Krugman on Ireland Post author By Philip Lane Post date November 26, 2010 Paul Krugman provides an update on his interpretation of the Irish crisis in this article. Categories In Banking Crisis Tags Irish crisis 75 Comments on Krugman on Ireland ← More on the Four Year Recovery Plan → 2009 data on household living conditions published 75 replies on “Krugman on Ireland” “Iceland helped avoid a financial panic in part by imposing temporary capital controls” Could the Irish government do this on the quiet (and, say, introduce it over a weekend) or can a European citizen not be stopped from moving his/her money from one EZ country to another? Does fear of this happening explain why so many deposits have been leaving Irish banks lately? If capital controls were introduced, would it only be implemented after FF cronies had been tipped off well in advance? @PL We have had fair comment on Swift’s Modest Proposal …… “And you have to wonder what it will take for serious people to realize that punishing the populace for the bankers’ sins is worse than a crime; it’s a mistake.” Paul Krugman … you have to wonder? Quite! Krugmans seems to be distancing himself from the breaking windows increase demand old school Keynes towards a more nuanced neo – keynesian stance where he recognises there is limited resources and thus choices that have to be made. Shame he did not recognize the destruction of resources that was the Anglo saxon housing experiment of the last 4 decades or so. Burning capital that took this madness as a given will end this misallocation of resources once and for all. He took his time. Although the US polity may not be working as well as it might (something he frequently bemoans – but which would require little to fix) I expect Prof. Krugman is bemused by the willingness of the powers-that-be (in Ireland and Europe) to impose private losses on taxpayers – and the apparent docility of the public in accepting this. @Paul Hunt “I expect Prof. Krugman is bemused by the willingness of the powers-that-be (in Ireland and Europe) to impose private losses on taxpayers – and the apparent docility of the public in accepting this.” Eh, yeah. Unlike the US which has experienced a massive swing to the left as a result of the publicly funded bailout of the banks there? @Keith Cunneen Krugmans seems to be distancing himself from the breaking windows increase demand old school Keynes towards a more nuanced neo – keynesian stance where he recognises there is limited resources and thus choices that have to be made. And yet he’s till bemoaning Ireland’s austerity programme, which he sees as one of the causative factors of the crisis. One wonders just what amount of evidence would be required to get this dinosaur to confess that he just might be mistaken. @Hogan, I think you are well aware that the ‘left’ (insofar as it has any meaning meaning in the US other than support for expansive Federal programmes and oversight) is a busted flush in most developed economies. There seems to be a prefence for limited, moderate, sensible governance. We haven’t seen this in Ireland for a long time. And it appears few in Ireland understand the extent to which Germany is a model modern democracy. It is there the political demand and desire for burden-sharing between taxpayers and bondholders is emerging most strongly. It’s a shame they retain an existential dread of QE. @Carolus There is merit in spending – in this monetory system you have to spend to save – therefore the question is what do you spend it on. I believe we are in a Minsky moment of debt implosion – he had vaguely Austrian views and even he relaised that certain drastic spending actions needed to be taken to prevent a return to equilibrium via a full scale collapse. He advocated massive spending on high technology public works and the like to prevent collapse. If they shelve metro north and other such projects with the justification of fiscal rectitude they will surely collapse the economy in a abyss. We need to create credit to reduce the fiscal draw down that these wealth creating projects would accelerate. @Keith Cunneen [Minsky advocated massive spending on high technology public works and the like to prevent collapse.] </blockquote. Minsky’s proposals as to how to overcome debt-deflation might possibly have worked at a time when the term ‘peak oil’ had not yet been coined. The world is completely different today. There is no iron guarantee that we will ever again enjoy sustained economic growth. The book to read is: The Entropy Law and the Economic Process by N. Georgescu-Roegen: http://www.amazon.co.uk/Entropy-Law-Economic-Process/dp/1583486003/ref=sr_1_2?s=books&ie=UTF8&qid=1290790509&sr=1-2 @CG If Krugman / Stiglitz / de Long et al (The Saltines !?) are dinosaurs could you point me in the direction of some less dismal scientists? I’m somewhere between toddler and Phd in economics terms. A volunteer economist! (though I think we have too many of those) 🙂 I don’t think he’s ever claimed austerity as a causative, more a laxative for diarrhoea. I.e a cure for something else. I may ascribe to “better out than in” but death is a real risk. As I understand it the above names models would have suggested countercyclical fiscal action, not pro. @ KC Yes, Krugman has a long post up on Minsky. It’s pretty glum! S&P Downgrade of Irish Banks http://www.irishtimes.com/newspaper/breaking/2010/1126/breaking38.html “we believe that the Irish Government may be forced to reconsider its current supportive stance toward Anglo’s unguaranteed debt.” The bloody cheek. I wonder which of their customers (and Anglo subbie holder by conincidence) asked them to throw that in. @Andrew S If Krugman / Stiglitz / de Long et al (The Saltines !?) are dinosaurs could you point me in the direction of some less dismal scientists? I can point to some scientists whose predictions were more accurate than those of Krugman and co — many of the ‘sectarian’ Austrian schoolmen, for example, or non-dogmatists such as Steve Keen, non-academics such as Mike Shedlock, Marc Faber, Peter Schiff …. My mother-in-law wasn’t far off the mark either [personal communication]. @Rob Thanks. Actually the most telling sentence in this report is this: “The agency lowered Anglo Irish Bank’s rating by six notches to B, or junk, and also lowered the long-term counterparty credit rating AIB, Bank of Ireland, and Irish Life and Permanent by one level. The j-word has arrived. @CG Thanks will cast a cold eye. @Carolus Well I like to try it before collapse as I believe it has a fighting chance – ever since the beginning of the monetarist era more and more credit has been produced withen banks on consumption growth converting credit into BTUs with the smallest allocation of capital allocation deemed necessary. This theory reduced capital expenditure and increased profit and expressed this as efficiency without calculating depletion and depreciation accuretly on its books due to the deliberate junking of Gold as a unit of account – this created among other things the equity explosion of the 80s and 90s without a overall increase of wealth. If credit at near zero interest is produced to increase wealth by having the objective of reduced energy and particularly oil usage then we may have a chance to beat this catastrophe or at least slow it down. If we can burn half the resources we spent in the past for a net loss then we can spend money / energy on net energy positive projects. A extensive light rail system would be start as in my native Cork and surroundings as the early 20th century urban landscape of the Edwardian era is still to some extent intact. We can increase credit again but this time the increase in credit aggregates can also increase wealth by reducing energy intensity. Using high interest debt to build capital and its equality with consumption expenditure is the reason we got into this mess – interest for creation and interest for consumption needs to be separated pronto. @ Carolus “One wonders just what amount of evidence would be required to get this dinosaur to confess that he just might be mistaken.” US picking up and Ireland sinking?? Big debt is the hole in the bucket (economy) scenario – either you put less water (money) in so that less leaks out!? or you pour more water in so that you still have something left in the bucket. @ KC: “Metro North” An obscene waste. Debt is Money? Yes/No? Debt GROWS Keith – the damn stuff grows – like in exponential! BpW So where are all the “serious people” (as Krugman puts it) on this site who said that senior bondholders could not be touched? Can we have a riposte to PKs column? Krugman says: “Investors have noticed that all those austerity measures are depressing the Irish economy — and are fleeing Irish debt because of that economic weakness.” Could it not be the case (running at odds with what Krugman says) that investors recently sold off Irish debt (bringing about a 9% 10-year bond yield on Govt. borrowing) because of doubts relating to the viability of Ireland’s support (or “pseudo-stimulus”) for its financial-sector? Or that that investors sold off Irish debt because of fears related to the Merkel loss-sharing (or “bail-in”) proposal? Either way, suggesting that Irish debt was sold off due to the Government’s attempts to make a fiscal adjustment might be incorrect. In a previous post, Karl Whelan stated the following — which contrasts with the Krugman quote from above: “Like it or not, bond market participants go along with the boring mainstream analysis I described above: They believe stimulus packages would raise the deficit. If they see the Irish government acting in a way that, rather than reducing the deficit, would raise it for a number of years, they will just pack it in. Borrowing rates would either rise enough to offset any positive effect of stimulus or the bond market would just give up on lending to Ireland altogether.” Karl’s post is here: http://www.irisheconomy.ie/index.php/2010/07/22/unpleasant-stimulus-arithmetic/ @Brian Woods You can give credit without expecting interest – central banks could do it now – they just buy bonds to keep the illusion of debt as money. The American CB buys bonds and gives most of the interest income back to the treasury – whats the difference really. Also credit for consumption and credit for capital creation are two different things. For instance you could give me credit to buy beer – this would enrich the farmer and brewery(and make me a happy consumer) but would not increase the underlying wealth of society as drinking and manufacturing beer is not a utility although some here might object. However improving a utility such as transport connections is a common good. Without effective utilities the beer consumer may have to drive to the pub or God forbid get the bus. Anyhow do you seriously believe that the consumption sector via bank credit in the property and other sectors was efficient or effective. They(the banks) tried to ramp up consumption in a artificial fashion without creating the underlying wealth first. Think of the French economic model where they used fiscal means and also low cost loans to build railways. If you could buy France in the morning and had the choice of France with railways are without what would you choose ? France with railways is wealthier although it consumes less or more accuretly spends its surplus on other things rather then getting from A to B We need to divorce ourselfs from the concept of consumption as wealth. In America they consume more to get around and therefore by these metrics they are more wealthy. Go figure as the Yanks might say. PS those utilities the French built are still delivering revenue , the Yanks houses not so much and without a reserve currency to spend they would have no interest income period. Read loads and loads of economists stuff over quite a long time and have found a lot ot be worse than a waste of time in respect of useful insight relevant to financial markets. Krugman is the exception that comes most readily to mind. Lots of people in financial services have deeply entrenched political prejudices that compel them to be highly selective in their reading of his stuff to find an angle. Doesn’t bother me, their loss. He has a problem with Ireland though because he just doesn’t know it properly. He has an idea that there is croneyism and all that, but as a American I just don’t think he can grasp the extent of the hokey, small town fixer mentality and grabby nature of so many of the economic agents within it. He basically has Ireland and Spain sussed, in broad terms. Boom, money supply expanded, inflation of local asset and services prices. Then “pop” – competitiveness problem, with no devaluation mechanism available toi correct it. He might point out the obvious – that its own currency would have been andy to have kept, but he stops there. If the country is not to leave the Euro, the competitiveness thing has to be addressed. He’s probably never heard of “benchmarking” in the Irish context, and I think the fact that he feels compelled to campaign so forcefully against spending reductions in the US means that he cannot bring himself to actually say that no, it is not appropriate for Irish civil servants, lawyers, politicians and the “protected” professions to continue to be Europe’s most highly paid (along with being among the most inefficient). it is not appropriate for Irish civil servants, lawyers, politicians and the “protected” professions to continue to be Europe’s most highly paid (along with being among the most inefficient) Maybe if you keep repeating this tired old canard about the civil service (not clear if you mean the public service in general, but I suspect you do, precision not being a speciality of yours, apparently) it will transmogrify from falsehood into truth. Let’s have the post-pension levy, post-pay cut evidence please. And do be sure to use purchasing power parities. rte suggesting a rate of 4.8 to 5.2% for imf loan. Something strange with the RTE reporting, now they are saying 6.7 http://www.rte.ie/news/2010/1126/economy_bailout.html I think Steve Keen is the man to read. See here for his lectures: http://www.debtdeflation.com/blogs/lectures/ @Ernie Ball Purchasing power parities are part of the problem; not just in the public sector, private sector pay ballooned with asset prices. There is no good reason why inflation in one part of the eurozone should be significantly different to another. We are paying for past inflation. Unfortunately, some of the drivers of inflation are still in evidence – doctors fees, drugs prices, education costs, legal and accounting costs. You name it, the deadweight costs keep getting deader. The problem with benchmarking of any sort is it becomes a competitive war. No private sector CEO wants to earn less than a hospital consultant. No hospital consultant wants to earn less than a bank director. No plumber wants to earn less than an electrician etc. And it all feeds into the cost of living. @Martin Ryan Or could it just be that the markets took fright at the damage of the banks and the level of the deficit? The two combined add up to an insurmountable hurdle. Either one on their own is large enough… @Frank They probably took .3% off because we were good little boys who are considerate enough to bend over politely before we get a good buggering. FOR GOD SAKE DEFAULT and do the state some service instead of servicing us. 6.7% Krugman was right. Only question is do the Germans want us as sauerkraut or currywurst? Danke! Paul Krugman is right in that the key feature of the Irish debt crisis is that it is a massive public sector bail-out of private debt where the burden sharing seems to be only one direction i.e. on the Irish tax payer. While some 69% of those surveyed (Sunday Irish Independent of November 21st) say that they support the EU/IMF intervention, this is presumably on the basis that hard decisions will be taken. One holy cow is the question of private sector burden sharing which, according to today’s Irish Times, is on the table in the negotiations with the IMF/EU. The complication to all of this is, of course, the blanket state guarantee of the banks, which lies at the root of the crisis as the scale of liabilities has called into question the sovereign’s financial standing itself. Assuming therefore that some cutting of the umbilical cord of the banking sector to the sovereign is not only morally justified but also now required by economic circumstances, the question is how and by what means. Two facts stand-out. One is that existing senior bank debt is heavily under water given the rise in interest rates for Irish debt i.e. there is an effective economic loss already in place for the bond holders. Second is the fact that while the markets dislike uncertainty and the flight from Irish bonds has been driven by the perceived black hole of bank losses, two recent reports from Goldman Sachs and Credit Suisse point to the further write-down potential of the bank’s as being not that great – EUR 13 billion according to Credit Suisse – and thus ‘manageable’ in the circumstances. Putting these together, there is obviously some level at which further bank losses can be quantified and covered by capital and some future value of equity in any debt/equity conversion which gives value to any such restructuring. This means that if the trade off is between losses on bonds or something with alternative value/upside potential a deal could be made with bond holders. A key step is to deal with the uncertainty on bank losses without prejudicing the state even further. As there is an urgent need for the Irish state to cap its liabilities, one approach could be to provide credit risk insurance, using say EU/IMF funds set aside, to cover losses up to a given cap but not beyond this – say an additional EUR 10 billion. On this basis and assuming that the investment bank estimates on further losses have some credence, there can be an effective floor also put on the value of a debt to equity swap. What is crucial, however, is to disentangle the government bank guarantee, which implies letting this run out or otherwise putting compulsion on bond holders. While such pressure is one thing, the fact that bond-holders are sitting on losses and have an interest in greater clarity gives support to a process of re-negotiation i.e. ex-ante situation is not sustainable in any case. Assuming the guarantee issues can be dealt with and a cap put on the government’s commitments to the banks, a way forward is possible. The banks of course will have to shrink over time but this could be conducted in an orderly fashion based on the effective recapitalisation of the bank’s as (on)going concerns. This would of course reduce the effective debt burden on the state and on the tax payers. As the problem of insufficient capitalisation of the banking sector and a sovereign underwriting of all banking sector liabilities does not apply to other peripheral EU economies, the potential negative market effect of such a move on other markets would be diminished. As a proverbial Irish solution to a specific Irish problem, it is therefore a particular response to a particular situation but where all stakeholders have a role to play. Time to start mentioning the war because past action is the best predictor of future behaviour. We don’t want them any more methinks. would it be politically possible to give ireland a rate even slightly lower than greece?sounds like the can is going to get a good kick down the road.the bond vigilantes are winning,michael milken would be proud. if 6.7% is the case we are well and truly sunk. To continue the German analogy these repayments will imose a burden on us which is similiar to their reperations post WWI reperations. Whereas what we need is a Marshall Plan. tell them to get back on the plane, they’ll be back next week. i cant believe it. The Washington-based lads are annoyed at missing Thanksgiving so they made us the turkey. @Eric Ball “it is not appropriate for Irish civil servants, lawyers, politicians and the “protected” professions to continue to be Europe’s most highly paid (along with being among the most inefficient))” “Maybe if you keep repeating this tired old canard”. I’ll help repeat what grampy said. @hoganmahew Steve Keen? You must be the first person resident in the Emerald isle to have heard of him. No record of his name in the online Irish Times archives. More about Steve: I’m one “economic guru” who did predict the Global Financial Crisis. I went public with warnings that it was imminent in December 2005, established the DebtWatch Report in November 2006, and started this blog in March 2007. I saw the GFC coming, not because I’m that much smarter than other economists, but because I long ago realised that the standard model of the economy–known as Neoclassical Economics–is utterly unrealistic. Instead of working within this dominant but barren paradigm, I helped developed an alternative approach based on the work of Hyman Minsky. Knowledge of this far more realistic approach to economics is why I saw the crisis coming, while neoclassical economists were rabbiting on about “The Great Moderation”–the belief that their management of the economy had reduced or possibly even eliminated the business cycle… http://www.debtdeflation.com/blogs/ebook/ @ hoganmahew: The extent of the combination of the two (the support for the financial sector *and* the Exchequer deficit) is indeed the possible reference point for the recent (pre-‘bailout announcement’) bond sales. The Lagarde/Merkel announcement on Oct. 29th (that taxpayers shouldn’t have to bear the full brunt of private lending losses) could also have played an important role as a catalyst though. One question to ask is what exactly changed over the last month (Oct. 29th onwards)? Nama turned a profit and won a court-case. Taxation revenues stabilised, and a firm commitment to a four-year austerity plan was announced. On Nov. 8th, Morgan Kelly questioned the overall cost of the bank bailout, but he didn’t have access to information that others don’t. It was on Sep. 30th that the Govt. announced the final cost of bailing out the banks could rise to 50 bn euro, by their estimate. It may well be that Lagarde and Merkel started something on October 29th that heightened fears about the smallest country in the eurozone with the worst-performing banking-sector. And as the Guardian suggested on Nov. 21st, maybe we were told “take a bailout or risk starting a new crisis”. One has to ask though: why then was the announcement on Nov.12th (that the EU’s proposed new bailout mechanism “does not apply to any outstanding debt”) not enough to bring Irish bond yields back down (and thereby reduce fears about our next bond auction)? The only answer I can think of is that Lagarde and Merkel triggered fears about lending losses in our banking-sector that simply didn’t go away. In addition, there were two other factors at play in the last few weeks (which were also potentially spurred on by the Lagarde-Merkel announcement on Oct. 29th). It is possible that these were not reversed after Nov. 12th due to fears failing to dissipate; or simply because the fears became self-fulfilling: (i) Rising yields on corporate bonds issued by the Irish banks; the banks have also been facing a debt market with rising costs, and may have needed to return to the market sooner than the Irish Govt. (Does anyone have the precise details on the timing of their borrowing needs?) (ii) A flight of deposits from Irish banks. According to the Irish Independent recently (for what that’s worth): “Up to €40 billion of deposits could have been retained by Irish banks had the IMF bailout been accepted only two weeks ago”: http://www.independent.ie/national-news/governments-dithering-cost-euro40bn-in-withdrawn-deposits-2429253.html It is also worth bearing in mind that the Irish banks have become holders of massive amounts of Irish Govt. debt, which we know has lost a lot of market value. According to the FT recently: “AIB’s holding of Irish bonds went from €165m in December 2007, the last figures before the bank bailouts began, to €4.1bn in July this year – a 25-fold increase… the State’s two biggest banks spent €5.8bn between them buying bonds…” Surely this makes everything much clearer. 1:Let our German buddies bail out their own banks 2:Let’s leave the Euro (after we default of course!) Nothing to lose now. Markets won’t lend to us and neither will the fuhrer. TIme to go. If I thought it was likely that a stimulus, or even resistance against austerity would, IN IRELAND do anything other than further polarise its society into “connected and protected” vs “weak or vulnerable” I would sign up to the campaign. But I know too much about the place and its political system. Genuine reform and there would be a point. Its a mess and the vested interests will fight tooth and nail to hang on to their position with scant regard for anyone else. C’mon Kruggie what do you reckon? (appart from 6.7% being bonkers). @Grumpy if you want vested interests look at Brussels and Berlin @Martin Ryan I agree with you those too are relevant issues. You may add the revelations about the size of ECB support, Irish Central Bank support and deposit outflows from the main banks. In effect, there has been a run on the country like there was in 2008 and like the one in 2008 it is happening slowly until the tipping point (which resulted in the guarantee in September 2008). The decline of bank shares during 2008 was evidence of ebbing confidence in the banks, confidence is ebbing away from the sovereign. In the same way that the banks did little right to address their problems in 2008, the sovereign has done nothing right to fix its problems (the banks and the deficit) since then. There were also rumours spreading that the ECB would no longer provide liquidity. This would lead to a swift end both to the banks and the sovereign carry trade. A final chunky issue – the size of the fiscal adjustment jumped from 7.5 bn to 15 bn. It’ll be for the historians of the future to figure out the weighting of the factors (and to argue about it ever after…). I think we can finally put to bed the Morgan Kelly article. There were more fundamental factors at play. @eureka At 6.X%, I agree that we leave planet euro now. Far off pastures must be les greedy. http://www.albuquerquenews.net/story/712121 @Carolus Did you ever come across the Monthly Review ? Sweezy did some great work on the financialisation of capital. @Eureka Please don’t mention the war. The British might withdraw the offer of 7bn! @martin ryan “One has to ask though: why then was the announcement on Nov.12th (that the EU’s proposed new bailout mechanism “does not apply to any outstanding debt”) not enough to bring Irish bond yields back down (and thereby reduce fears about our next bond auction)?” First it served to undermine the consensus view in some investment houses that all politicians are in thrall to the bond market, and will just do what they are told. Second, there is a question of the law applying to each bond issue. As it stands each country generally has its law govern the bond – so if it wants to default it mainly has to dispute in its own legal system. A Euro-wide bond agreement might remove this local element – perversely making it actually harder to deault on the new bonds, so why should the new bonds inpractice be any less risky. @eric ball Civil servants, in fact the whole public sector signed up to an agreement which took the top off the costs – effectively reversing the last part of the inflation in return for no further cuts in pay or compulsory redundancies – ei totally insulated from reality so the rest of the country has to suffer disproportionately. That agreement (Croke Park) was drawn up a long time ago when the MOF had convinced itself there was going to be a V in GDP. It had in it a clause that left it ineffective in the event of significant adverse financial or economic circumstances. Now, the state is effectively bust, IMF are in town, the is open speculation about the country exiting the Euro. So disingenuous and corrupt is the political system that even this apparently does not count as significant. You couldn’t make it up. @CG: Steve Keen. Well known personality. Eric Janzen? Michael Hudson (the economist guy)? Albert Bartlett? Bill Black? Formidable guys. Jeeze, that 6.7%!!! BpW @Carolus “You must be the first person resident in the Emerald isle to have heard of him. ” I doubt it, the internetweb spreads ideas (good and bad) like nothing else. I think I first read about him on thepropertypin http://www.itulip.com/forums/showthread.php/4731-Debtwatch-No.-25-How-much-worse-can-%C2%93It%C2%94-get?p=42596#post42596 What struck me in particular was the “contribution of debt to final demand” aspect. Working out that for Ireland of the bubble is way beyond my intelligence grade, but my suspicion is that all the growth (and more) we’ve seen since 2001/2 can be attributed to debt. What we are seeing now is the result of that debt – final demand collapsing, ‘savings’ ratio climbing as debt is repaid, the weight of interest costs (on both private and public). Ultimately, we have two choices – repay the debt or default on it. At the interest rates being quoted, we really only have one choice, as far as I can see. Without a kind interest rate, we aren’t going to be paying back all the capital. @ hoganmahew: Agreed about the importance of other issues. While the ECB support was in some sense the corollary of deposit outflows, there was a shocking report (on the extent of ECB support) in the FT on Nov. 15th: “Ireland’s banks account for about a quarter of the liquidity provided by the ECB” http://www.ft.com/cms/s/0/d1841b72-f0ef-11df-bf4b-00144feab49a.html#axzz16Qe2QCt9 The Govt. announced that the (overall) fiscal adjustment would be €15bn on Oct. 26th, so that was pre-Merkel. However, many factors gave of course been evolving since August 2008 (and indeed August 2007), so I take your point that it’ll be for the historians of the future (or maybe the researchers of the not too distant future) to figure it all out. Nothing to disagree with in Krugmans piece as far as I am concerned – socialisation of private debt onto the citizens (essentially those least able to pay) whilst those who are able to pay and those who incurred the debt are laughing – all the way to the bank if you excuse the pun. @grumpy you are right you couldn’t make it up. You really believe that the most significant problem we are facing as a nation is over paid psychiatric nurses, not the impending bail out of commercial lenders by the Irish tax payer at a cost of 6.7% apr @ Sarah Carey: Pimco (as you probably know) is the biggest bond-fund in the world, so it is good news they are saying that: “it is unreasonable to expect the Irish taxpayer to bear all the costs of the Irish bailout… Mr El-Erian’s comments were widely believed to have been prompted by… some bond investors (who) now recognise the need for compromise.” http://www.albuquerquenews.net/story/712121 So, on the back of Mohamed El-Erian’s advice we would make some (how many? which?) bondholders take losses – which would conceivably push the IMF lending rate lower than 6.7% (how lower is a good question) – and we could be getting somewhere with this. Some folk might argue that we need to hit whoever many (and whichever) bondholders it takes to bring the lending rate down to 4.5% – which is the average borrowing rate on funds raised by the NTMA over the past two years. @Michelle Norris How odd that psychiatric nurses get wheeled out as a human shield to protect the senior ranks of the civil service and their linking formula that ensures Brian Cowan is paid oodles more than Barak Obama, judges, state dependent lawyers, endless quango and semi-states boards and senior management and the doubling up of even some junior mangement posts. Your suggestion that I am in some way picking on the poor civil service to protect bond holders reveals that if you have been reading the comments on these threads you can’t have been paying much attention., @Martin Ryan I would not take Mr El-Erian’s comments at face value without knowing his trading positions in Government bonds. Pimco hedges while its owners (Allianz) lose their shirts???? @grumpy, my point is not specific to psychiatric nurses or any part of the public sector. My is that the Croke Park Deal is small potatoes compared to the cost of this IMF/EU bailout particularly if an interest rate of 6.7% is imposed on us. @ Grumpy So you hate Ireland – big deal. Every country has its problems of petty corruption and cronyism. Ours are no different For all our faults we don’t deserve this!!! @Eureka “Deserve”? What do think this is, some sort of morality play? Our corruption is no different? Are you kidding me? I’ve worked in a few third world countries, a few second world and a few first world. Ours rank with the worst of them. Not because they took loads of money for their corruption, but because they sold the country for so little. A few bob here and there, a paint job on the house… @Michelle Why do you think we need to borrow at 6.7%? Those 2nd and third world foreign governments you read about who systematically deceive their populations and who are run as oligarchies, whom you feel smugly sorry for? Well, that’s twenty first century Ireland. The size of the bank bailout and the deficit, the lack of accountability, the token investigations, the rescue of the developers, the protection of the establishment’s remuneration, of vested interests etc are all indices of how corrupt the country is. All say the country is very corrupt. However, no matter how bad they are the public are nowhere near as bad as the establishment. This is shown by the fact that the average mortgage holder is solvent but the banks, the developers, the state itself and many members of the establishment aren’t. @ hoganmayhew So you’ve worked in a third world country – big wow! Every country is corrupt! It’s not a morality play – but people seem to think that we ate due this because we are corrupt. Name me one country that is not! @ Hogan Do we send our young men to die in wars nobody wants? No. Do we release terrorists for oil deals? No. Do we assasinate political rivals? No. Do we do arms deals with dodgy dictators? No. Get a grip We are a good people. We spent our money on schools, hospitals and roads. This self hatred has to stop @Eureka No, we are due this because we are stupid. Stupid enough to elect people we know to be crooks. Show me another country that does that? Okay, there’s India and Pakistan… @Hogan They all do it. The Americans elected Nixon twice. The Brits elected Thatcher. The Germans were fairly fond of your man. Every country gas done it. It’s bound to happen since most politicians in every country are self serving psychpaths. Krugman talks about eating children – let’s not serve them up with a sauce of undeserved guilt PS “We are a good people. We spent our money on schools, hospitals and roads. This self hatred has to stop” Would you get over yourself? We spent most of our money on hotels, offices, apartments in the countryside, get rich quick schemes, BMW X5s, assorted electronic products and other bling and tat. This is not self-hatred, this is what happened. Saying anything else is lies. Yes, we built some roads. A motorway to Sligo and one to Waterford and one to Galway… great for me living in the Midlands, I can whizz through the no traffic until I reach the outskirts of Dublin (Enfield, it appears). Hospitals? Well, we’re going to build a national children’s hospital in one of the most inaccessible parts of Dublin… national, right? Under the auspices of a religious order… pluralist, right? Schools? Yes, we’ve built some, but many, many schools are a shambles. Non-denominational schooling is an aspiration for large parts of the country. A good people? We are the same as everyone else, neither better nor worse. That doesn’t mean we should wrap ourselves in the flag and fail to take a hard look at ourselves occasionally. And a hard look is what we need right now. why are we looking at 9yr money? It’s time that the pigs try take control of the farm rather than follow the franco german alliance. You have to look at what we’ll look like in three/four years time. Will Ireland be able to access debt markets? Current plans would require 3% of gdp borrowing when our rating will be bbb at best. I’m not sure if Ireland can even afford 3/4%. The leaked rate may be to make the agreed rate sound acceptable. A load of tosh. Swift created Saint Patrick’s facility for the most vulnerable in Ireland. The most vulnerable under the cross of Patrick and the hope that though they own everything you see they might share the Gospels with the weak. @ Hoganmayhew “We are the same as everyone else, neither better nor worse.” Agreed. The lurch to self-praise was motivated to counteract the negative self-loathing that others like to indulge in. It gets us nowhere. Isn’t it strange how dealing with the IMF would prove much less costly than dealing with Berlin! Is that deliberate? Do they really want us out? Our natural home will always be in the Anglo American axis. It’s where our emigrants have gone and prospered. We have shared values. Now I know they’re not perfect too but nobody is. @hoganmahew You wrote: “Purchasing power parities are part of the problem; not just in the public sector, private sector pay ballooned with asset prices. There is no good reason why inflation in one part of the eurozone should be significantly different to another.” Can I take it that you think that this view should also inform investment decisions? In other words, since “there is no good reason why inflation in one part of the eurozone should be significantly different to another” investors should just ignore the inflation rate and only look at the interest rate on offer? The cost of living here is high. That’s not due to excessive taxation to fund the public sector. It’s largely due to private sector cartels (groceries) and private sector speculation (housing). So why the focus on the public sector alone taking the hit to initiate the deflation you find so desirable? @Ernie Ball “why the focus on the public sector alone taking the hit to initiate the deflation you find so desirable?” I said: “not just in the public sector, private sector pay ballooned with asset prices.” I don’t think I could be much more even handed in that and have long railed with Paul Hunt against deadweight costs. “investors should just ignore the inflation rate and only look at the interest rate on offer?” No, what I am saying is that because we share a common currency, inflation here in Ireland above the rest of the eurozone reduces our competitiveness. Investors will of course look at local inflation rates. They have decided that private sector wage demands and state imposed costs (rates, power, national wage agreements) are too high. Social partnership since the turn of the century has been a disaster, pushing both public and private pay rates beyond sustainable levels. Not because there is anything wrong with social partnership per se, but what was done here was to chase asset prices in a bubble with wage levels. The knowledge economy is a bad joke, I know, I work in it. I can hire two experiened people in India for the price of one graduate in Ireland in the industry I work in. And I don’t particularly blame the graduate here, because the cost of living is still too high, as you point out. I am deeply disappointed that there is no structural reform in the four year plan. The social solidarity levy, or whatever it is being called these days, is still not introduced despite a promise in the last budget. There has been no attempt to reform pensions, health provision, utility prices, rates, the legal (which in part accounts for the high cost of insurance) and accounting professions. These are costs that businesses have to bear and increase the cost of employing people. “The cost of living here is high. That’s not due to excessive taxation to fund the public sector.” No, but taxation levels are high. Yes, they can and will go higher, but still government spending will have to shrink. Why? Because the difference between income and expenditure is debt. And debt is expensive; interest costs are going to be an appalling drag. So debt will have to be repaid in future to reduce the interest burden. Or debt will have to be defaulted on. If it is defaulted on, there will be no funding for a period, so the deficit will have to disappear and I don’t think a sudden stop is going to be pleasant for anyone. @ Hoganmayhew You’re missing the point. There was an unchecked flood of cash from the centre to the periphery causing a housing bubble and a feeling of wealth. Everything stems from that. The ECB was not equiped to deal with this. It’s sole remit was to protect Germany from hyperinflation. Ireland had healthy growth leading up to the Euro. The real rot set in after that. The structural reform is part of the picture for sure but it is required just as much at European/ECB level as at local level. The Europeans want to plunder our country. Will you let them? @Eureka Well, I believe you are missing the point. The eurosystem is set up with the Central Banks managing money supply in their own markets. The Irish Central Bank failed to do this as a result of determined policy from the government to feed asset inflation. An attempt was made to dampen this in 2001 with the implementation of the Bacon report reforms. It threatened a mild property bust and so the reforms were reversed and it was full speed ahead into the bubble. I agree that cheap money did not help, but you mistake the power of the ECB to control interest rates. It largely follows the bond market and the bond market was flooded with cheap american, japanese and latterly chinese and middle eastern money. To see what might have happened to us had we not had the euro, look at Iceland. They too had a Central Bank politically enthralled to their ‘entrepreneurs’. The viking capitalism model is not much different to the celtic cub model – borrow vast amounts of money, lever up every asset to the max (beyond if you can get away with it), lever your personal guarantees even further, and, er, profit… The Galway tent bears far more responsibility for the situation we are in than the ECB. To say differently is to miss what happened and so risk repeating it. It “was the other older children that made me do it” is an abrogation of responsibility. It is the spin that ythe failed elite are pushing at the moment in an attempt to ensure their survival and you are falling for it. @hoganmahew My point, which you are ignoring in the course of making your points about the evils of social partnership, is simply this: in the same way that the question of whether something is a “good” investment or a “poor” one can only be answered, ceteris paribus, by looking at both return on investment and inflation, similarly, determinations about who is “highly paid,” “overpaid,” and “underpaid” can only be made relative to the local cost of living. To insist that wages can or should be evaluated without reference to living standards is just as dumb as would be evaluating investment returns without reference to inflation. The claim is often made that Irish PS workers are overpaid relative to those in other countries. The people making this claim (in the Independent notably) invariably compare only the headline pay figures but have nothing to say about the pay relative to the cost of living or the pay relative to other salaries in the country. You may say that prices are chasing wages and not the other way around. That would need to be demonstrated. I distinctly remember several national wage agreements that did not keep pace with inflation. @Ernie First of all, not all social partnership is evil, only the recent pork filled one in Ireland. Secondly, in a constant currency, your returns on investment are based on inflation in the market you sell into, less inflation of your costs. If inflation of your costs is greater than inflation of your prices, you go bust. Finally, if you have a choice of countries to employ people in, cost of living for the people you employ is irrelevant except in so far as it influences their wage demands. I don’t know why you keep banging on about the Public Service. As far as I know they don’t export anything. I am not saying that prices chase wages (thanks again for another strawman). I am saying that wages chasing prices is the wrong method of maintaining living standards, because the root cause (which you partially identify above) is not addressed. In that situation, once wages have risen, prices will again rise. As one of our FF greats said about some overpriced piece of OPW work (Bertie’s office, was it?) “it’s not about value for money, it’s about affordability”. It is always and everywhere about value for money. @Comnrade Ernie: “… determinations about who is “highly paid,” “overpaid,” and “underpaid” can only be made relative to the local cost of living.” Nonsense. They can be made relative to whether we can get someone else to do the same work more cheaply. As for the local cost of living, that might apply if (or when) the workers are subsisting on potatoes and buttermilk. But the cost of 42″ television sets wouldn’t bother the workers if they didn’t insist on buying 42″ television sets. Remove these luxuries from the workers’ buying plans and they’ll soon be able to provide their services more cheaply. bjg @ Brian J Goggin Is a house a luxury? @Eureka Is ownership of a house a necessity? @Eureka: Shelter is a necessity. A four-bed semi-D with en-suite master bedroom, lounge, kitchen-dining room, main bathroom and downstairs loo is not a necessity. http://www.apolloduck.ie/display.phtml?aid=147829 bjg @ bjg ‘Nonsense. They can be made relative to whether we can get someone else to do the same work more cheaply’ We ? The constitution is not an employers charter. Marketing is a central part of business enterprise. The social alchemy of turning wishes into needs. Lots of it is aimed at kids. It’s real easy to sell to them. Go on go on go. Try telling teenagers they don’t need a widescreen. Social aspirations are set by those with the necessary power and means. Everyone else has to play catch up. Institutions and media play their uncritical and destructive part in this. As the graffti artist wrote when Reagan was elected ‘Shut up and buy buy buy’. So yes, people experienced, and still experience, a nice semi D (for example) as a fundamental need. Read Bourdieu. It’s not just shelter, and you know it. A house is a symbol of social security and status. Address adddress address. No one wants to be, or be seen as, a loser. Kids can be cruel too. There could be a dialogue about doing with less, and kowtowing less, but that would have to start at the top. And it wouldn’t be good for all the businesses which are still selling dreams and nice addresses. It might threaten the pecking order of private clubs, social status and snobbery. So the ‘alternative’ will be confined safely to the Sat IT review. Unless there is a new estate somewhere. If the media are the Fourth Estate, the Fifth Estate is for all the people who were sold a pig in a poke. Nice boat BTW Comments are closed.