – the Greek deficit WAS larger than reported in 2009 BEFORE (not despite) their cost-cutting, in 2010.
    .
    Paul Hunt, Jules and Cormac Lucey all seem to be fairly on the ball as to what investors want. And what they want is what most taxpayers want, i.e. sound management of the public finances. The interests of government bond investors and most taxpayers are almost identical, in that sense.
    In addition, investors, like citizens, want to see growth and prosperity. Investors want to get their principal back. So the ability and willingness to repay cash is the ultimate litmus test.
    Unfortunately when nations are living far beyond their means, year after year, consequences can be expected. We are now in our fourth year of crisis since subprimes exploded on the scene, resulting in large and permanent drops to wealth and incomes in many countries.
    In Europe, the UK was set the longest objective by the authorities (in 2009) to ensure compliance with its treaty obligations (for the UK to take its deficit to GDP ratio under 3% by 2014/15). Now we see Portugal targeting 4.6% for next year, and 3% thereafter. If the budget is voted next week (and it is one of the last governments to pass its 2011 budget), that will be great news not just for holders of Portugal government bonds, but also for Portugal’s taxpayers.

  26. grumpy Says:

    Regarding:

    “We’ve known all along that fiscal adjustment here would be contractionary, and that our economy thus needed substantial export growth if it was to avoid falling into the hands of the IMF.”

    Just who is the “we”.

    We outsiders were given a load of bull earlier this year about how Ireland was embarking on ” an expansionary fiscal retrenchment” – just like in the ’80s.

    The heretical response was “Er, what about the currency, oh, and the West emerging into the greed is good era following the early 80s recession?”.

    The ranks of the “we” were obviously more substantial than was apparent at the time.

  27. Mick Costigan Says:

    @ Ciaran

    Kevin’s piece is not current, the ideas are, which is why you don’t find the Spain news you are looking for in recent news.

    On the Greek deficit, your point is not wrong, that is true but it is you who is behind the news. The NY Times is reporting today that lower revenues than expected and a larger resulting deficit – “Tax Shortfalls Spur New Fear on Europe’s Recovery Bid”. Apology accepted

    As for the rest of your point, there is little that can be quibbled with general statements about what everyone, citizens and investors want out of an economy. But we are talking about where we go from the situation we are in right now. The various targets you cite are great but the evidence is accumulating that no-one will achieve them as a fiscal contraction sets of national and potential regional recessions and tax revenues decline. We have to have the open-mindedness to explore the scenario that our imposition of massive social costs will not have the consequences we desire and may actually make things doubly worse.

  28. grumpy Says:

    Oh, by the way, I can tell you that what the government bond market wants above all right now from Ireland, is the Croke Park Agreement gone – pronto.

  29. Hugh Sheehy Says:

    @Mick Costigan and seafoid
    Hmmm… Mick says that “competitive local and national markets” are new, at least according to Polanyi, and seafoid says that I should look for “advanced neoliberal markets” in rural India.

    What should I do with reading like Silver or Thompson or MacMullen or Temin? They don’t completely agree with Polanyi, or even agree much at all.

    As for rural India, I defer to superior knowledge of its similarity with Medieval Europe, although confess I doubt that Medieval Europe had the level of GSM coverage that rural India has.

  30. Mick Costigan Says:

    @Hugh Sheehy

    Interesting you cite Temin, he’s the co-author with Eichengreen of a recent Vox paper highlighting largely the same point Kevin is making:
    http://www.voxeu.org/index.php?q=node/5359

    I look forwarding to investigating further the alternative views you suggest that those authors have.

    I would agree with you that rural India today is actually part of the global market. You can’t go back from where we are.

  31. Hugh Sheehy Says:

    @Mick Costigan
    Temin may well agree with Kevin. As far as I can see he doesn’t see eye-to-eye with Polanyi or with your view on the novelty of markets. From the history I’ve read, and I’m no specialist on the topic, I don’t either.

    The point on how market pricing (and in different contexts things like newtonian mechanics and exponentials) conflicts with the human mind is seen in areas like equivalence heuristics. Most people intuitively feel that there ought to be some equivalence in the items exchanged, similar in some way to the amount of labour expended. This manifests itself in various areas, but one example these days is indignation when items lose or gain value. The cry of “But I paid €x for one last week. That’s not fair!” is familiar but irrelevant in a modern market. A participant in a modern market will simply say “I don’t care what you paid for it. We’re discussing how much I will pay for it.”

    I’m not going to stray off topic any longer.

    @Colm Mc
    The fact that Ireland doesn’t have its own currency is probably very relevant to multipliers. Ilzetzki, Vegh, etc., talk mainly of four main parameters; Development (high or low), exchange rate (flexible or not), openness (high or low), and outstanding debt (>< 60%)

    Ireland is developed, but is open and has – or is perceived to have – high outstanding debt. This would indicate a max starting point multiplier of up to 0.8 because we’re developed, but our openness and high debt would lead to a conclusion that the multiplier could be negative. Only our exchange rate policy remains. In the paper the suggested mechanism is that spending can cause a rise in domestic interest rates if the exchange rate is fixed and that this might cause the multplier to be positive. If the exchange rate is unaffected by govt spending – as in Ireland’s case – then the multiplier is likely to be negative.

    The Ilzetzki, Mendoza and Vegh paper has Ireland aiming for a negative multiplier on 3/4 criteria. I suspect that Ireland might be in a corner for their analysis on exchange rate anyway, since the reason we’re in problems is a huge flow of foreign capital into the country in the last years…which is now leaving because there’s nothing to invest in. Exchange rate appreciation would be balanced against the departure of capital anyway.

  32. Adrian Kelleher Says:

    Global financial markets have immense power as does the WTO and meanwhile numerous environmental and regulatory problems are global as well. What is lacking is any political framework capable of dealing with these issues at the appropriate scale.

    Some forms of competition are good, others less so. Competition to achieve the lowest environmental or employment standards or to slash spending when a depression is still possible benefits nobody.

    Internationalism is dead in the water and has been for a generation. It’s unpopular and breeds paranoia.

    What’s needed is a new political movement willing to sacrifice electoral success while it builds support among opinion-formers for a new internationalist agenda. A transformation in thought like this has never been achieved incrementally. It can only occur when short-term popularity is sacrificed for long-term influence; this is what Marx did and what Von Hayek did also.

    A global, democratic political framework established by treaty with a strictly limited remit could tackle these issues to the benefit of all. Independent revenue-raising powers need not be included, and the institution need never challenge national governments or be permitted to challenge them. Insofar as such an institution might circumscribe — or even supplant — institutions like the EU or the UN, it might even prove popular with nationalists. Nations would retain all the guns and, in accordance with subsidiarity, the vast bulk of the butter as well.

    Such ideas are electoral poison. Notwithstanding this fact, existing diplomatic and political arrangements are manifestly inadequate for dealing with the political consequences of globalisation.

    Nothing could be more dangerous to peace than the emergence of 4 or 5 trade blocks competing via currency manipulation, a scenario Robert Mundell among others has warned of. Such an outcome is entirely possible today, as are all sorts of other even more frightening futures.

  33. seafoid Says:

    @ hugh sheehy

    while txt msgs are wonderful I haven’t come across across any study to indicate that they have any effect on land distribution.

  34. Mick Costigan Says:

    @Seafoid

    Mobiles and even txt messages do have an effect on the definition of the local markets that individual small-holders can choose to sell their produce in though. There’s considerable evidence on that, see this January 2007 Newsnight report on Kenya for example, which includes a farmer who by text message sources price data from 3 different local markets, enabling him to make a choice about where to bring his produce and cutting out the middle-man whose information he used to rely on:
    http://news.bbc.co.uk/2/hi/technology/6241603.stm

    And then think how much more mobile penetration there is now in these kinds of rural areas

  35. seafoid Says:

    @ Mick

    Thanks for that
    The tribal areas of India are particularly disadvantaged. FTSE 100 Vedanta and others have been expelling tribespeople from their ancestral lands in Orissa and elsewhere with the backing of the government leaving the people destitute. Mobile phones are fine for what used to be called strong farmers with security of tenure but for these people they don’t make any difference. They are the lowest of the low in India and not part of a globalised trading bloc.

    Here is another community Hugh could have a look at- the Puthirai Vannars of Tamil Nadu in Incredible India , also living in the Middle Ages

    http://www.tehelka.com/story_main13.asp?filename=Cr073005Dont_look_at.asp

    the whole series is worth a read.

  36. paul quigley Says:

    @ Kevin
    Many thanks for the excellent thread. Everything is indeed connected.

    @ Ciaran O’H

    The bondholders bought the bank bonds, and thereby assisted in creating the mother of all property bubbles here. On the back of the property taxes associated with that bubble we had a bubble in state spending, including state employment. It follows that the bondholders were directly involved in facilitating the fiscal crisis.

    Those same bondholders have already benefited hugely from a scheme whereby the potential losses from the property crash were socialised, on the basis that a default on bank bonds would adversely affect the credit of the sovereign. The bank guarantee has duly affected said credit, but all of the focus now is on the ‘underlying’ unsustainability of the state finances. Yes, there is a problem, but Kevin is right to warn of deflation.

    If the bondholders and taxpayers really had common interests, ‘our’ banks would not have been able to sell those bonds. And if the common interests didn’t exist then (as they clearly didn’t) it’s pretty hard to believe they exist now.

    Mr Market was remarkably silent on the Irish fiscal problem during the boom. The common interests were between bondholders, bank management, developers and crony politicians, with a wide circle of folk getting a bit of the pie. That’s not exactly the taxpayer.

    You say:
    ‘In addition, investors, like citizens, want to see growth and prosperity. Investors want to get their principal back. So the ability and willingness to repay cash is the ultimate litmus test’

    Investors don’t just want their money back. That’s boring. They want returns. Without going as far as @OSM, I put it to you that the search for yield can be a dangerous and destructive addiction in itself.

    As my late father used to say, ‘enough is as good as a feast’. While I do not question your own commitment to decent social values, some of the conduct in the finance sector is not even compatible with economic development, let alone social equity.

    Doubtless a great deal of technical skill goes into ratings. But it’s all f****d up by the addiction to big returns. There is no other explanation for the shambles which occurred around subprime and derivatives. The in-house people knew it was hokum but they couldn’t say it.

    @ Hugh Sheehy

    I think you will find that history, sociology and anthropology all support @Mick Costigan on the limited role played by markets through the centuries. Try the Gift by Marcel Mauss for a classic description of economic exchanges without ‘trade’. We know a great deal more about the past today than Adam Smith did. We didn’t ‘truck and barter’ as individuals. We negotiated things through the group.

    Polanyi rightly said that the spread of market relations had an impact which was comparable to the spread of a great religion. It revolutionised society. That’s why regulation of markets was so necessary, and it’s why, for our survival, we need to take a hard look at Mr Market.

    You say : “But I paid €x for one last week. That’s not fair!” is familiar but irrelevant in a modern market. A participant in a modern market will simply say “I don’t care what you paid for it. We’re discussing how much I will pay for it.”’

    Who is entitled to determine what is relevant ? If asset values can be manipulated covertly, as they are, what security has the citizen ? What is the purpose of democracy if international creditors get to be the ultimate arbitrators of fairness and value ?

    @ Adrian K
    ‘What they never ever understand is that in finance, as in horse racing, the greatest returns go not to those who best analyse the form but to those who best understand the erroneous prejudices of the other market participants’
    + 1 The Education of Speculator. Niederhoffer.

  37. hoganmahew Says:

    @seafoid
    What do you think happened to sharecroppers and subsistence farmers anywhere else in the rest of the world? The industrial maw needs working consumers. Subsistence doesn’t really cut it.

    One puzzle I can’t quite work out in relation to, say, Germany spending more. It is part of the eurozone, so it is not free to set monetary policy either, but, because of its size, it has a large effect on indicators in the eurozone. So say Germany did embark on some deficit financed spending on, say, built infrastructure. That would pull workers in from across the EU, but particularly from the Baltics, Poland, Hungary (I suspect – given their relative experience of working in Germany and their labour cost advantage).

    With German unemployment low (by German standards), it would also create a scarcity of labour (it wouldn’t really be an effective stimulus if it didn’t).

    All the workers would have to live somewhere while working, so there’d be some pressure on housing. It would probably be a good time to invest…

    So, we could end up with a situation where:
    1. German wages are rising
    2. Surrounding countries are experiencing strong capital inflows
    3. German property prices start to rise as speculation takes hold
    4. Commodity prices rise?

    What does anyone think the ECB’s response would be? What does anyone think the effects would be?

    So my puzzle is this. I don’t see how you can push growth without getting inflation out the other side. I don’t see that the ECB would respond to inflation other than to try and suppress it. I don’t see how that really helps anyone to have higher interest rates.

    Instead, probably what we need to see is a return to centrally funded investment in peripheral countries… probably with a stiffer hand on the fiscal tiller. As Mr. Hennigan points out, the last time we got into serious trouble, the EEC was effectively paying the interest bill for us.

  38. hoganmahew Says:

    @Mick Costigan
    So Adam Smith was an idiot savant describing something that would happen nearly 200 years after his death? (Polanyi dates the market economy to the mid-nineteenth century). I guess tulipmania was just a bunch of people who liked flowers? And the Sumerians put all those scratches on, not for commodities futures trading, but to give modern scholars something to think about?

    I could go on. Archeology has given us many modern insights into the complexities of ancient societies. Complexities that were not evident in Polanyi’s day. To say that profit was not a motivation is to hark back for a time that didn’t exist, to dream of the noble savage. The necessities of subsistence life may have made the profit motive unattainable for most, but that does not mean it did not exist.

  39. paul quigley Says:

    @ hogan

    This has nothing to do with the noble savage a la Rousseau. It has to do with the economic and social mechanisms which verifiably underpinned human life for millenia. And still do for millions.

    The existence of specific limited markets is not the same as the generalisation of market relations throughout society. Smith was anachronistic in ascribing a central economic role to exchange.

    Tulipmania happened in the context of expanding north European urban finance markets and the economic shift to the Atlantic. A specifc, limited manifestation. Read Fernand Braudel on the Mediterranean for broad view of economic development over many centuries.

    Pierre Bourdieu gives a proper, generic definition of’ economic interest’. It is whatever drives people, and it is fairly abstract. Market relations are just one sort of relations. Social relations, political relations, geographic relations, and many more all matter.

    It is hubris to imagine that all people are and were like us. All cultures are transitory, and there is nothing special about the 21st century.

    Don’t know much about the Sumerians but you might check out Michael Hudson’s project on ancient economies. Accountancy goes back that far, but that doesn’t mean they were interested in profit as such.

  40. hoganmahew Says:

    @paul quigley
    “Accountancy goes back that far, but that doesn’t mean they were interested in profit as such.”
    Well, it beats me why they bothered… as I say, you can’t generalise from even a majority of the population – just because they didn’t have an opportunity to specialise for profit, doesn’t mean they didn’t want to. You end up being fooled by correlation.

    “Pierre Bourdieu gives a proper, generic definition of’ economic interest’. It is whatever drives people, and it is fairly abstract. Market relations are just one sort of relations. Social relations, political relations, geographic relations, and many more all matter. ”
    I agree entirely and it is also relevant to the modern economy. Most people are still not in a position to pursue profit. Their skills are not specialised enough, their opportunities are too limited, the benefits are too small. Do we doubt that the current dominant economic theme is the pursuit of profit? (Leaving aside all notions of whether it is right or whether the concentration of profits in the hands of the few is justified).

  41. paul quigley Says:

    Thanks hogan. As Kevin puts it:

    ‘The essential point is that markets understand that governments face political constraints, and take this into account when assessing the credibility of their economic policies’

    Does that mean that market relations (and the legitimate pursuit of profit) are ultimately subordinate to social constraints ? I think Adrian K is on the right track.

  42. hoganmahew Says:

    @paul quigley
    “Does that mean that market relations (and the legitimate pursuit of profit) are ultimately subordinate to social constraints ? I think Adrian K is on the right track.”
    I think so. There has been nothing unfettered about market capitalism recently; it is the people who have been fettered that is interesting. The social constraints have been allowed to operate down only. If you were a pure Marxist, you’d be looking to the collapse of monopoly capitalism as the Third Estate rebel against the First! (I wonder who constitutes the Second these days? Who are the high priests?…). Economics is in danger of falling into the disrepute that sociology did – economic engineering of outcomes (promoted by peripheral understanding of economics, in my view) is the updated (with more credible models) version of social engineering.

  43. Adrian Kelleher Says:

    @hoganmayhew

    What do you think happened to sharecroppers and subsistence farmers anywhere else in the rest of the world? The industrial maw needs working consumers. Subsistence doesn’t really cut it.

    A well managed economy will certainly move away from subsistence agriculture. The world is replete with examples of market-driven economies failing to develop economically, however; such examples are as common as examples of economies that do develop.

    Compare Costa Rica with just about all its neighbours. Its defining difference? There, agriculture was always dominated by owner-operated smallholdings whereas the rest of Central- and most of South America was characterised by large plantations worked by landless labourers.

    The very large difference in economic performance between Costa Rica and its neighbours results from broad based politics, social and economic peace and the ability of its citizens to equip themselves for the industrial age — all products its pattern of land distribution. In the other countries, by contrast, markets have become stuck in a sub-optimal configuration that perpetuates backwardness.

    The most successful model for development seen in recent decades, exemplified by Japan, S Korea, China and Germany, involves state-subsidised credit, funding for training etc, support for exports and sponsorship of ‘national champion’ conglomerates. Siemens and Mitsubishi typified this in the 60s and 70s, as do LG, Daewoo and Asus today. This is all a long way from neoliberal theory (which I substantially subscribe to, just not to the evidence-defying degree of modern market movers), but it’s fact nonetheless.

  44. Pat Donnelly Says:

    I have corrected you before: markets do not want anything. You are anthropomorphosing!

    Markets is a concept only useful for micro-analysis and petty theories for the neophyte.

    Buyers? Sellers? Governments? Those who can cause governments to fall? Those who counterfeit bonds and currencies? These are the entities that have “wants”.

    I have ceased to read any of what followed in your piece as you appeared to be confused.

    How did the actions of NMRothschild in 1815 affect the “markets”? Are you saying there is a regime or conspiracy in effect to prevent similar but infinitely more complex schemes today? Produce your proof, so!

    You contimue to mislead, in this way, presumably because you wish to see what is going to unfold happen without the chance of a more educated mob being in control of its own destiny?

    Your articles are usually more relevant, sorry!

    You are part of the problem not the solution!

  45. Paul Hunt Says:

    Many thanks again, Kevin, for kicking off such and interesting and insightful thread. We’re probably close to the end, but, reflecting on the exchanges an interesting question might be, rather than what do markets want, what do bond market investors see when they look at Ireland in the context of the EU bond market?

    In the aftermath of probably one of the most spectacular economic and banking blowouts in modern history, what changes in institutions, process and personnel do they see?

    Well, let’s see. Two of the domestic banks are dead as the dodo and the remainder, to varying extents, are wards of the state. We have NAMA and a new CB Governor and Financial Regulator who are doing what the job says on the tin. The MoF/DoF have acquired two new economic advisers. We’ve had numerous inquiries, task forces, review groups, but nothing substantive has emerged. The ‘social partners’ have drawn the curtains in the railway carriage and are pretending the train is still moving. The same government is in office – but not in power; and is contemplating a drastic fiscal adjustment. And the politicians continue to protect and advance the primacy of faction over the national interest.

    Would you put your money – or the money of those to whom you owe a fiduciary responsibility – at risk in that country?

  46. seafoid Says:

    @hoganmayhew

    “What do you think happened to sharecroppers and subsistence farmers anywhere else in the rest of the world? ”

    Outside the OECD and the tiger economies of East Asia sharecroppers who could no longer make a decent living on the land have ended up in urban slums. Cairo is full of them. So are Karachi, , Lagos, Baghdad, Khartoum, Kabul, Dhaka, Lomé , Nairobi etc. The explosive growth of the Third World slum has been one of the defining phenomena of the last 50 years. Mumbai had a population of around 300,000 in 1948 and now has 15 million. The numbers are similar for Cairo.

  47. Hugh Sheehy Says:

    Save me, but I can’t let it pass…

    @seafoid
    Most subsistence farmers and sharecroppers could never make a decent living on the land. One of the main reasons these unfortunate people are fleeing to cities is to escape lousy living conditions, in often (semi) feudal societies. They certainly aren’t moving to the cities in huge numbers in the hopes of rejoining a brotherly tribal society.

    @paul quigley
    Markets’ role is limited today, so why should I argue that it was unlimited in the past? That wasn’t the point being argued. Mick Costigan was saying that markets were absent for most of human history, essentially up to the 19th century. It just ain’t so.

    On pricing, both parties in a sale are relevant. If they can’t reach a price then there is no sale. However, previous parties are not necessarily relevant at all, whether or not one of the parties feels sad that this is so. If you bought a classic car for 1.5 million 4 years ago you may feel aggrieved that a buyer now does not wish to pay more than 200k. He does not have to. This is not some conspiracy but the 1.5 million buyer will still feel as if there’s some obligation on a buyer now to care about the amount he previously paid. There is no such obligation nor should there be.

    However, on your point, if there is a conspiracy to manipulate prices then the other market participants and the state have a job to do. States hardly ever leap in to markets in order to ensure price and transaction transparency, but it should be one of the primary roles of a state. Often they are foolish enough to like the early effects of some particular type of manipulation. Witness the recent political push to sell loans that shouldn’t have been sold, permission to create such complex products that no-one could see what was going on, then finally bans on short selling the dead banks that were the result of all those bad loans. Madness piled on madness, with only a few particularly clever people taking huge advantage of the whole mess.

    Also, more modern data – or less rose tinted interpretation – suggests that Rousseau’s noble savage was savage but not noble. The past is not a pretty place. Men carried swords in downtown London until when, the 18th century? Infections, tooth decay, bad plumbing, horse bound travel, food that could only come from about 20km away. Thank heavens for man’s inventive spirit, states that permitted innovation to take place and markets to spread the benefits.

  48. seafoid Says:

    @ Hugh Sheehy

    Life in the slums of India isn’t much better than life on the land. A killer can be hired for €8. The notion of universal human progress is a very shaky. The main problem is overpopulation – India has 4 times the population it had in 1948.

    At least in the countryside the farmer can crap in peace in the fields. It’s not the same as a hurried one by the side of the railway.

  49. Michael Hennigan - Finfacts Says:

    Markets of course are seldom perfect and the convergence of bond yields towards the German level around the launch of the euro is unlikely to be repeated anytime soon as the July 2007 situation when at one point Irish 10-year bond yields were below the German bund level.

    Market players generally go with the herd and we are more aware of that now compared with the fairytale of Ireland’s acclaimed ‘miracle.’

    It’s always amazing how stupid clever people can be!

    The German fiscal measures are minor compared with the UK’s.

    German imports are on the rise and we should applaud the remarkable jobs miracle that has followed painful reform.

    Amazing too how Germany could become a net exporter of food and drink for the first time in 2008 when Irish exports in the sector fell.

    Germany’s jobs miracle; For first time since 1970s unemployment falls below its level before previous recession

    An example of a happy market!

    The FT reported on Thursday:

    The sudden death of Néstor Kirchner, Argentina’s pugnacious former president, sparked a rally on international financial markets at the prospect of a more investor-friendly regime in one of the world’s top commodities producers. But it threw next year’s presidential elections wide open.

    The Buenos Aires stock exchange was closed on Wednesday for a holiday but Argentine stocks saw their biggest rise in two years, with the MSCI Argentina index rising as much as 13 per cent and shares in Galicia, the country’s biggest consumer lender, surging 26 per cent in New York.

  50. seafoid Says:

    @ Mick Costigan

    That is an interesting video. The New York Review of Books reported a few months ago that the average urban Kenyan pays sixteen bribes a month . Sheehy type markets don’t operate correctly in that sort of context.

  51. Aidan R Says:

    This is a great thread and a welcome contribution to a much required debate on the future prospect of European coordination in the Irish public sphere.

    It is becoming fairly obvious that ideological conviction rather than empirical or economic circumstance is driving fiscal austerity in countries such as the UK, and, I would argue – Ireland. What is most depressing, however, is the Eurozone response. There are a whole variety of reasons for the absence of solidaristic coordination. Political preference is driving economic policy and centre-right conservative governments dominate the Commission. Economic policy is always determined by the strategic terrain of politics.

    25 million people will be unemployed across Europe by the end of 2010, 8 million directly associated with the recession. It is not sustainable and Euro-coordination is required.

    Europe needs a) establish a larger budget to stimulate structural investment b) develop alternative institutions to generate public ownership of debt via Euro-bonds and c) establish a Euro-independent credit rating agency and d) generate diagnostic tools beyond the growth and stability pact to assess the structure of tax and spend government policies e) introduce a tax on financial transactions.

    All of this requires European policy makers (particularly economists) to stop thinking of support as ‘foreign aid’ and recognise that punishing peripheral countries for their financial difficulties is counter-productive for the Eurozone as a whole.

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1657571

  52. Keith Cunneen Says:

    @Aidan R
    Europe needs to do none of those things – it only needs to wipe out the debt.
    This will not destroy the wealth.
    However all wealth is being crushed by debt.
    Given that Germany ,France Italy and others have huge reserves of Gold – they can preserve their wealth and start a new credit cycle with the primary aim of lending money to the periphery to reduce their oil intensity as I think Iberia Greece and Ireland have enough houses to last several lifetimes and dozens of countries.
    However we all know by now that Europe is a bankers construct with the sole aim of preserving a artificial value on Euro paper to obtain the maximum amount of rent.
    So sad really to have cockroaches infesting the Kitchen when the food was so delicous.

  53. Aidan R Says:

    @Keith Cunneen

    Wipe out the debt? Impossible. Money is nothing but an IOU. Since the 1970′s debt has simply been privatised. What some call ‘privatised Keynesianism’.

  54. Keith Cunneen Says:

    @Aidan R
    It is possible to wipe out the debt while preserving wealth and still keep a credit based system operational.
    It is however impossible to have exponential debt creation forever in a closed system.
    The basis of the Gov Bond markets of the 19th century – where Gold was extremely stable in price while the debt was a risk and not essentially money – they were the oringinal “markets”
    Economic activity has become extremely sluggish and inefficient in the west as nearly all human activity now goes to servicing debt and capital creation is undervalued and indeed run down to service debts.
    The global bond market for example in many multiples of the size of equity while goverments are unable to provide utilities and indeed are prepared to sell these in order to service overvalued and unrepayable debt.
    As I said before Trichet just needs to recognize Gold as money without external liabilities and bid up the price such as what happened under FDR.
    This would reduce the debt burden that industry and individuals have to pay to invest in capital creation and to live.
    Fiat savers would be punished but also other vital commodities may reduce in cost as the monetary inflation produced over the last decade or so follows a inert asset rather then inflating vital commodities as they do now.
    The inflation has already been produced into the system by psychopathic CBs and their clients – it is just a question of how this debt will be paid – via debt destruction by Gold or default/ debt repayment which would reduce the money supply and cause havoc to peoples lives.

    This system is now completly out of equiliberium due to a Gold suppresssion scheme and has caused massive malinvestment all over the globe.
    This system must end – we must clear the debt quickly to peserve what little capital remains.

  55. Hugh Sheehy Says:

    @seafoid
    ooooh..I’ve had a type of market named after me!

    I hope it’s an transparent market where the product sold is honestly described, clearly priced, safe for the customer, paid for at exchange and where no market participants collude or have excessive market power. Preferably it’d be one where price information is openly available.

    Of course, if government is corrupt then you cannot have fair open markets. If government is corrupt you can’t have much that’s fair, not even a fair.

    @Kieth Cunneen
    There were basic capital markets in Mesopotamia, and even these weren’t the original markets. Sorry, but this idea that the first markets arose in the 19th century is just flaky. Capital markets were being abused by things like The South Sea Bubble in the early 18th century.

  56. Keith Cunneen Says:

    @Hugh
    I was referring to the modern global finance “markets” created by the Rothschilds rather then archaic markets of Prehistory – with particular emphasis on the Gold – Sovereign dynamic.

    I would recommend Ian Ferguson’s House of the Rothschilds 1798-1848 for a in depth view of the first steps towards modern globalisation as we have come to know it.

  57. Hugh Sheehy Says:

    @Kieth Cunneen
    I met one of the Rothschilds. Last year I think it was, maybe the year before. Charming man. A little strange perhaps, but charming.

    I have not met any of the Fuggers or the Medici or any of the other medieval banking families that existed before that. Of course their banking was less sophisticated than what came later but there’s enough history there of gold and Sovereigns to keep most people happy.

    Spain, England and Italy, Flemish wool, German trade…all the makings of a nice conspiracy novel. Certainly not a 1-1 comparison with a modern capital market, but neither was the Mesopotamian version.

    In any case, debt is not a modern invention, nor is government debt, nor is paper money, nor is banking, nor is sovereign default. Modern financial markets are tautologically modern. In 400 years someone will be writing about a period 200 years ago (and 200 from now) when modern finance really took off and how everything before that was archaic.

  58. Keith Cunneen Says:

    @Hugh
    Fair enough , but still the goverment bond market that we know today is a creature of those times – debt raising powers before then were almost entirely due to a King needing money for immediate war rather then a states Industrial preparation for war although maybe the Northern Italian republics had a similar system of debt management.
    By the way – did you ask the man why did they pull out of the London Bullion market 6 years ago……..
    Fractionally reserving Gold 70 to 1 may not have been his cup of tea – a sensible man I guess.

  59. hoganmahew Says:

    @Hugh
    “In 400 years someone will be writing about a period 200 years ago (and 200 from now) when modern finance really took off and how everything before that was archaic.”
    :D And they will be as wrong then as they have been at every other time in history! This time it’s different!

  60. Keith Cunneen Says:

    @Hoganmahew
    This time may be different as there is no more worlds to conquer.

    Capitalists will have to create capital rather then extract it – imagine that.

  61. seafoid Says:

    @ Hugh Sheehy

    There’s a hole in the bucket !

  62. Mickey Hickey Says:

    As I see it fate will unfold as it should. Our glorious gov’t god bless their little cotton socks are in deep denial as they wait for divine intervention. Total refusal to make the tough decisions that must be made if the downward slide is to be reversed. Still catering to their constituents with anouncements of projects every day by the national, county and local gov’ts as well as state supported institutions. The market players are looking on flabbergasted by this flagrant display of profligacy unfolding in broad daylight.
    Europeans have been net exporters of manufactured goods since the 17th century and that is the bedrock of European prosperity. Germany is riding high today because of their highly skilled labour force and the relatively low cost of skilled labour. The German culture appreciates and rewards productive workers and have an education and training regime that ensures a steady supply to support the export machine. At various times the French, Italians, Dutch, Swiss, Scandanavians and others have been in the sweet productive spot.

    Ireland flogged the productive horse into the ground so far that only its ears protrude from the bog. While the private sector will self correct the public sector is drifting to a sorry end. The ECB while giving the gov’t plenty of rope did not foresee that the gov’t would use it to strangle the country. At a point in the very near future the ECB will pull the plug and the gov’t will be negotiating with the ECB and IMF. Only then will we see concrete and positive action. Unfortunately the more it is delayed the worse the pain will be.

    As we say in Kerry ‘To hell with poverty, we will kill a duck’.

  63. Mick Costigan Says:

    While Michael Hennigan and everyone else continues their canonization of Germany for it’s admirable economic performance, it does well to remind one of the very different philosophy regarding trade that underlies their success:

    http://www.theatlantic.com/magazine/archive/1993/12/how-the-world-works/5854/

  64. Pat Donnelly Says:

    The market for drugs is well known. It is only so profitable while it is illegal. Once it is unregulated, the miracle of supply meeting demand will mean the price drops dramatically!

    Again, the analogy with credit raises its head. When usury laws are enforced, credit is very thin on the ground? No bubbles to burst. Oddly, the bubble only forms when the drug is cheap! It clearly underestimates the risk of lending at such time! So how come? It seems someone is able to steal money and thereby risk it at a low percentage return. Stealing it or making it? All credit formation is supposed to be regulated. Absence of enforcement means that we can buy illegal drugs for quite low amounts, such that it competes with fully taxed drugs sold by state regulation.

    As the depression progresses, all forms of regulation will suffer degradation. Services will break down. Taxes will increase. Markets that are grey and black will increase in number and complexity. The academic from TCD who scores coke for the weekend will be offered RU486 and Viagra as well? Perhaps she places her order over the internet? The internet is so cheap, it has to be the backbone for new markets and social interactions, including education and entertainment. Savings will accelerate. Markets require intelligent savvy buyers. See any of those lately? Theft will increase. As prospects of the future become more widespread how will we keep the unemployed from becoming predators? Employ those who fit the profile to become Gardai and service providers? Start a war? It worked for Iraq and Iran. Getting rid of the young is easy when there are wars to fight. Sop beneficial to the economy too! There is a market for war as many benefit in different ways. Where will we draw the line? What should we get involved in as the depression bites?
    I expect to see many more solicitors going to the wall as their bets fail. A market in honesty?

    It would be so different, there would be no blog like this, if Ireland had not let itself be fooled so thoroughly? Much more to learn, by being so thick, eh?

  65. Pat Donnelly Says:

    The List article just shows that some people are not in on the act to pretend that the business cycle is inevitable!

    Squeeze and release is well known to non-Anglo economists.

    No doubt none of the economists teaching will reorganize their lectures to incorporate Steve Keen. To do so, or to teach Hayek too well, will release more of the Morgan Kellys on the world.

    Why do that if we can steal all the production from the world every three generations? Have to keep that knowledge suppressed as much as possible!

  66. Kevin O'Rourke Says:

    @ObsessiveMathsFreak: you are now famous!

    http://krugman.blogs.nytimes.com/2010/10/30/sex-and-drugs-and-markets-role/

  67. Keith Cunneen Says:

    Krugman is out there………… in the debt ether , watching / waiting for more excuses to stimulate

  68. Hugh Sheehy Says:

    Never mind Krugman, is Mick Costigan actually referring us to an article from 1993 about the success of the Japanese economy and how it and the German economy owe their success to a forgotten early 19th century economist?

    1993? Ehm…1993?

  69. Adrian Kelleher Says:

    @Hugh Sheehy

    I found the Atlantic article excellent, although I know nothing of List. While they were market based economies, the Asian tigers were neither doctrinaire neoliberals nor deregulation fanatics. As the article points out, Adam Smith himself was neither of those things either.

    China meanwhile has developed by making minimalist if persistent market-based modifications to what was originally a communist system. It’s still a long way from what would be called deregulated by the standards of the anglophone world.

    Without question, functioning markets have unique properties; they’re the best way to correctly price goods. This fact has taken on the aura of holy writ in too many minds, however, typically minds with no understanding of things like market failure and with little grasp of the actual evidential basis for their opinions.

    Questioning of markets in any way is greeted with suspicion — it’s assumed there’s a covert objective to hike up taxes or otherwise strip people of their wealth. The fact that markets can give self-contradictory messages is seldom considered, as when rent-multiples and sale prices valued property differently during the boom here.

    The weight of evidence supports the South Korean model of development for poor countries. It further supports modest, pragmatic restrictions such as the 10% tax on ‘hot money’ in Chile that served to insulate the country from the emerging market hysteria in the late 90s. Still further, there are reams of historical and theoretical information about bubbles, monopolies and cartels, insider dealing and other kinds of market failures of different sorts.

    These are issues politicians handle with the delicacy they might use with a live bomb for fear of upsetting the market fundamentalists; instead they should tackle their delusions head-on. All the evidence is on their side.

  70. Hugh Sheehy Says:

    @Adrian
    I always remember an abbreviation from a website in Australia. They used PDUMs as a term for “people who don’t understand markets”. This includes not understanding where a market is appropriate (goods, services) and where a market may not be appropriate (allocation of lifeboat places on the Titanic), and even where one market is interacting with another market in ways that no-one actually wanted (e.g. land, building permission, mortgages)

    On market fundamentalists and their opposite, I also remember watching with amazement transatlantic discussions on markets and governments during the last decade. The level of appropriate market regulation was topic and the primary characteristic of the discussion was that neither side was actually listening to the other. All markets are regulated, even if it’s just that they are given permission to exist. If you bring in a 10% rule on money flows, in advance, then that may limit the inflow a little but may bring long term benefits. Up to the govt.

    Govt decides what market will be allowed to exist and should take that task very, and I mean VERY, carefully. The problem is that govts often approach the task with an agenda of local protection at the forefront. This is not helpful.

    Elizabeth Warren’s toaster analogy is hardly complete, but it’s pretty good.

  71. Adrian Kelleher Says:

    @Hugh Sheehy

    Those are sensible and frank sentiments that find little echo among politicians unfortunately. The message seldom rises beyond “markets good” in sophistication. This permits vested interests to present any constraint on markets — even those designed to help them function such as information rules — as somehow amounting to attacks on enterprise. The market fundamentalist position is receiving every encouragement from the right in the USA at the present time.

  72. Hugh Sheehy Says:

    @Adrian Kelleher
    Whatever about the US, where the quality of debate has descended to amazing depths for a variety of US-specific reasons, Europe has no such excuse.

    Various Euro govts’ approach to things like the single market in Europe is destructive and asinine in the extreme and they have no excuse. Many markets that are over regulated should be thrown open. Some markets that are under-regulated are like that for all the wrong reasons. Then we have other areas where misaligned market regulation or tax policy creates deadweight losses of huge scale.

    One can expect a proportion of cheats, thieves and liars in any market but at least with market players their motives are fairly easily understood and detected. Caveat emptor is still a valid, if hugely imperfect, approach to market regulation. However, one cannot avoid the government and governments are so far from trustworthy and their motives so murky that it does almost seem safer to trust that we’ll get good outcomes from an unregulated market than one which is excessively, badly, and/or dishonestly regulated.

    Regulation has come, falsely, to be a discussion of left and right because the left usually wants to use regulation to protect producers instead of consumers and to allow featherbedding and an easy life on the back of the consumer (let’s call it the French approach), while the right gets election funding from people who want to use regulations or a lack of regulation to enable fiddling of another sort (let’s call it the Wall Street approach). Sad and wrong, in both directions.

  73. paul quigley Says:

    The weakness of Irish entrepreneurism is a fatal affliction. It has been too easy for the privileged to establish a state which is designed to let hold what they have passively, and put the arm in as well. With notable individual exceptions, our professions and ‘leading lights’ are taking us backward in economic as well as social terms.

    Given the consequent overweighting of US MNCs in our financial economy, and the historic underevelopment of our industrial sector, and the idiosyncratic role of the state, it is hard for the political system to get traction on economic reform. Joe Lee has it right. We need more economically and socially literate politics.

    Following from the excellent comments immediately above, is it also a question of finding ways to make markets work better and more appropriately within Ireland, Europe and beyond ?

    http://clausvistesen.squarespace.com/http://clausvistesen.squarespace.com/

    which rightly links the impasse at global macroeconomic level to development economics. In the long run at least, we are all in the same boat.

    http://edwardhughtoo.blogspot.com/

  74. paul quigley Says:

    Not sure if the first link works.
    Site: Alpha Sources
    Title: Has the market finally gotten it on the eurozone periphery ?

  75. Deus Ex Macchiato » What do want? Coke and prostitutes. Says:

    [...] Paul Krugman, an interesting comment on The Irish Economy blog: The markets want money for cocaine and prostitutes. I am deadly [...]

  76. Emer O'Siochru Says:

    There is another way, actually a couple of options. Some economists from both hemispheres of the globe dispute the deficit hawks in the US and elsewhere. Take the time to watch these videos and presentations that describe a Modern Monetary Theory (MMT) that has been developing in academia for at least 15 years but has only emerged into public consciousness since the crisis. Names to watch for are Marshall Auerback (Canada) and Warren Mosler (US) on how the money, tax and bond systems really works and Bill Mitchell (Aus) on the need and real possibility to have full employment in any sovereign country.
    http://www.netrootsmass.net/fiscal-sustainability-teach-in-and-counter-conference/

    Admittedly, Ireland is not sovereign in monetary terms as is the US, UK or Australia but we could still try Option 1: demand the ECB makes an adjustment to Euro Member State accounts on a population basis to the tune of 1 trillion (a new Lisbon referendum might be just the opportunity). That would reduce Ireland’s need to beg from the masters of the universe bond by about 14 trillion. If the ECB will not play ball, the government could try Option 2: announce that it is happy to accept the bonds it issues at face value in payment of Irish taxes. That eliminates the default risk thus reducing the coupon spread to a more acceptable level. It would also encourage more Irish people to buy Irish bonds (currently we hold al low confidence 15% of the total). The ECB wont like it because they would be terrified the other so called PIIGS might copy and they couldn’t bully us around anymore…but hey, they could then do Option 1, which actually give them great control over any EMU government that strays from the Stability and Growth pact terms.

    If you want to learn more go to http://www.smarttaxes.org where we have been documenting our learning curve on MMT for the past year. The foregoing does not mean we do not have to reform our dysfunctional public service and benefits systems and readjust the taxes on work and investment with better kinds of taxes, especially Land Value Tax, Carbon Tax and other environmental taxes. These Monetary Options (1 more so than 2) will give us the time and clear direction so that that we can reform while maintaining full employment through a ‘Job Guarantee’ scheme of needed environmental and community works so that domestic demand is strengthened sufficiently to overcome the devastating debt-deflationary pressures that have already been set in train.

  77. “Cocaine and prostitutes for the markets” « occasional links & commentary Says:

    [...] Krugman [ht: rm] found this gem, among the comments on a recent bog post by Kevin O’Rourke: The markets want money for cocaine and prostitutes. I [...]

  78. stanleyrumm.com » Blog Archive » This Little Piggy Went to the Market Says:

    [...] Krugman at the New York Times reflects on a comment by “ObsessiveMathsFreak” on irisheconomy.ie. Finally I can see sense in the markets. Thanks ObsessiveMathsFreak! The markets want money for [...]

  79. Adrian Kelleher Says:

    @Paul Quigley

    I hadn’t heard of Niederhoffer, but read the reviews of his book on Amazon. He gets lots of 5* reviews and most of the rest are 1* and 2* — these ones are the funny ones, well worth a read.

    With unconscious irony, the people giving the bad reviews complain that a book specifically designed to show the usefulness to an investor of a general education and broad knowledge of human life doesn’t focus enough on investment tips. The top ranked negative review even mentions the horse-racing analogy and complains Niederhoffer doesn’t give the statistical basis for it.

    QED as regards market movers’ often limited ability to process information about the world I think.

  80. Morning Take-Out - NYTimes.com Says:

    [...] –What do markets want? Life’s simple pleasures. [...]

  81. If Only We Can Give What the Markets Want?! Says:

    [...] Want?! Kevin O

  82. Mick Costigan Says:

    @ Hugh Sheehy
    I see no reason why an article from 1993 couldn’t be of interest. One has to look beyond the specifics of the moment in time to the economic thinking and the policy framework that is being discussed. Besides, didn’t you reference Adam Smith at some point in the discussion, and he wasn’t writing today or yesterday! Anyway the proof is in the pudding, and it seems to have stimulated some interesting comments and reactions, so I consider myself vindicated in sharing it with the group.

  83. Hugh Sheehy Says:

    @Mick Costigan
    I made no reference to Adam Smith. Others did.

    In any case, if I wanted to make a point about the power of a dead economist’s approach I would try to find an article that was less unfortunately placed in time. Praise of the Japanese economic miracle in 1993 is not good timing.

  84. Josh Rehman Says:

    I find it amusing that neither the article nor the comments revolve around the anonymous “cocaine and prostitutes” comment – and yet that is the content that Paul Krugman chose to quote in his NYT opinion piece.

    Truly, the intersection of the (wacky) internet and (presumably staid) mainstream media has never hit me with such force. (Well, the reimagining of usenet troll as political pundit is also rather remarkable).

    http://krugman.blogs.nytimes.com/2010/10/30/sex-and-drugs-and-markets-role/

  85. Mick Costigan Says:

    Did you read the article? I would qualify it much less as praise than as description. That is the whole point. See the last para:

    “Today’s Americans and Britons may not like this new system, which makes their economic life more challenging and confusing than it would otherwise be. They are not obliged to try to imitate its structure, which in many ways fits the social circumstances of East Asia better than those of the modern United States or Britain. But the English-speaking world should stop ignoring the existence of this system—and stop pretending that it doesn’t work.”

  86. Hugh Sheehy Says:

    @Mick Costigan
    Ok so if you see it less as praise than description, I would still think that a 1993 description of the Japanese and Asian miracle is less than compelling support of an alternative industrial coordination strategy; a couple of years after Japan started its decline and before the 1997 Asian collapse.

    Now, the Asian collapse may or may not have been related to the coordination strategies in the markets but Korean and other countries have changed their approaches since then, and I will retain some doubts about the Chinese economic miracle until China has politically matured and has survived another decade or two without a political implosion.

  87. Mick Costigan Says:

    @ Hugh

    Your doubts about China are shared. But look at Fallows again. After 30 years of economic growth in China, and the entire post-war miracle in Japan, I couldn’t possible say that it doesn’t work, at least for a while.

    “…the English-speaking world should stop ignoring the existence of this system—and stop pretending that it doesn’t work.

  88. Adrian Kelleher Says:

    @Hugh Sheehy

    In all probability, most elements of the model are inappropriate for developed economies. It has proven highly successful for developing nations however.

    China’s politics are not really relevant, and the originators of the ’98 collapse did not employ the model. S Korea and Taiwan only caught the blowback and were able to pick themselves up without too much difficulty in any case.

    As regards Japan’s disaster, no matter what the economic theories a country employs its government will still need to display basic competence.

  89. Taming the Vampire Squid « Crossed Crocodiles Says:

    [...] O´Rourke has a post, What do markets want , raising the same issues I´ve been discussing about debt, austerity, [...]

  90. Still Behaving Like Animals | K D Grace Says:

    [...] in which Paul Krugman discusses a comment from a post by economist, Kevin O’Rourke, called, ‘What do markets want.’ This is the [...]

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