Morgan Kelly: Ireland’s future depends on breaking free from bailout

Back when the euro was being planned in the mid-1990s, it never occurred to anyone that cautious, stodgy banks like AIB and Bank of Ireland, run by faintly dim former rugby players, could ever borrow tens of billions overseas, and lose it all on dodgy property loans.

The Invisible Hand was presumably off doing something else at the time, then.

“National survival requires that Ireland walk away from the bailout. This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately.”

This is the crux of it and we had better get on with it. Dissolve NAMA now and let the ECB swing in the air instead of going along with their dastardly plan to grab our national assets before making us a pariah bankrupt state.

Serves them right. Thank’s Morgan you figured it out, others could only talk about asymmetric risks. As a reward I am going to vote for you to deliver the speech from the steps of the GPO in 2016.

Wow
For once The Dork is speechless.

“Honohan’s miscalculation of the bank losses has turned out to be the costliest mistake ever made by an Irish person”

PH has at times come across as amiable but casual – certainly about property valuations, but I thought it was forbidden to criticise him.

“Back when the euro was being planned in the mid-1990s, it never occurred to anyone that cautious, stodgy banks like AIB and Bank of Ireland, run by faintly dim former rugby players, could ever borrow tens of billions overseas, and lose it all on dodgy property loans.”

I actually know people with connections to the guys in question who regard the most important thing in career development in Ireland as acceptance into appropriate rugby clubs. This is not a joke.

” The ECB can then learn the basic economic truth that if you lend €160 billion to insolvent banks backed by an insolvent state, you are no longer a creditor: you are the owner”

This is the just-keep-your-collateral version of more elaborate debt for equity swaps. The ECB chose the haircuts based on its own risk analysis. It effectively took a position.

“So the second strand of national survival is to bring the Government budget immediately into balance. The reason for governments to run deficits in recessions is to smooth out temporary dips in economic activity. However, our current slump is not temporary: Ireland bet everything that house prices would rise forever, and lost. To borrow so that senior civil servants like me can continue to enjoy salaries twice as much as our European counterparts makes no sense, macroeconomic or otherwise.

Morgan is evidently refreshingly both self-aware and not afraid of Paul Krugman. What on earth is he doing at a university?

“Cutting Government borrowing to zero immediately is not painless but it is the only way of disentangling ourselves from the loan sharks who are intent on making an example of us. In contrast, the new Government’s current policy of lying on the ground with a begging bowl and hoping that someone takes pity on us does not make for a particularly strong negotiating position”

How insightful. If only this kind of thinking had been allowed into the pre-election discourse!

Much of what he says rings true, at this priority should be given to ensuring that the government gets quality independent economic advice. Given the sheer novelty of the crisis in general, and how much we are being jostled by others, I think we need to reach beyond these shores for economists of global repute to advise Ireland. A council of econmic advisers, with dedicated staff (including banking and legal experts), would seem like a wise investment….cos else no one will make our case effectively

In addition…. concerning EU and IMF ‘bailout’ as well as ECB, I consider their lending policies as odious, hence, a hostile act against the people of Ireland.

@Georg – just to be clear, that’s something you are quoting from another piece. Its not from the article.

@Liam,

correct, it is not from Morgan’s article. Apologies if that came across as such.

It reflects my personal opinion!

UNCTAD, United Nations Conference of Trade and Development:
The Concept Of Odious Debt in Public International Law

http://www.unctad.org/en/docs/osgdp20074_en.pdf

Note to Mr. Shatter and Mr. Noonan:

Ireland is not South Africa!

http://www.unctad.org/en/docs/osgdp20074_en.pdf

Political transitions pose complex, multi-faceted challenges for the transitional regime, from accountability for wrongs of the past, to establishing a framework of legal stability and economic reconstruction. Dealing with odious debt from the prior regime usually involves political as well as legal considerations….

…With respect to obligations of debtor States to private, i.e. non-state, creditors, there is no established rule of international law that requires that these be continued in the case of political transition. Only where changes in contractual rights amount to a denial of justice or otherwise fall short of the minimum standard of treatment of aliens in customary international law, or where these changes can be characterized as an expropriation of property rights or unjust enrichment, can any claim be established against the debtor State in international law. Where odiousness can be established, it would be very difficult for a private creditor or a State espousing its claim to argue successfully that the alteration of contractual rights is a denial of justice.

Ireland is bankrupt now and if restructuring is inevitable in say 2 year’s time, the issue is would triggering a Eurozone crisis now be better for the country?

For decades we have had a twin-track economy; in one, world class companies have prospered supplying European markets, relatively independent from the broken governance system and low-level but insidious corruption.

Our challenge is to keep the existing foreign companies and being within the euro system is likely seen as a plus; it is much more difficult to win significant new projects as the centre of gravity of world trade moves to Asia.

Without the foreign sector, we would look more like a Balkan country than a Northern European one.

On swiftly cutting the budget deficit to zero, Ireland would need a level of national solidarity that hasn’t been evident so far.

The Department of Finance’s stability update report last week said that while taxation receipts in 2011 are projected to be around 2004 levels, gross voted expenditure of Government Departments and Offices in 2011 is projected to be about 40% above the 2004 level. It is this large gap between the State’s revenues and expenditure that is now being addressed by budgetary policy, and will continue to be in the coming years.

In 2004, Gross capital and current spending was €47bn; in 2011 it is forecast at €67bn.

Tax, PRSI and other revenues were €45.2 in 2004; in 2011, they are forecast at €48bn.

The current estimate of the Exchequer Balance for 2011 is -€18.21bn.

The vested interests who remain with bubble gains need to be challenged but it’s evident that for too many of the 85% with jobs, unemployment is not the front burner issue as it is in the US.

If we want to embrace an economic emergency, it cannot be left solely to the politicians.

Insiders like Morgan Kelly have to come forward and propose what could be done in their own institutions with a lot less.

Otherwise, the efforts of political leadership would be sabotaged by the vested interests.

There are big unsustainable sums other than easy pickings on the welfare budget; dependence on the Exchequer is hugely expensive.

€2.7bn on public staff pensions; science budget €2.5bn; public procurement at €16bn; public legal bill at €500m and on it goes.

.
The prophet has spoken AGAIN.

Will we heed him THIS TIME?
Or ridicule him as we did LAST TIME.

As Greece Considers Exit from Euro Zone
http://www.spiegel.de/international/europe/0,1518,761201,00.html

.

Go Morgan Kelly!

@ Michael Hennigan

Public procurement 16bn? Is that right? Could you clarify what is being procured?

The lunatic is back, after a six months silence, during which Osama Bin Laden made more public pronouncements than he did. The latest diatribe is full of the usual hysteria. It contains not a word of serious analysis about how the real economy is currently performing, just a pretence, unsupported by any figures, that it is in the process of meltdown. Nothing about: (a) GNP has risen by 4 per cent in the past 9 months (Kelly himself has said repeatedly that it is GNP that is the aggregate that matters) (b) the balance-of-payments is in surplus (which competent economists like John Fitzgerald point out means that Ireland Inc’s debts are falling) (c) tax revenues are above the December budget target (see figures out this week) (d) the live register has been falling since September (see figures out this week) (e) monthly redundancies are failling sharply (see figures out this week) (f) monthly job vacancies (see Irish Employment monitor) are rising sharply (g) competitiveness has been rapidly improving for 4 years (h) manufacturing is growing at its fastest rate since the 1990s (see recent PMIs) (i) FDI is growing rapidly on the back of the improved competitiveness. I could go on and on but, unlike Kelly, I won’t. Noonan should put out a statement saying that this gobsh*te’s comments are unworthy of serious consideration, and simply leave it at that.

@ Gavin Kostick

You have me on that one. I recall reading several references but would find them difficult to track down. But the situation described can be inferred from the different approaches of the two institutions involved. The IMF is there on German insistence despite its involvement being initially vehemently opposed by Trichet. The idea was to adopt the hard line reputation of the IMF – there are euphemistic references to this repeatedly even in the official documentation – but the instigators overlooked the fact that this hard line approach included taking an equally hard line with private creditors, leaving aside the usual other element in the IMF’s armoury, that of a devaluation.

But, as the phrase has it, we are where we are.

As to Geithner’s involvement – in case the matter is raised – I do not see how the US, as the largest contributor to the IMF, and the holder of a de facto veto in that organisation, could be expected not to have a say. Indeed, I posted a link to a January interview in the WSJ with Trichet which contained the following.

“WSJ: Should senior bondholders of bank debt be forced to accept haircuts in the event of a bailout, as proposed by the European Commission?

TRICHET. This is not a European concept. This is a global concept, which is discussed in particular at the level of the Financial Stability Board and of the Basel Committee It is particularly important for so-called systemic financial institutions. Very careful analysis is required on the various possible options – additional capital buffers, contingent capital, bailing in financial instruments, etc. I would say for us it is still a work in progress. In any case I don’t imagine we could have a different solution in Europe than in other advanced economies”.

As to Ireland’s relationship with Europe, I have in my head a story I recall of two Irish authors who passed each other every day in Stephens Green but, as one was always looking at the ground and the other at the heavens, they never actually met.

A first class contribution, with a lot of information about what went on during the bailout, and how it was interpreted by the players at the time, that I had not seen before.

Useful in how it takes aim at the Hononohan hagiography. Whether or not there’s a reasonable alternative view, the Governor has had far too much of a free ride to date in public discourse because he seemed like a decent stick who knew his stuff. His actions should not be beyond robust criticism.

Useful to know that the perversion of the IMF’s involvement in the bailout, which we understood in broad terms already, is so severe that it may be illegal.

It’s very useful to have a clear voice added to the case for achieving a primary surplus immediately, and for returning responsibility for the funds imposed by the ECB Expeditionary Force to their source. The Government and much of the public are living in Cloud Cookoo Land, and we desperately need an antidote. Before this, of the country’s prominent economists, only Colm McCarthy seems to have been prepared to speak the bleeding obvious.

The educated middle class is in disarray, as an article of this type would otherwise never be published in the ‘newspaper of record’. It threatens the standing of our CB and its Governor in a most direct way. I wonder what Mr Elderfield is thinking as he cycles along.

For a senior Irish academic, Prof Sheehy pulls remarkably few punches. As he sees it, our economy has received the administrative equivalent of two bullets to the head. He even names the shooters.

Absent major surgery, he foresees the imminent demise of our principal remaining support, namely the FDI sector, through the cumulative, confidence-sapping impact of complex litigation, externally enforced corpo tax changes and other systemic interlinkages. The logic seems to be the consequences of bankruptcy at Ireland Inc will redound fatally through the public, financial and non-financial private sectors. A crisis doesn’t have neat boundaries.

‘Make no mistake: while government defaults are almost the normal state of affairs in places like Greece and Argentina, for a country like Ireland that trades on its reputation as a safe place to do business, a bankruptcy would be catastrophic. Sovereign bankruptcies drag on for years as creditors hold out for better terms, or sell to so-called vulture funds that engage in endless litigation overseas to have national assets such as aircraft impounded in the hope that they can make a sufficient nuisance of themselves to be bought off’
and
…………In other words, we have embarked on a futile game of passing the parcel of insolvency: first from the banks to the Irish State, and next from the State back to the banks and insurance companies. The eventual outcome will likely see Ireland as some sort of EU protectorate, Europe’s answer to Puerto Rico’

I find the argument convincing, and I think his assessment of our capacity to perform the necessary surgery is also pretty accurate. Joe Lee must be shaking his head.

@JTO
Good to see you back.
Not sure about this article. I think it contains a contradiction:
1: Everyone expects bankruptcy but
2: When the bankrupcy comes it will be unplanned and chaotic.
If it’s expected then restructuring is probably already being planned.

The other thing is the effect of wage cuts on mortgage defaults. I don’t know how he sees that working through the system.

On MK’s two points.

1.
It’s something that many people have long said…that we need to get out from as much of the banking debt as possible, for moral reasons if nothing else. The political issue in Europe is then “Who pays?”. Passing the debt onto other EU taxpayers is better for Ireland, but will be politically dangerous in the short and long term. Another solution is to be desired. Perhaps a EU-backed levy on those creditors who rotated out before the ECB rotated in? No neat solution presents itself, but unilateralism will remain (I hope) an option only to be considered in true extremis.

2.
On adjusting the budget, the difference between MK and – for instance – Karl W seems to be profound. I’m inclined to side with MK, but it’s a question of degree. The differences of option are (IMHO) driven by whether you believe the recession in Ireland is a temporary or permanent loss of output and whether you think that borrowing hard currency to try to stimulate a small open economy is sensible or nuts. Again, I tend to believe “permanent” and “nuts”.

I will side with JtO on one thing. Ireland can be a prosperous place if we take sensible decisions. There is a base from which we can work and parts of the Irish economy are, or could be, strong performers and creators of wealth.

As Michael H and Paul H often say, these sensible decisions will have to be taken on the basis of economic and societal logic and justice, not on the basis of protecting status quo or old relationships…..and that’s a problem with the current govt.

Every time we get a new wave of trouble, the usual suspects from Germany come forward to say there can be no easing up, no restructuring, no improvement of the terms. It is, we are told, the future of he Eurozone itself which is at risk.
What they are actually to Greece and Ireland is this.
YOUR determination, YOUR sacrifice, YOUR suffering will guarantee OUR prosperity. Why is this a sensible bargain for Ireland and Greece?

It’s chaos. Riding a tiger. Prof Honohan is a decent man but this is a structural breakdown. Humpty Dumpty. So many careers have been destroyed already and we are nowhere near equilibrium. The mess just gets messier. It’s will contaminate lots of careers on mainland Europe in time.

http://monthlyreview.org/2011/03/01/structural-crisis-in-the-world-system

“Premise No. 1 is that all systems—from the astronomical universe to the smallest physical phenomena, and including of course historical social systems—have lives. They come into existence at some point, which needs to be explained. They have “normal” lives, the rules of which need to be explicated. The functioning of their normal lives tends, over time, to move them far from equilibrium, at which point they enter a structural crisis, and in due course cease to exist. The functioning of their normal lives has to be analyzed in terms of cyclical rhythms and secular trends. The cyclical rhythms are sets of systemic fluctuations (upturns and downturns), in which the system regularly returns to equilibrium. However, it is a moving equilibrium since, at the end of a downturn, the system never returns to exactly where it was at the beginning of the upturn. This is because secular trends (slow, long-term increases in some systemic characteristic) push the curve slowly upward, as measured by some percentage of that characteristic in the system.

Eventually, the secular trends move the system too near its asymptotes, and the system is unable to continue its normal, regular, slow upward push. Thereupon, it begins to fluctuate wildly and repeatedly, leading to a bifurcation—that is, to a chaotic situation in which a stable equilibrium cannot be maintained. In such a chaotic situation, there are two quite divergent possibilities of recreating order out of chaos, or a new stable system.’

Step forward John McHale and all the other apologists for ECB/EU policy.

It has long been clear that the solution to the mess is political and using models and crystal balls and talking about the option value of waiting is completely useless.

Part of the problem with the Economics profession is that it doesn’t know when its models and predictions are useful and when they are so unreliable that they are harmful.

http://www.nakedcapitalism.com/2011/05/geithner-blocked-imf-deal-to-haircut-irish-debt.html

Goldman Sachs alumni strikes again. It helps if you know who your friends are.

Morgan’s article provides one answer to the question of what happens next after the Baldini-Wally conversation

http://www.irisheconomy.ie/index.php/2011/05/02/promissory-notes-the-movie/

We walk away from the banks, letting the ECB take the collateral underlying the loans, and we also stop paying out on the promissory note. The EU pulls all fiscal support so we have to run a zero primary deficit.

It’s undoubtedly a high risk strategy and all sorts of things can go wrong. But then sleepwalking to default on our official sovereign debt isn’t too rosy a scenario either.

Two other smaller points.

1. I’ve never heard the Geithner story as told by Morgan. Not saying it’s false. Just thought I’d indicate that this doesn’t seem to be one of those stories that lots of people know about but nobody reported until now.

2. “Unfortunately, most Irish government bonds are held by Irish banks and insurance companies.” This isn’t true. See page 53 of the appendix here
http://www.financialregulator.ie/publications/Documents/Quarterly Bulletin Q2.pdf

€74 billion of €90 billion in official sovereign debt held by non-residents. That said, the underlying point being made about Irish sovereign debt — that it might be preferable to renege on past commitments to bail out insolvent banks than to default on regular Irish sovereign bonds — seems valid to me.

Central Bank website still a disaster. You can find the figures on ownership of sovereign debt at the back of the Quarterly Bulletin which, for now at least, can be found on this page

http://www.financialregulator.ie/publications/Pages/default.aspx

It is about time Honohan’s role during the bailout negotiations is being more closely scrutinized, and there is no doubt that his intervention weakened further any chance that the Irish taxpayer would not be on the hook for the full amount of the bank debt, including all the unguaranteed debt.

Here is what was said in the FT article that spooked him into the early morning interview

Saving the banking system, however, is not the same as bailing out extant institutions; nor should taxpayers give up even more of their blood to the walking dead. Yet this is what Ireland is being asked to do – borrow money from the EFSF to raise the banks’ equity. Doing so would be an insult to the Irish people (whose incomes will be mortgaged to pay the loan back) and a gratuitous one at that: it defies logic to claim that adding to Dublin’s debt will seduce markets back to Irish sovereign bonds.

Honohan’s view on the bailout, and implicitly on the huge (€35bn) commitment to recapitalize the banks with taxpayer money is

From my point of view this is the absolutely right and necessary thing to do.

He has been very consistent in demanding that recapitalization should be in full and immediate, as was evident when it was delayed by a few weeks due to the election.

So we had Honohan lined up with the ECB against Lenihan and the IMF, with the EU Commission somewhere in the middle on the topic of senior debt. So was his position “the absolutely right thing to do” or “an insult to the Irish people”? You be the judge.

As for the idea of getting to a primary surplus immediately – it has about as much chance of happening as pigs flying past my window. The reason is because the Irish electorate took fright in the last couple of weeks of the election at the possibility of a single party FG government (who just might have made deeper cuts, though that is debatable) and decided that a “balanced” government was better. Labour would never agree to such a move and so it won’t happen without the government collapsing and another election. This is before the issue of whether a huge adjustment would actually achieve a primary balance in one go anyway.

Any significant senior debt haircuts can’t be done because it is too late; tearing up the bailout agreement can’t be done because there is no political or popular will to take the consequences of an immediate end to government borrowing; resolving the insolvent banks and letting losses fall where they should can’t be done because the ECB (and now the US government) won’t let us as long as they are underwriting the bailout.

It is all over other than to see what happens to Greece and then prepare for a modified version of that to happen to Ireland, exactly as happened with the bailouts.

Let’s face it, Morgan has gone completely OTT here. Not in his predictions of default but in his conspiracy theory and his proposed Final Solution.

It was Gerry Adams whom I first heard say that if the ECB has lent us oodles then that is their problem. Where Morgan and Gerry part however is that Morgan thinks the Brits are good guys and that the really evil behind the scenes forces are the Yanks (surprised that he didn’t include Ossama Bin Laden in his conspiracy theory).

The guys pulling the strings……
http://www.bloomberg.com/news/2011-01-15/wall-street-s-secret-society-inducts-members-with-lehman-video.html

“Pigs in a blanket” as their main course too!!

MK’s immediate budget balancing proposal should looked at seriously. What would it do to the domestic economy, what would it do to GDP, what would it do to mortgages and banking, what would it do to employment and emigration? What percentage of private sector economic activity is dependent on public sector and to what extent is public sector pay a stimulus?
If these costs are managable then let’s go for it. If not let’s just bide time and wait for an opportunity to negotiate collectively with the other peripherals.

So who is up for 30-40% paycuts and pension entitlements?

Next week, in the private sector, people who will not get even get out what has been paid into funds over the past 10 years and likely the next decade, will face a levy.

If we want to have some aces in 2 years time, the end of the deficit in that time period will coincide with recession and unemployment rising maybe by 50,000 or more.

In 2013, there wil be a clearer outlook on the recovery in the developed countries as the US puts in place big budget.

A “balanced” budget? Let’s start with some cuts.

No one on the State payroll gets more than €100k. No one.

No one gets a State pension until they have reached pensionable age and that pension cannot exceed €60k. No one.

Cancel ALL foreign aid.

Make child benefit taxable.

Make all foreign recipients of child benefit reapply. And make them do so every three months. Apply a withholding tax of 50% on foreign recipients of the benefit.

@DOCM
I think we mostly agree. Taxpayers in other countries should also not have to pay Irish banking debts they didn’t incur, and that seems to be the common plan in Ireland…get someone else to pay, anyone else. However, on your point on lesser evil or common good actions, the morality of a common good action is broken when we get to a situation where the scale of the seizure of taxpayer assets exceeds any possible interpretation that protecting banking creditors is for the “common good”. It isn’t the lesser of two evils any more and it ain’t for the common good.

So, now. Who does pay? That is the question where – so far – the answer is “whoever happens to be living in Ireland today”. It’s a bad answer because there’s a solid chance that the Irish taxpayer can’t pay and it’s a bad answer because the Irish taxpayer (in general) shouldn’t have to pay.

@Karl or any other econimist.

How can we balance the goverment books if we have no banks to lend out into the economy ?
Surely some organisation has to be in defecit in this monetory system ?

Is MK suggesting that Ireland come up with a new monetory system of punt tokens ?
and if so how can we pay for oil ?………. virgins ?

@JtO
All good points but unfortunately also all somewhat irrelevant to the central issue.

Which is Ireland will almost certainly have to default.
Using your new favourite measure of the economy, GNP, the debt will hit 142% of GNP, excluding NAMA.

I could be wrong but cannot think of (m)any countries where the public debt has hit almost 150% of the economy, in a fixed exchange rate mechanism in a low inflation environment that have managed to get out of the mess without some form of default.

Consider also if you will how much of the public sector expenditure is already going into the banks rather than the wider economy. How many mortgages are held by teachers, guards, nurses, civil servants?

Reducing these debts by making upstream lenders take the hit will not adversely affect the functional economy if you reduce those public wages, since they were never going into the economy anyway, merely being poured into the bottomless banking pit.

So refreshing to be told the truth in black and white. Yes, NAMA, as I’ve advocated many times, should send its toxic load back to the banks. Yes, as I’ve stated, Honahan has been a disaster touted as a banking genius by FF. Yes, the ECB turned us into roast pig with 5.8% bailout that hung us and protected its international loan sharks. Yes, the FG/Lab coalition, peddling the nonsense of growth and our ability to grow our way out of unsustainable obligations to predator lenders, is a government leading us into default.

We should do as Kelly says, bring our balance of payments into line immediately, set losses made by the ECB and our private banks, not against the state, but against the banks.

The renewed state could set up a public bank to serve the needs of the people of Ireland along the lines of the Bank of North Dakota, see more about public banking here:

http://publicbanking.wordpress.com/

Either we do this, or we come a dominion of the ECB, without a sovereign economy and with a puppet government in service of the ECB/IMF presiding over the decimation of employment in Ireland currently 14.6% with only message of hope to young people, emigRATION ….And austerity is just beginning to cut into the economy….

Time to end the gombeenism! Hard to know if ECB has set this country up as the village idiot, or scarecrow, to frighten Spain as MK believes.

As a matter of political practicality, how can the government turn around and move rapidly to a positive primary balance?

Well, it has two contradictory mandates: to take a tough line with the EU and to delay running a positive primary balance for as long as possible. Right now, it has dropped the first in favour of the second. Switching to a strategy that drops the second in favour of the first would have equal democratic legitimacy.

If that’s not enough, it can run the referendum on the bailout that so many people want. Give us the choice that was not offered in the election between continuing the naughty puppy act and taking on the institutions of the EU with all that means for sorting out the primary balance pronto.

well done Morgan Kelly you have done this country a great service outlining our position
the approach of “lets kick the can further down the road” and wishful thinking by our political leaderships short vision have ensured we are still digging the hole
a some point we have stop digging and face reality of our position by the i fully agree with at needs to be done next,

“National survival requires that Ireland walk away from the bailout. This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately”.

@ JtO

What’s that Eamonn Dunphy line about “a bottle of whiskey, a shotgun and a dark room”? Well that’s what you need if you read Kelly’s stuff too much. I ain’t calling it right or wrong, but it’s just a tad OTT, only tells half the story, and gets fairly vindictive and venomous yet again, particularly in regard to Prof H.

And advanced democratic economies do actually requiring fuctioning banking systems Morgan, not sure how letting ours implode (which is what he de facto argues for) will help our economy or encourage FDI to remain here.

@DOC

re The Dork of Cork Says “I agree we should set up a public bank such as the above – but that would entail turfing out the ICB.
If we did that the cartel would not recognize our currency as payment for oil.”

Nope, that’s scaremongering, Public banks can exist happily alongside the ICB as they do under the Fed in the US.

No reason why a public bank cannot acquire some of the functions of the ICB.

As regards currency problems, perhaps its time we looked at sterling to help with greater 32 county cooperation and our economic relationship with Britain.

Time for a chat with Cameron before the ECB blitzes us out of the water.

ECB insistence we pay up from the NPRF before they put in their money to our banks, was precisely to ensure we do not do the runner implied by MK

The minority of us who agree with MK anyway probably realise all this is a lost cause, we’ve already been sold down the swanee by Geitner, our stakeholder puppets with their begging bowls and the ECB

Interesting times, looks like 2016 will be a sad affair

@Colm Brazel
ECB insistence we pay up from the NPRF before they put in their money to our banks, was precisely to ensure we do not do the runner implied by MK

Every bride knows the value of running away money.
The ECB was determined that the Irish virgin would have no way out and would continue to present herself and her children on request and on time.

So, Prof Kelly to be an appointment to the Senate by the Taoiseach???

Why 2013?

To give the German banks enough time to fix their balance sheets ahead of inevitable default?

@colm
Correct me if I am wrong but does not the B of North dakota have local tax raising powers ?
You may be thinking of the old ACC and ICC which I believe were state banks independent of the ICB.
ACC had independent credit creation from the cartel but it could not get funds via tax.
I believe that is a crucial difference – but if I am wrong about the B of N D please feel free to pull me up.

Here’s the film version of this debate with JTO in the role of the Black knight. http://www.youtube.com/watch?v=zKhEw7nD9C4

@Brian Woods 11

This purports to be a serious economics blog yet we are seriously giving space to a solution which says walk away from the banking system, the ECB and the EU and immediately lop 50% off the government’s budget.

The figure to be taken off the budget is approx 14 billion from a total of 67 billion(using MH figures) to get to a primary surplus. That about 10% of GNP.
Not catastrophic but essential in any case. Still a country where a Supreme court justice can earn €275,000 pa plus a AG pension of approx €94000 pa should be able to manage a few cuts.

As for walking away from a banking system. Au contraire.
We are detaching ourselves from the runaway train wreck that calls itself a Irish banking system and is currently pulling the country with it right over the cliff.
So let it go over the cliff with its €160 billion ECB / ICB carriage attached.
After the initial violent recoil, the nation would survive.
If the ECB want to save the European banking system, let them hitch some other country to its runaway wagon.

@Shay

” What would be required in taxation increases and cuts in the public wage bill and national infrastructure investment to reach a budget surplus if the difference was to be met in equal proportions?”

I’ll have a go. That’s 10bn extra tax and 10bn less spending. Various ways to cut the cloth but let’s say income tax is doubled. Not across the board you understand because twce 52% is 104%. I suggest the top rate would go to 80% and all other income would be taxed at 40%.

On the expenditure side say 33% off all public service pay, pensions and social welfare, and a cessation of capital spend.

But this is an economics site, so it is not so simple. If Morgan was made MOF for a day the above measures would be implemented but they would result in maybe a 30% fall in GDP and unemployment approaching 30%. So we would need round 2, where tax rates go to 98% (yes they were once this in the UK) and a further 50% cut in public expenditure, and then, you must know the plot by now, round 3 and before long we will be the North Korea of the western world.

@Michael H

“the attitude appears to be that the tooth fairy may arrive to the rescue”

… or Greece will default and Ireland can ‘draft’ to use a cycling term on the rush to sort out a restructuring program.

Pure speculation on my part, but the tortoise pace of reform is consistent with the suspicion that the government is literally sitting around waiting for the Greek situation to boil over. Maybe some ‘cute hoor’ spread the rumour yesterday that Greece might be on the verge of bailing out of the euro?

@Brian Woods II
“I’ll have a go. That’s 10bn extra tax and 10bn less spending. Various ways to cut the cloth but let’s say income tax is doubled. Not across the board you understand because twce 52% is 104%. I suggest the top rate would go to 80% and all other income would be taxed at 40%.

On the expenditure side say 33% off all public service pay, pensions and social welfare, and a cessation of capital spend.”

We wouldn’t need anything like those type of measures to close the deficit.

From this thread http://www.irisheconomy.ie/index.php/2011/05/01/government-revenues-and-spending/

€10bn would correspond to a 20% increase in taxes and a 14% decrease in spending. Or some mixture in between.

No doubt all of the Morgan Kelly article is true, and some of the comments here only serve to confirm that we are, indeed, heading towards a chaotic ending. If we go there Ireland’s reputation will be destroyed and our ability to fund the very basis of our past success, our educations system, mortally compromised.

We are on our own, it is indeed like the over indebted family with irresponsible parents. Nobody can help Ireland until it knuckles down and helps itself but the parents, those that have the power to sign the cheques, are still in denial. They talk about European solidarity, no this trick will do it, let’s just wait and see, but everyone else, including the kids, can see that it won’t work, but they are powerless unless they can convince the parents that radical action is needed now.

Our advantages lie in our educated diaspora AND the fact that the US insists on recreating the over leveraged ponzi finance system that caused the mess. They can’t allow derivatives, CDS, leveraged loans etc etc, to go away with the dodo because if they do, no government will be able to fill in the losses.

We are a small country, we have to fix the bank liability mistakes and then we have to call on Irish citizens abroad (I am one) to step up and help smooth the transition to more normal government financing. We have to TRY something on our own, raise money, pay back the international agencies and get out from under this.

The transition is going to be horrendously painful we have to accept that..but today we don’t accept it…we look for someone to blame and for nice, neat solutions that burn the creditor. They won’t work, they will only destroy everything we have built. I would happily and proudly invest, but only if I believe that the smal minded, in crowd, Sunday independent types that have destroyed the country are safely removed and have no power to do this stuff ever again.

@ Joseph
Thanks for the clarification.
Does this mean that we end up with no banks then?

@ Hugh Sheehy

As to who will pay, my own view is that, in the end, private creditors will get together with the countries in difficulty and agree a deal. That is the Eurozone plan. But only when it has become clear that the debtors have demonstrated without any doubt that they have reached the limit of their capacity to repay. Ireland is far from that stage. Not so Greece. Again, morality has little or nothing to do with it. It is the attitude since time immemorial that creditors have taken to debtors.

The curiosity of the situation is, of course, that the nominal creditors are, given their “systemic importance”, simply front men for the creditor countries. They are not commercially strong enough to take the hit at this stage. It is a classic Mexican standoff and the first that can make it move stands to earn a fortune if they have been investing in the “right” outcome: hence the continuous spate of rumours to put pressure on Greece.

The interest of Morgan Kelly’s piece is not that it is off the wall, which it is, but that it contains a sufficient degree of truth in relation to a number of very uncomfortable facts, notably the confusion that evidently arose about responsibility for what were fundamentally political choices.

@ D_E

Okay, thanks for the clarification, but, as you concede, the immediate application of such a dramatic correction would surely be calamitous and would only make our economic plight much worse.

The point is that Morgan Kelly is a Professor of economics. He has written a full page article in our most respected newspaper in which he advocates such a course. It is highly irresponsible.

Morgan was right about the state of the banks’ balance sheets. But he must know that the simplistic solution he is proposing now would be catastrophic. He has moved from predictive analysis to the David McWilliams playground of proposing outrageous silver bullet solutions which he knows can never be implemented and therefore leave no hostages to fortune. On the contrary, as things get worse and it seems they will, he will point back and say “told you so, should have implemented my plan”.

maybe we should have a new entry to this blog on how it is possible to reduce the 14 billion deficit through higher taxes lower spending that enhances the domestic economy introduce salary caps,more vigor in the promotion of irish produce

we at war unfortunatly our goverment just did`nt no it don`t know it

we need pull out all the stops to safe guard the future and stop pussy footing with EU partners who have put us in quarantine and have looked to safe gaurd the core countries EU banks

it is very clear that we need to re set the economy on sustainable levels at the moment their no money in the irish system and we are dying by a slow drip process with belief that reproduce the bubble

We are heading for a positive primary balance by around 2015 anyway. All Prof. Kelly is suggesting is moving forward the target date. There is no good reason to think that it will be more calamitous if we do it all at once than if we stretch it out over the next four years.

@DOCM
I suspect you’re right in what will happen.

Meantime, for Dreaded Estate and co, if you raise marginal income taxes much more (let alone to 80%) you’ll kill or force out a lot of businesses that Ireland really needs to stay alive and in Ireland.

If you cut the salary of a high court judge by 50% he’s less likely to leave the country and bring his skills with him than a pharma engineer or supply chain logistics expert if you increase his marginal tax rate to 80%. Would we like to have an economy in a few years? If yes then more taxation on hard-to-replace skills is not the answer.

The Irish state must balance its budget or borrow. It cannot borrow on the market for a long time .It cannot balance its budget either for several years ,trying to do so would contract the economy so much it would be self-defeating (the tax base would collapse).Therefore it will have to borrow more from the EZ. Whether those debts can be repaid remain to be seen, but it is a problem for the next decade ,not for the short term. This whole discussion is surreal.

@ DOCM
That outcome makes sense. But I just wonder if some people have actually a lot of money to make through default as well (bear with me!!) by betting on drop in the Euro?
We have already seen the effect of a rumour of Greece leaving on the value of the currency. Imagine – a few more rumours, an actual default etc. They could make money during the decline and also make money on the eventual recovery after the weaker countries devise alternative currency arrangements. In this way – the really smart guys could actually be playing the ECB by ostensibly pushing for repayment of bonds while surreptitiously engineering defaults to destabilize the currency. This may be ridiculous – i don’t know

@ John Mc

Phew, the cavalry has arrived to talk a bit of sense. Ta. The MK articles of late have been curiously vindictive, he really feels sleighted…

I hate to say it but yee guys are economic illiterates – even a Dork knows something has to be in deficit.
If the banks can’t lend the goverment must be in deficit.
Your proposals to cut the goverment deficit will result us exporting everything including the kitchen sink to service fictitious debts.
There will be no internal commerce – people will decide to take a farmers crops rather then exchange symbolic tokens for the stuff – chaos will ensue.

All money is debt – money is only a tool for the physical economy – yee people are prepared to destroy all productivity and civility for flawed economic indices.

Only the Irish could display such a combination of foolishness and madness in one final dramatic expression of Gombeenism.

I am surprised at some of the above comments. Kelly says as much himself that the basic issues are plain arithmetic. Some of the above comments about how well the economy is doing are merely observing how well the band is playing once the ship has been holed.

The central point is the liabilities the state has taken on. The argument that if we try and ignore these and play nice we will be looked after are plainly idiotic given the evidence of our own lying eyes.

So where is Kelly wrong, in either tone or content?

@ John McHale

1. Its not a popularity contest
2. Truth Hurts
3. Morgan Kelly has been rubbished with every article he has published in the Irish Times, yet every point he has made has come to pass. Yes, I agree he takes no prisoners but who cares at this stage when our futures are on the line. Its not personal, if you can,t take the hits get out of the kitchen. Remeber Honohan said BOI and AiB were attractive buys 18months. Peronsally I thought he,d save us but has gone all native. Morgan Kelly does,nt do Politics and is not seeking a govt position in the long run. Personally I wish he was in charge and I,d see some hope. John, you seem to be a cautious guy but jesus at this stage where are the options. Dan O Brien had a article in the IT a while back and he rekconed if Spain goes under we are all doomed to a Great Depression. From my humble point of view his article makes perfect sense, get our deficit down asap. As Colm McCarthy mentioned its the only thing we can control

we are holding the can

ok we play the good Eurpeans do what were told show no national determination see the bail out as a good thing believe we can trade our way of this crisis ect , down the line ECB /EU partners will come to our rescue in 2013 ?

what if that analyst is wrong whats PLAN B

@Dork
I lived in Yugoslavia…

My money, such as it is, is not in Ireland, where’s yours?

Again, I’ll say that you appear to think that this is economically an island. As foolish a view as thinking that deposits can’t leave is the view that somehow a mass mortgage default is a silver bullet.

There aren’t any silver bullets.

There are a series of nasty choices.

@ John McHale

I could not agree more.

On the issue of timing and what the government of the day was trying to achieve, especially by repeating the mantra that the country was “fully funded until April of next year”, I can resist no longer the Irish joke about Paddy who falls out of a twenty storey building and passing, let’s say the 13th floor, is heard to remark “well I am OK so far”.

If the government had a plan, the concomitant was to restore the credibility of the Irish sovereign by a Latvian style solution i.e. dramatic cuts in public expenditure (which Morgan Kelly in his confusion now also seems to be advocating; too late!). This was not a matter of being told by some mentor, such as the ECB or the Commission or whatever, that it was the right thing to do but the logical consequence of the policy it was purporting to pursue.

As Peter Nyberg pointed out at his press conference “everything that happens in a country is the responsibility of its government”. The Finns need no instruction on what constitutes sovereignty. We evidently still do.

@ John McHale

‘Bottom line: this is crazy stuff, and all the more bewildering because it is coming from one of the heroes that stopped the original credit-fuelled bubble getting even bigger’

You are right to appeal for reason and civility. Everyone makes mistakes, and some judgement calls have to be made. It’s natural to lay the blame on key individuals, but it is the forces which are brought to bear on them which, I think, should interest us more. Those pressures are going to intensify fiercely in coming years, and in ways we cannot imagine.

One of the reasons for frustration, including that shown on this board, is the lack of transparency which characterises our institutions. There is also the groupthink factor which Nyberg identified, and which hasn’t gone away. Today’s groupthink is ‘ we know we are in a bit of trouble, but lets keep the head down until things get back to normal’. If I am not mistaken, the Irisheconomy.ie is generally agin that.

People like MK strike a chord, even if there are a few sour notes. As DOCM pointed out, there is enough truth in what he says to make the establishment uncomfortable. That’s surely a healthy development, because we simply cannot resolve this crisis by resorting to the usual reassuring nostrums. Nor will be rescued.

I don’t know why the Prof prefers to speak ex cathedra, rather than join the debate. A robust interaction with some of the hard chaws on this board might have the dual benefit of shapening his analysis, and blunting some of his barbs. We all need that.

@Hogon
I keep all of my liquid funds in the post office , I have a checking account in a bank also.
Again the debate as a whole displays a ignorance of the difference between money and credit.
This sort of crisis has been played out in Ireland before , infact looking at the figures for the past 21 years and possibly throughout our history we export more of our goods then we import but now its gone crazy again.
Ask yourself why can we export to a market – because our trading partners have symbolic money to spend on goods and services.
Our symbolic money is backing the new generation of famine house – that money can be divorced from those dead assets and begin to increase velocity and internal trade.

The purpose of economic trade is not to export – its to increase wealth – we are engaging in a crazy pseudo Maoist exporting drive.
I am sure our executives will ask us to mass produce Pig Iron soon as it may be part of a future economic index.
Pure Madness.

@Shay Begorrah

I would suggest the last of your questions here should be focussed on by everybody.

“* What would be required in taxation increases and cuts in the public wage bill and national infrastructure investment to reach a budget surplus if the difference was to met in equal proportions?
* Could the tax increases, wage cuts and benefit cuts be structured in such a way as to favour domestic spending (how much can we soak the rich and spare the poor while not collapsing consumption)?
* Is it still practical to follow this course while using the Euro internally?”

@Dork
“As far as I can make out the ECB and their FF Irish goverment cretins have broken contractual law by not allowing losses down the capital structure.”
Not sure whose fault it is, but I agree with you as to what they have done. I suspect the fault is at home, though, and is ideological in bent.

“Whats to stop a forcefull Irish executive engaging in emergency legislation to divorce term deposit / credit and turn it into money ?
If the ECB can break all the rules , why not a democratically elected executive who campaigned for losses on risk capital ?”
Recognition. They are not a monetary authority. They run into the same credibility problem that a newly independent currency would. So if you are going to go that far, you might as well try and reintroduce a new currency.

In the good times, people on above average incomes but short of rich were taxed about in line with what’s normal in the developed world. People on low to median incomes paid very little tax by comparison with their counterparts in other countries.

After the downturn hit, taxation on people on above average incomes was quickly pushed to around the limit beyond which it really messes up their incentives. Taxation on people on low to average incomes was pushed up a smidgin.

Starting from that point, it is really difficult to change the tax system in a way that further soaks the rich and spares the poor, without screwing up economic incentives and thereby threatening future growth potential.

@KO’R, you are obviously right on the need for a big current account surplus. Perhaps you could explain in more detail why it is difficult to achieve it without leaving the euro. Surely, if the government cut spending and raised taxes this would be the natural outcome.

Yes but, if we go back to the Punt and peserve the numerical order of our external debts, our debts both internal and external will have to be all re dominated in a grossly undervalued punt.
But given we are running such a huge surplus already this would increase the trade surplus to gross levels via even more import austerity.

Although the nationalist side of my mind likes the Punt illusion – we never really had a true sovergin currency with the BOE dictating things in the past.

From a gaming perspective we would be best to externalise the losses but preserving the buying power of the Euro.
Anyhow as you infer the local CB cartel has expertise in these matters – I doubt if the Irish exchequer would know what to do if decided to eject the priests.

From a practicality perspective its probably best to run towards the BOE – they may have been bastards but in fairness the last time they acted like the ECB was the 19th century.

@Kevin:

“Hard to see how this could be achieved quickly without leaving the euro. Which would be very good in some ways, and very bad in others.”

Kevin, I leaving the euro is bad all the time, in every possible way and under all circumstances. Always and forever. Amen.

(any inference drawn that arguments against leaving the euro sound more like articles of faith than analysis is purely accidental)

Kevin O’Rourke: Hard to see how [a big big current account surplus] could be achieved quickly without leaving the euro. Which would be very good in some ways, and very bad in others.

Well, one way it could be achieved quickly is through an austerity-induced slump, which would shrink demand for imports. But that’s an especially hard road. Since Morgan Kelly knows his stuff, I guess he accepts that his preferred policy does indeed require leaving the euro. Yes, that is very bad in some ways but surely it is less bad than any available alternative? Time to weigh it up, I think. Over to you sir – please don’t leave it to the economic illiterates!

Some chess genius remarked that in a bad position, all the moves are bad. That’s the pickle we’re in. And in economics there is no way one can just resign.

@ EWI

If you believe most workers in the private sector can be compared with bankers, then you are an idiot and delusional to boot.

You say: “The pension funds in the private sector seem to mainly fall under two categories: piggy-banks for the employer to raid, or else tax-avoidance schemes for the better-paid.

The majority of private sector workers have NO occupational and again, the statement you make in respect of those who have, is rubbish.

Crime is a reality but most people aren’t criminals.

@ Kevin O’Rourke

In an economy dominated by foreign firms responsible for 90% of tradeable exports, can we not have a current account surplus and still be in the knacker’s yard?

@ John McHale

I hope the IT contact you or alternatively that you contact them. They normally feel embarrassed to give a right of reply to a MK outrage. Last time it was some stockbroker guy. He was good but open to taunts of conflicts of interest.

Last time, MK was predicting a mortgage default meltdown. It was a plausible opinion. This time MK has simply gone off the wall as you have highlighted so eloquently. If you get the chance to reply in the IT it will be a walk in the park.

A tip though, no need to give any concessionary plaudits to MK. This time he has got it way wrong, don’t go easy on him.

“So throw off the victims’ cross and sort out what we can at home. Then we will be in a stronger position to make demands in Europe.”

To be fair to Prof. Kelly, that is exactly what he is proposing.

@ Michael Hennigan

There was a lady from DCU on VB the other night who made some claims about the economic wealth that Ireland’s participation in Common Fisheries has transferred to the rest of the EU (she also referred to processed-vs-raw catch values). She stated that the net transfers into Ireland from the EU was much less than what people thought.

Some figures from the academics on this would be welcome.

Greetings,

Fascinating – and depressing – article by Professor Kelly.

I’m not an economics’ buff, just the “armchair” variety, my background being in the computer industry, but here are some things which have puzzled me and some suggestions…

There is one thing that’s always puzzled me about the bailout.

Given that the IMF’s rate on its €22.5 billion tranche was just above 3%, whilst the ECB’s rate on its tranche was higher, why didn’t the previous government maximize the IMF part at a lower rate and minimize (if not do without) the ECB’s “contribution”?

How much would the IMF be willing to lend at 4%, 5% or 6%? (If I remember correctly, 6% or 6.5% was the break-even point.)

This is something which the current government could “correct” in renegotiating the bailout deal.

The important point being to ensure that the total interest rate on the loan is sustainable – ie, repayable – unlike at present.

Even if, having gained the maximum amount from the IMF at a sustainable rate of interest, we still fell short of what is required, and if the ECB wasn’t willing to reduce the interest rate on the balance to a reasonable/sustainable level, Ireland could simply give back the ECB’s money and then look to cut the balance out of the debt by separating the bank debt from the sovereign debt, and not guaranteeing coverage for (all/most/part of) the former.

Further, the public sector payroll needs to be cut – properly.

That means collapsing the upper pay brackets – like a circus tent – whilst leaving the lower brackets unchanged. No negotiations needed – just do it!

In fact, overall, the public payroll should be not more than (in my opinion, say) 80% that of the private sector’s, since the latter fund the former, and are struggling to sustain this weight whilst having difficulty getting credit from banks, resulting in continuing “down-sizing”- making the public payroll even less sustainable.

The pay-packet of ministers – TDs, Senators, Cabinet ministers and even An Taoiseach – should be set at the average public wage for all of them, regardless: that way, it would reflect how well they were serving the private sector – their pay would only go up if the private sector’s improves and go down when the private sector took a economic hit.

For the private sector, given Ireland’s efforts to go “greener” than others, South Carolina passed a bill where utilities could lend to consumers to replace less efficient electric appliances with newer, more efficient ones – the loans would be replaced over time through savings to the utilities in producing electricity.

A similar government policy for energy (and water) might prove effective in encouraging innovation in the private sector to develop/manufacture more efficient appliances – TVs, fridges, etc, along with water-saving devices – which could not only be sold to the home market but exported to Europe and elsewhere, thus increasing the income from our exports.

In fact, a extension of this policy to the business community would be even more helpful.

Businesses could upgrade their computers/IT equipment to ones which had a lower carbon-footprint and/or were more energy efficient, for example, thus helping businesses cut their overheads.

Kindest regards,

James

@ EWI

Net receipts from EU 1973-2009 €41bn; average 2.9% of GDP; 6.2% in 1991.

The EU hadn’t existed during the Famine when there was starvation in West Cork coastal areas.

The claim that we couldn’t develop our fishing industry because of the EU is a fairytale.

What frightens me, what really frightens me is that any folks are still willing to believe the latest economic stats as reported by any government.

Of course here, as with pretty much every financial blog, there will always be a vested Pied Optomist happy to pipe you over the cliff before you realise what’s happening.

@Micheal Hennigan

at the time of entry to the then EU in 1973 we have given away our fishing waters in return for farm subsidies N receipts don’t take this in to account remember why Norway refused to enter the EU the major reason was access by other EU countries to its fishing waters

i agree the has been very good for ireland ,but i agree with Morgan Kelly that we we are put in a straight jacket for reasons that are not for our good

@ EW,

“the economic wealth that Ireland’s participation in Common Fisheries has transferred to the rest of the EU
…
Some figures from the academics on this would be welcome.”:

I hope they make allowance for all the fish that would have died of old age, as we would not have fished them.

@ John McHale

If you have a moment.

A portion of what is being discussed is the immediate closing of the gap between government income and expenditure.

I attended a lecture by Philip Lane in which he put a figure on the impact on economic growth as a result of deficit cutting. I don’t have the notes, but it was a fairly simple for X billion of deficit cutting revise growth % down by Y.

For the sake of clarity here, do you work by such figures, and what might they be?

Ignoring real world problems for the moment (such as the collapse of the government) do you think that growth would be better served by doing this all in one year, or over 3/4 years as envisaged?

Thanks.

@Eoin
California isn’t an individual paid-up member of the IMF, Ireland is.

Its not entirely clear why we could not have been bailed out by doing a bilateral deal with the IMF, except that Greece set a precedent.

Greetings,

@ Bond, Eoin Bond

Thanks for the clarification regarding the interest rate.

I understand your point about it being a EU/EZ problem but there are two points in favour of their involvement:

1) It’s not called the International Monetary Fund for nothing, and
2) If one’s looking for a loan, one should take the best deal on offer.

Kindest regards,

James

@bazza

California isn’t an individual paid-up member of the IMF, Ireland is.

Its not entirely clear why we could not have been bailed out by doing a bilateral deal with the IMF, except that Greece set a precedent.

It’s even more straightforward than that. The Treaty of Lisbon specifically bans intra-EU deals like the EFSF/EFSM. It permits external assistance from the IMF.

@Colm Brazel

Totally agree with you. Have to admit I did,nt put it together as well as you did.

It comes across as McHale is slapping down Morgan Kelly for sticking his head above the conventional wisdom which for McHale and many others is being a good European and get on with the pain.

My ideal guests on Vincent Browne would be 1. Morgan Kelly 2. Max Keiser. 3. John McHale 3. Pat Honahan.
Bring it on Vincent. Going by his article on Wed in the IT, Vincent is on the green tablets right now to steady the nerves and could even step down from TV3.

@ All,

THERE IS A PROBLEM, IN THE ANALYSIS OF IRISH ECONOMICS BY MANY FOLK I HAVE READ HERE, IN THE LAST COUPLE OF YEARS.

The voice of macro-economics, environmental economics, behavioral economics, property economics, depression economics . . . lots of different variants are in evidence, in attendance and well accounted for. What I haven’t come across as yet, is an outstanding voice in Ireland as yet, in the area of Labour Economics. That is, the understanding of human capital as, and on whose bottom line it ends up. I have listened to Paul Woolley of the LSE, speaking about the principal agency problem in modern day finance. He talked about the ability of the financial industry to capture the bulk of the benefits arising out of activities of the productive sector of the economy. I believe that Europe needs to stop looking at the problem in terms of nations, such as the ‘Irish’ problem, or the Spanish problem. And to realize this has far less to do with nations and a lot more to do with how the profile of industry in the west has altered so much in the last quarter of a century. I think that Robert Pye expressed it a lot better yesterday in his Irish Times article, in saying: “With a 40 per cent fall in its industrial capacity in just 25 years, a staggering and unsustainable trade deficit, and a massive burden of unfunded liabilities (social security and medicare), the US economy could only be held together by a dangerous expansion of its money supply (“quantitative easing” is now in full swing).” He also said a lot more than that, and his views are an important consideration in the context of the Morgan Kelly article of today, or the Colm McCarthy Sunday Independent article of a week ago, ECB is leading Ireland and the eurozone to disaster. What we need actually at the moment, is someone such as professor Patrick Honohan, doing the job he aught to be doing. That is, assisting the European institutions, and the most powerful nation states on our globe to gain a clearer, longer term picture of what has/is/will happen to the industrial and labour profile in our economies over the next quarter of a century. Everything else, and Ireland’s sovereign debt problem into the bargain, just pales by comparison to that mounting problem. The thing that is so difficult for us as Irish men and women to accept, is that we cannot solve the ‘Irish’ problem, without solving the ‘European’ problem first. BOH.

@ Colm Brazel/John McHale

Peace be to yiz. You guys both blog under your own names, and have made many thoughtful and enlightening contributions. For which much thanks.

John has deplored the personalisation of what is a systemic crisis. There are also academic sensitivities, which matter a lot to some of us. Colm wants accountability, and insists that a spade is not called a digging implement. We surely need that now.

With all due respect to our academics, the current state of the country is no academic matter. The government wanted a clean pair of hands for the CB, and they got them. Given the barefaced carry-on of the bubble era, that has to be a plus.

It is hardly fair, however, to expect someone, no matter how well qualified in theory, to enter the shark infested waters of central banking or capital markets, and not get eaten. If we are to follow MK’s line of argument, it looks like that may have happened.

I guess he has placed the ball firmly in the Governor’s court and I doubt we have heard the last of it.

@Michael Hennigan

‘I do hope that Prof. Honohan ignores convention if it exists an defends himself.!

Agree. A good ol’ expressions of staunch opinions, the equivalent of the meedja duel, would certainly brighten up the public sphere. It is probably also in the public interest – as through present, apathy, apprehension, ignorance, stockholm syndrome, or otherwise – to generate as much relevant discussion on Ireland’s present ‘ludicrous supine position’ and the real choices that are available. This serf is particularly up-to-here with the dominant discourse that all the ills and real losses of the risk takers in the financial system be paid for by the sweat and blood of the serfs who bear no direct responsibility for such risks.

Why do people seem to think that the rules that apply to sovereign debt are the same as those applied to personal debt?
You can’t repossess a country! You can’t have collateral on a country.

@ Eureka

You can’t repossess a country!

Tell that to Germany, France, Spain or the UK? All of which have made efforts in that direction as regards us, historically 😉

@EWI
“As to Ronan Lyons, I refer you to “lies, damned lies and statistics”. If he wants to compare the same professions and trades in the public and private sectors, then I’d be interested. Seeing as though he apparently has no desire to do so…”
They also say you can tell a scoundrel by what he doesn’t read… clearly you didn’t read the post referred to…

The solution that Morgan Kelly proposes (ditch the banks and balance the budget) is crazy and would be catastrophic if implemented. However, as I see it, any alternative would be worse. That is the predicament we face.

Sorry wrong link – how about this? (please delete previous- thank you)
http://www.bloomberg.com/news/2011-05-07/eu-said-to-consider-requiring-more-collateral-for-extra-greek-aid-on-debt.html
Is it possible?

They also say you can tell a scoundrel by what he doesn’t read… clearly you didn’t read the post referred to…

I did read it – for the umpteenth time. It has been referred to here and elsewhere many times in the past. I particularly enjoyed his claim “that grade for grade, age for age, hour for hour, the public sector enjoy a huge premium of anything up to 70% (on a per hour basis) over their private sector colleauges.”

The ‘anything up to’ seals it as a classic, in my mind. In the very same paragraph he himself goes from claiming 30% differential (ESRI) to 70% differential (Davys). As he says himself, “how much more evidence do we need?!”

I don’t believe fro a second that the ESRI is as impartial as he claims – their codology over public sector pay (the curiously-timed reports), the incinerator in Ringsend and (especially) climate change in the last couple of years has put paid to that.

@EWI
The picture, the picture…

PS I also think the private sector pays itself too much…

Given the seriousness of the situation, and our almost innate propensity for group think, there is no excuse for reputations to be beyond the pale. It is childish in the extreme for commentators not to talk about WHO made what decisions in their official capacities and what consequences flowed from those decisions, especially when what we are talking about is loss of sovereignty and economic collapse on an unprecedented scale.

These are highly paid jobs at the front line and we need battle hardened people not people who want to hide behind titles and theories. I for one, think it was most disingenuous of Patrick Honohan to say at one point that he was “not interested in naming names”.

This is the theoretical approach, and it gets us nowhere. This approach contributes to people saying ‘no one is responsible, no one will be held accountable, no one will be sent to jail and then they follow up those comments with ” I am taking what is left of my money out of the Irish banking system” where no one is accountable for anything. It will also contribute to social unrest. Nyberg, followed up that logic with the idea that we were “All” accountable. Nobody in their right mind believes that for a minute. Indeed by saying that Nyberg was contributing to his own “group think’ solution of his peers.

@ John McHale

Our sovereign undertakings cannot be predicated on lies, intimidation and group think. If someone lies to me and then says “but Robert I have a contract with you’ the contract is ultra vires. You cannot make something legal that was illegal to begin with and you cannot run to the law to have an illegal contract “enforced” as the ECB insists must happen.

Kelly’s assertion that the EU were paranoid, is not, a Kelly idea as such since it has been repeated ad nauseum in the MSM.

On your second point, are you afraid that as a people, we might have a disorderly march along the road to economic ruin? Because, that is precisely what we have had since the crisis began. NAMA “only game in town’, cash or more accurately debt for trash was wrong. The guarantee hammered out in the early hours of the morning with John Gormley stumbling out of his bed, was wrong. The IMF deal announced on Morning Ireland was wrong and the slavish endeavor to convert ECB lender of last resort, short term loan facilities into long term government debt is wrong. Over 70bn of ECB lending to Ireland has been used to repay senior debt and there is much more to come. This is not a bailout.

As for; “who on earth would want to take the risk of economic collapse and impoverishment that would follow”

It is already here. Have we not 443,000 people unemployed with another 100,000 on schemes? Will 300,000 people not have left the country by the end of this year? That is an economic collapse and the debt being piled high is totally unsustainable and Morgan Kelly knows it but he has probably got right up peoples noses when he says that lecturers and professors like himself are paid twice what they should be. Something that Edward Walsh has also said. However, just because salaries still come out of ATM’s does not mean that we should not face reality no matter how painful that reality is. Your approach is to kick the can down the road. Constantine Gurdgiev has already said a lot of what Morgan Kelly has said, Kelly is certainly not the only one saying these things but he certainly has said them in the most blunt and comprehensive manner.

@ PQ

Ooh ho, hokey pokey 🙂

Oh now, I should think one would not take a cue from others as to how they act or from precedence (of Middle Ages monarchs. Though I’m not for a moment paying any compliments to the intellectual calibre of the modern world). After all one only gets one chance to do the hokey pokey, so better make it one’s own dance. Someone has to try to give direction to … form; rather than simply add to the force of a race to the bottom.

Ok, our recent culture got us to where we are – currency wreckers and financially very embarrassed. I think we should now be quite disposed to listen to our family- -friends rather than preach; take a break from digging; sack cloth and ashes for a while might be what our character- -culture needs as the foundation to the future.

Unfortunately I’m concerned that the rest of the old G7 world may catch up with us in our demise, and that may be the future.

@Peter Kinane

you mean that G7 are following in our lead ?
that the west is at a structual endgame ie Brian O Hanlons post earlier

Robert Browne writes,

Given the seriousness of the situation, and our almost innate propensity for group think, there is no excuse for reputations to be beyond the pale. It is childish in the extreme for commentators not to talk about WHO made what decisions in their official capacities and what consequences flowed from those decisions, especially when what we are talking about is loss of sovereignty and economic collapse on an unprecedented scale.

It’s kinda weird to be reading these sorts of paragraphs today in Ireland isn’t it? I mean, who would have guessed that such a paragraph could have had any relevance in the context of Ireland, only a few years ago? I mean, who? If I had read that paragraph, then, I might have assumed it was about some far off developing nation with a dictator for a leader. Certainly not Ireland.

Well done Robert. Couldn’t have said it any better. BOH.

for a moment a had thought that “the Dork from Cork” may be our enlightend one but he kinda trailed off on his own steam

but i am certain the financial sector has been on some sort of crusade for the last few years that has gone on un checked

every time i look at the oil price i ask myself how has come so high in that bulk of the western world is going through tough times which makes it hard to understand i accept that developing world is seeing real growth through higher export orders it makes me question are at fundamental wealth transfer timefrom west to east

Morgan Kelly’s article added two things to my view of the situation.

Most importantly, he gave us his analysis that sovereign default will damn a generation. This is the opposite of the view that we will be best off if we default on the ECB’s terms. The view that “sure nobody expects us to pay all that back so we’ll get a deal in the end” may be accurate but it doesn’t mean that course of action won’t yield the worst possible result for our nation.

Interestingly, but less importantly, MK gave us some new insights into the negotiations. However, apart from the Geithner snippet, a lot of it is a subjective analysis of other people’s behaviour. Whether it is right or not does not matter hugely.

The personal vitriol in the article does not bother me one bit. That is the way MK is. It appears he is not beholden to anybody and is not mindful of anyone’s feelings. It may seem harsh but you know that, apart from the judgments on other people’s characters, what you are getting is the unvarnished truth as MK sees it. The insults are a very small matter beside whether Morgan Kelly is right on the prospects for Ireland’s future.

My own analysis have evolved to mirror MK’s analysis over time albeit I have been hoping there is a possible endgame that will allow recovery.

I have also reached the view that our civil servants and the cognoscenti of politics and business are psychologically incapable of taking any course of action other than persisting in keeping in lock-step with the ECB. There are loads of reasons for this – a lack of capacity to understand the situation, the life experiences of your average Irish 50-70yr old, incompetence, exhaustion, cowardice, fear, mental capture by the EU bureaucracy of our ruling classes, inferiority complexes and so on.

I have been resigned to this up until now. When I read Morgan Kelly’s article I feel like going out and looking for a fight. I am full of fear that if we do not fight for the state to walk away from the banks and the ECB now then we will end up having much more horrible fights amongst ourselves in this country.

@ EWI

I don’t believe fro a second that the ESRI is as impartial as he claims – their codology over public sector pay (the curiously-timed reports), the incinerator in Ringsend and (especially) climate change in the last couple of years has put paid to that.

You unwittingly provide an excellent illustration of the common mindset that is part of the culture that brought the country to its knees.

I suppose the CSO staff who produced similar research on pay differentials for comparable jobs, were on the payroll of the Bilderburg Group?

Perish the thought that we could have a national waste management policy like that of a well run country like Austria.

We need the reviled EU to force us to clean up the water supply and end the current landfill system!

@ The Dork of Cork

You should get out more and perhaps remember the past with greater accuracy.

Tim Pat Coogan has a commnetary here on the fishing industry:

http://bit.ly/k1jenf

Rather than address shortcomings, the default is to blame the foreigner.

Tim Pat refers to an RTÉ flash which read: “A large hole has opened on the Naas dual carriageway and the Gardai are looking into it.”

There was an interesting example of Ireland at work in 2006, when a burst pipe triggered the biggest traffic jam in Irish history: The Indo reported: “Five ministers were on hand to reveal plans for a fabulous new Dublin Metro line. On the same day, commuters witnessed the biggest traffic jam in Irish history.

Thanks to a spot of bother with a pipe, motorists were stuck in a snarl-up for up to seven hours. Lots of time to unwind.”

@ Karl Whelan

It’s undoubtedly a high risk strategy and all sorts of things can go wrong. But then sleepwalking to default on our official sovereign debt isn’t too rosy a scenario either.

We have had over 200 posts and nothing really that would help the Minister for Finance.

Isn’t it time to get the ball rolling on specifics?

Unless people like yourself in secure employment and able to command media attention, end this dancing around the issue and make radical proposals that would likely shock colleagues, we will continue with the same slow-motion scenario that exists in so many areas of Irish society.

Brendan Howlin said on Friday: “The number of posts has been reduced by 2000 in the three months to end March 2011. We are on track to achieve the end 2011 target of 302,000 public service posts.

The latest figures show that the Exchequer pay bill outturn for the first three months of the year is in line with the 2011 pay bill targets. The total Exchequer pay bill for 2011 is estimated at €15.7bn. Public service numbers have fallen by 16,400 since 2008.”

What he didn’t say was that the pensions bill has increased by 35% since 2008.

There are 2.5 workers per pensioner.

So in this big spending area, severance deals and pensions have to be set against gains from a lower payroll.

Today’s Sindo quotes the comments of Karl Whelan and John McHale in this thread, without mentioning that this is where the comments first appeared. What is it with journalists that they are so reluctant to acknowledge blogs?

@ Kevin Donoghue

Thanks for the tip. I wonder is that ethical or even legal?

Honahan to be on News At One today. Hopefully he will be questioned deeply on the truthiness of our scambling bailout:

1. Identify the impact on Government expenditure of the bailout for the next 5 years.

2. Define his projections for growth in the economy over the next 5 years.

3. Given the economic impact of the economic decisions taken, should citizens be given the opportunity to have a say on his opinions.

4. Will Honahan be producing a White Paper to educate people and help them understand the colossal decisions that he has helped make on their behalf?

5. Then on to mathematics with chart overheads on GNP/GDP, ICB promissory note support, bondholder maturity payments, and the rationale for unsustainable debt repayments….simple arithmetic

Doubt if the truthiness we’ll get today will uncover any of the scambling behind those decisions:)

Perhaps after default we may in the future have something similar to the Senate Hearings in the US and we could have Honahan in for the day, a questionnaire template with Q’s added to it from posters here and other commentators from at home and abroad. But doubt it!

@ Paul Hunt,

“(4) the need for further institutional reform in the EU (including refrom of democratic governance), “:

Just to say on this point that it rather seems to me that the EU has always been better than a democratic system – democratic system in the sense of counting hands until one has more than 50%. It has operated as a family – always bending over backwards to get and keep everyone on board, rather than just 50%. But perhaps that spoiled some children

@ Paul Quigley

Wow looks like we are being led over the cliff alright

if Damien Kiberd is correct then decisions that are being taken by our new FF/LAB goverment that seem even more reckless than the old FF/GR goverment

@ Colm Brazel

The Governor was always going to be a prisoner of circumstances but he still has choices.
As the saying goes, it’s good to talk.

@Zhou: Plaudits to you for admitting how your views, always honestly arrived at and expressed, have evolved as evidence has emerged.

It was always a debate, always an interprtation of partial evidence and incomplete models of how small open economies work. We, and others, crossed swords years ago about whether or not to nationalise, as opposed to guarantee, the banks. Perhaps we would have neded up in the same place whichever path was chosen.

But there is now, I think, abundant evidence to support the assertion that we are on a path to disaster, much bigger than anything that has befallen us so far. And, contrary to much of the discussion above, there is no ‘solution’, easy or hard, other than to accept the inevitable and now, finally, to get on with it. And see where the dice fall.

Out of the gloom we can discern a number of facts. First, we have nobody externally that thinks of our interests. Second, as you say, we don’t have anybody domestically, who sees this.

Europe is getting its banks in as good a shape as possible to prepare for our collapse. We choose to accept this path or not. Their timetable or ours: it ends at the same point. At that point, our banks will have no ECB funding and our Exchequer will have no EU/IMF borrowing facility. So, whichever tiemtable, we have to have a primary budget surplus.

@All: particulalrly K O’R and all of the other neo-Keynesians out there (I am a fully paid-up member of this club, so the following question really hurts). Is there anything to be gained by not moving to a primary surplus straight away, giving its inevitability?

@BWII,

Think Howard Beale in ‘Network’ (1976): “Let’s all stick our heads out the window and shout ‘We’re as mad as hell. And we’re not taking it anymore.'”

@ Michael Hennigan

“Greg Says:

May 7th, 2011 at 11:26 am
A “balanced” budget? Let’s start with some cuts.

No one on the State payroll gets more than €100k. No one.

No one gets a State pension until they have reached pensionable age and that pension cannot exceed €60k. No one.

Cancel ALL foreign aid.

Make child benefit taxable.

Make all foreign recipients of child benefit reapply. And make them do so every three months. Apply a withholding tax of 50% on foreign recipients of the benefit.”

@simpleton
“We, and others, crossed swords years ago about whether or not to nationalise, as opposed to guarantee, the banks.”
Liquidate! It is not too late! (As Mr. Kelly points out, it is all that is left to us).

“Is there anything to be gained by not moving to a primary surplus straight away, giving its inevitability?”
It is a really painful question with really painful outcomes either way.

1. I don’t think a primary surplus is enough. We may need an absolute surplus. Default on bank debt will help in achieving this in that interest and promissory note payments will be lower (for all that promissory note interest is paid ‘after’ the capital payments).
2. The main advantage to a longer adjustment is that it gives people time to adjust. This only works, though, if they know what they have to adjust. Neither the last nor the current government have spelled out what changes they will make to taxation or to spending (both have impacts on citizens). If a government was prepared to stand up and say Budget 2012 will do this, Budget 2013 will do this and Budget 2014 will do this, then there might be some advantage. It would be possible for people to say “okay, that will cost me x, so I need to do y to get through it”.
3. As no political party will spell this out and, I believe, the DoF is incapable of producing those figures, we are left in the position that we are utterly reliant on external funding and so powerless to resist the demands of those external funders, while at the same time you and I and most other people still don’t know what is going to happen next to our after tax income and services.

As it was nearly three years ago, so it is now – it is about survival, not success. How do we avoid a lost decade? Well, we’re already three years on the path of it. Anyone fancy another seven years?

@Tim

“Yet every point [kelly] he has made has come to pass.”

Not true I think. What happened to the mass evictions? I think Kelly has made a series of diabolical predictions some of which have materialised and others that haven’t but in true confirmation bias we remember those that have and leave aside those that haven’t.

I wonder do most of the (anonymous) cheerleaders for Kelly here have the faintest idea what immediately balancing the budget would mean? I see the teacher cheers on the abolition of VEC committees. Try a 30% pay cut and teachers being fired and he might change his tune.

Hi Sarah. A 30% paycut? Talk about lighting the Blue Touch Paper, and failing to retire! Poking at a Hornet nest?

Is MK just being deliberately provocative? Like, he is serious, but he is not sort of thing? Quirky bloke.

A think a bit of triage may be in order. ID the doable.

BpW

Views from todays Observer:

See the bottom article: “Please, Greece don’t bring back the drachma”

http://www.guardian.co.uk/business/2011/may/08/payment-protection-insurance-lloyds-hsbc-barclays-rbs

“The eurozone is only as strong as its weakest member.”

And William Keegan carrying on the impact of cutting in the UK.

http://www.guardian.co.uk/business/2011/may/08/bankers-still-in-denial-about-causes-of-financial-crisis?INTCMP=SRCH

@ Kevin Donoghue

It’s tricky, but I think blog acknowledgement is good (the article does mention social sites), as there is an element of ‘thinking out loud’ here, which may not be definitive positions. It would be a shame if contributors with a public profile felt inhibited in putting out a comment.

I’d like to point out some numbers in relation to the effect of civil service pay cuts, numbers that should be obvious to everyone but apparently aren’t.

I’m a civil servant on less than €30,000 a year. My marginal take home pay, taking PAYE, PRSI, USC, pension deductions and the so-called pension levy etc. into account, is 61 cent in the euro. So if the government were to cut my pay by €1, then assuming no multiplier effects, it would save 61c. If it cut my pay by €5,000, then it would save more than €3,050, because much of the income it would be cutting would be subject to lower USC and pension levy rates.

This illustrates two facts:

Firstly, a cut of public pay by any amount you please will definitely not reduce the deficit by the same amount, even absent multiplier effects, because cuts start at the top, and the structure of our tax system is such that it’s the top that yields the least benefits. The yield at my rate of income starts at 61% and increases after a thousand or two has been cut. The yield at PO or AP level will start somewhere around 20-30%, and even at EO level you’re only talking 40% or less. Or to put it another way, a €10bn cut might only yield a €4bn reduction in the deficit (again, not taking multiplier effects into consideration).

Secondly, it follows logically that any cuts, in order to be effective, must cut pay at all levels, but especially the bottom, because that’s where the money is. Not only are there are more people at the bottom (and more still in the middle) than at the top, but you also get a better yield from them. It’s unjust, and runs counter to what you would like to do in order to reduce adverse multiplier effects, but that’s how it is.

Incidentally, anyone who thinks that our circumstances are as favourable as they were in the 1980s needs to think again. In the 1980s we had an independent currency, which could be devalued. We had an independent central bank with an inflation-cutting mandate, which meant that the deflationary effects of fiscal cuts would be partially offset by interest rate cuts, and our inflation rate wasn’t exceptionally low, which meant that such cuts could have confidence boosting effects. None of these factors apply any more. I don’t know what data Philip Lane was using in his analysis that suggested a multiplier around 1, but if it was based on the 1980s and 1990s, then we can be sure that the figure in our current circumstances is significantly higher.

How do we fix the banks? First up, clear out the current crop and bring back the protestants.

@BWII

Apologies if you have been particularly burnt but at a mactro level what exactly have we taken?

At a macro level Ireland has experienced one of the largest depressions, outside periods of war, on record.
What we are/have gone through could probably end up being one of the 5 largest economic collapses of a developed country in the last 100 years.
The fall of communism, the American Great Depression, Saudi Arabia in the 80’s, the collapse of Argentina in the late 90’s, then it is close but in GNP terms Ireland in the noughties might comes next.

http://www.economist.com/node/12852043?story_id=12852043

It is almost that we have been so spooked by the banking crisis that we are screaming “please give us the worst”. For sure, if we adopt Morgan’s proposal it will has he admits be far from painless.

But the most painful aspect of Morgan’s proposal is that we should cut the deficit to zero immediately.
Regardless of how painful the measures needed to get to that situation will be they will have to be implemented anyway.
The only difference between MK’s suggestions and the government’s strategy is that of timing.

All the measures immediately or spread over 3/4 years.

There are arguments on both sides as to which strategy will end up being the most painful.

A short sharp shock could potentially kill the economy but may allow us to look forward to years without more austerity ahead.

Spreading the austerity over a number of years allows people time to adjust but we may become drained by year after year of austerity, remain in paralysis because we don’t know what is planned for next years and we will end up with a much larger debt pile to repay at the end which could need more austerity to remove.

Is there now an emerging consensus that, for a variety of reasons, reducing the budget deficit as soon as practicable is the best course of action?

@Christy
Not by this Dork – it will just be a even greater transfer of wealth to the core – remember fiscal debt is MONEY – credit is a private contract.

Why should the core have money to buy goods & services and we cannot ?

Did I just hear the Prof say that risk sharing is on the cards if the growth target is not met?

The Prof also said that the markets accepted the credibility Of Ire following the stress tests… Huh…..10.25% 10 yr.

@Michael Hennigan
I was not advocating either course merely pointing out that strategically we should wait for Greece to explode and then we will be in a position to assess the best course forward. The Prof’s interview on RTE did not inspire me.

Pat Rabbit didn’t know about Friday night meeting ….. Says it was a G 20 meeting with Greece invited. Give us a break Pat. Surpasses Lenny

Patrick Honohan responded on RTE radio, probably available on the website.

Have to say I quite like PH. He’s the only central banker I wouldn’t mind spending an evening in a pub with. Most are just slippery bullshitters. Patrick seems more comfortable being straight.

A tad disappointing that he resorted to spinning that there was only one banking guarantee throughout and that its sovereign, irrevocable nature meant that had it ended last year it would in itself have been a sovereign default. For readers that don’t know, the original guarantee was replaced – it expired. A decision was therefore made under his watch, under the influence of his assessment of the likely situation of the bank’s balance sheets. It would have been more impressive to have defended this reality rather than a similar one that is incorrect, but easier to defend.

Difficult also to accept that his announcement of the bailout on Morning Ireland “had no effect whatsoever on the negotiations”. This is just not credible.

With regard to “lashing out” and John McH’s remarks about vindictiveness, I would suggest there is an academic cultural aspect here. On dealing desks and trading floors where people had positions and are trying to analyse quickly and correctly, four letter words, rows and no-holds barred discussions are quite usual. It can be very constructive and ensures a full discussion. If the discussion is obviously aimed at furthering analysis, people remain friends and colleagues. PH’s decisions have been positions of way more import than those of guys on bond desks. There should be no prohibition on full and frank exchanges of views.

@ Ceteris paribus/Greg

I wasn’t suggesting that CP was advocating any particular course of action.

As for Greg, we are part of the EMU, so by 2013, the reality will be the reality.

The Irish and Greek situation cannot be wished away by the 14 countries without a bailout.

Pat Rabbitte made a pertinent point that there has been a ghoulish fascination with MK’s analysis which he agrees with; in contrast, there has been little reaction to the implications of the swift elimination of the deficit and the ongoing obligation even after a surplus, to fund maturing debt.

We want swift early action but again where is the interest in reform absent the IMF?

I have listened to Patrick Honohan and Pat Rabbitte on the radio.

Neither Honohan or Rabbitte disagreed with Morgan Kelly’s analysis of what the future holds. There is effective consensus on this. It’s not just simpleton and I!

Honohan said we still have cards to play nand had to choose the right time to play them. Honohan also defended himself saying he did not toe the ECB line in negotiations and there was not an opportunity to avoid disorderly default at the end of the guarantee. However, he agreed we are up a creek if growth does not return.

Pat Rabbitte simply could not countenance cutting the deficit to zero. He spoke about it as if having to implement such draconian cuts would be the worst thing that could happen to us. This was the typical of politicians who exercise power by spending money and who live in a 4/5 year electoral cycle whereas the consequences of the bail-out may last for 50 years. Pat Rabbitte said there was a dynamic in Europe but Pat Rabbitte did not display any understanding of that dynamic and gave no cogent analysis of how the dynamic could or would work to our favour.

@BO’H

The property sector is very important when so much debt guaranteed by the government is secured on Irish property.

JTO made some points about good economic figures.

However, ultimately the debt gets you. It is no good to be like the lighthouse cinema or certain hotels and restaurants who say they are making profits if you don’t take having to pay the rent into account.

@Grumpy
Would be great (esp if you’re a banker). You could both have a great old time and he’d land the other punters with the bill!

@ zhou_enlai

So what are your cut proposals to eliminate the defict of €18bn in say 12 months?

This is a fair question given your criticism of Rabbitte.

Remember, you have to allow for a contraction in tax revenues in response to a further tightening of the domestic sector.

@MH
On reflection, the country should aim for a decent floor that starts at ground level rather than a well measured staircase that starts in the cellar.

I would like to see the following happen:

1. The Gov should make no further arguments for the interest rate to be cut. They should tell our international counterparts to do whatever they think is in their best interest and we will do the same.

2. The opposition parties should indicate that they are willing to support the Govt if it decides to renege on guarantee/promissory notes/implement resolution/act unilaterally separate from the rest of the EU. They should not direct the Govt to do so but rather suggest that they are willing to provide national unity.

@BOH

The ECB accepted NAMA bonds because they were guaranteed. They only own it if we renege on that guarantee.

I note MK made the same point I made here previously that the IMF appears to be acting illegally and against its best judgment. It makes sense that Geithner must have backed the plan for the IMF to behave in this way.

@ Zhou,

It would also make sense, that Geithner and company are the wrong sorts of commanders to have in charge at the moment, following the shell shock that north America experienced in recent times. I would feel a lot more comfortable, if we had some new people involved at this stage, to bring some kind of fresh perspective to things. Obviously Geithner and company do not wish to see the European Union in any perceived difficulty at the moment, in case it might pose the question, after the EU who comes next? But like I said above, if you look at this from the European perspective, from the perspective of those European wide bureaucrats (of which Patrick Honohan is a fully paid up member as we speak), there was no way, in their wildest imagination, they considered the possibility of ending up where they are. We are all focussed too much in our strategy in Ireland, of Ireland, and how we ended up where we are. Much more to the point (and I believe it is a relevant point that professor Kelly brought to bear in the discussion), is Europe itself is being held together at the moment, with bits of string and Sellotape. Furthermore, the north Americans, Japanese, Australians, United Kingdom and all and sundry know this to be the case. The European Union blew all their chips in places like Ireland. That is the significance in my mind, of the US presidential visit to Ireland, and a lot less to do with small towns in Offaly. BOH.

Second attempt.

@ Michael Hennigan

“I wasn’t suggesting that CP was advocating any particular course of action.

As for Greg, we are part of the EMU, so by 2013, the reality will be the reality.”

Why 2013? Why not now?

The bad debts of the core Euro banks get loaded onto the Irish Sovereign?

Then we become an indebted vassal state to the EU.

Yup sounds like a plan alright.

Or maybe there’s a more benign outcome.

One so good that they want to keep it a secret.

Just like they kept the Luxemburg meeting secret from Noonan.

I can’t help being impatient with much of this discussion.

@Christy

“emerging consensus to cut deficit”

Emerging?

@DE

“From listening to PH and PR this morning I think it is becoming very apparent that the official policy is that we are heading towards a structured default.”

“Becoming apparent”? That has been accepted wisdom since the bailout. (e.g. that was said on the Midweek programme I presented on TV3 back in December). We’ll restructure once the pension fund is spent and we’ve flogged off state assets.

@Joseph

teachers fired? Sure, teachers have been hired and we’re still running a massive deficit. How many would have to go to balance the budget?
(And UK house repossessions are still way ahead of Ireland’s AFAIK.)

The IMF lost the row in November. That was well known. The Geithner intervention is news to me but explains a lot. Aside from this gem, Kelly’s article has little to offer.

Greetings,

@ EWI

I also apologize for my contribution to the misunderstanding regarding the 80% figure.

I noted the following articles…

Public sector salaries:
http://namawinelake.wordpress.com/2011/04/09/list-of-public-sector-salaries-shows-the-extent-of-enda-kenny%E2%80%99s-challenge-to-impose-wage-ceilings/

Multiple pensions (which is also part of the public sector payroll issue):
http://www.independent.ie/national-news/elections/latest-news/teachertds-in-line-for-double-pension-bonanza-2550100.html

No public sector pay cuts in the near future
http://www.thejournal.ie/taoiseach-vows-that-there-will-be-no-public-pay-cuts-at-all-costs-despite-growth-downgrade-129446-May2011/

So it appears that, despite the case for addressing such issues, the government is not ready to grasp the nettle.

Having said that, as Ronan (sorry EWI!) points out in a comment to the following article, the savings to be made at the top-end is around €125 million, which would agree with Michael Hennigan’s point (which I accept) – from a different perspective – about where savings could be made and how much would actually be gained.

http://www.ronanlyons.com/2011/04/26/%E2%80%9Cslash-and-burn%E2%80%9D-anything-but-the-need-for-realism-in-budget-2012/

@ Joseph Ryan
Thank you for the support! 😉

There are several options as I see it:

1) Reduce the top-echelon public sector salaries/pensions
No lay-offs – potential savings of a couple/few hundred million Euros

2) Reduce the top-echelon public sector salaries/pensions and use savings to hire more low-echelon staff (nurses, teachers, etc)
No savings – increased staff, reduce unemployment/social welfare cost and increase economic activity.

3) Reduce public sector staff
Lay-offs and wages/pension savings – increased unemployment/social welfare costs and reduced economic activity.

I’d be interested in knowing how the economists among you would judge which is best – personally, I’d favour option 2.

Kindest regards,

James

@ Greg

Various senior politicians of the Eurozone have said that the EU-IMF plan is only a few months in operation – – the Finnish finance minister Jyri Katanian who is expected to be PM is among those who rejected any negotiation of the plan ; so should the Government declare a default even though we have a current funding agreement?

If it happens earlier for Greece it will be because of input from the IMF; similarly for ireland, not through threats.

We can emote about being a vassal state, Versailles and all that crap and walk away from the IMF and EU.

It’s Ireland will be at the loss if we opt for unilateral action and we will not be able to play off the EU against the IMF.

We set up new banks with a new punt?

How stupid would it be to have no lender of last resort?

@ zhou_enlai

Awaiting your I year Shock Therapy Budget details.

@ Joseph Ryan

You may be unaware the industrial hourly wage for electricity/gas workers is double the average industrial wage.

As for my point on low pay, I didn’t dream that up; there are 3 papers available from 2004 on the issue and a CSO report.

@Greg

What you said was “Make all foreign recipients of child benefit reapply. And make them do so every three months. Apply a withholding tax of 50% on foreign recipients of the benefit.”

If that’s not what you’re proposing, then my interpretation of your position is incorrect, but I don’t see how can I be held responsible for responding to what you post instead of what you mean. Also, if you can’t see how forcing people to reapply for benefits (which, after their reapplication is successful, will then be paid to them, backdated to the time of reapplication) isn’t a totally unnecessary expense, then I don’t know what to say.

@ Michael Hennigan

“Various senior politicians of the Eurozone have said that the EU-IMF plan is only a few months in operation – – the Finnish finance minister Jyri Katanian who is expected to be PM is among those who rejected any negotiation of the plan ; so should the Government declare a default even though we have a current funding agreement?”

The government slash the deficit. All foreign aid should be cancelled. Child benefit should be taxed and a withholding tax applied to non-resident recipients. No one on the state payroll should receive more than €100k gross. No one a state pension should receive more than €60k gross.

All this and more by referendum if necessary.

“If it happens earlier for Greece it will be because of input from the IMF; similarly for ireland, not through threats.”

If what happens earlier for Greece? The sequestration of €50bn of Greek state assets?

So the core states are going to extract as much as possible from each of the troubled states on a case by case basis. Divide and conquer. Solidarity my backside.

I’ll take a guess at what Plan B is.

Extract as much as they can before 2013 and then change the rules and lock the troubled states out of funding completely unless all resources are pledged or sold.

Or maybe Plan B is that there is no Plan B and that the EU is hopelessly conflicted on what to do. An even worse vista. Because the world will not wait. The US must raise its debt ceiling yet again. China wants to diversify its reserves away from US government assets. Deficit or not we could be locked out of the market for Sovereign debt for a decade.

A vassal state.

There is only one solution to the mess that the EU has created.

Monetise the lot.

Create €1.5 trillion of new credit/debt and put the banking fire out. Nationalise and breakup the banks and give the citizens shares. Then let the market sort out the value of a clean banking system.

In the absence of a radical solution to the bankruptcy of core euro banks Ireland has no choice but to take radical measures on its own.

@sarah
With respect, what was said last December could only have been mere speculation. Since then we have been rated junk, growth forecasts more than halved and today a Government minister states we must reschedule ( per IT) and to cap it all the Governor of the Central Bank admits that if we do not meet growth forecasts then the game is up. So why impatient?

@ Kevin Walsh

Apologies. Wrong choice of word.

I meant non-resident.

Foreign is a little loose. I suppose I meant it in the sense of “someone not here”.

Bravo MK – and you are right not to dilute the force of your arguments by constant reiteration. Either the assertions are correct or not. What was Geithner’s role for example? I was also expecting BLTD to be interviewd but so far nothing from that quarter. Patrick Honohan has been equivocal in his statements about whether he supported the original guarantee. I think we can accept at this stage that Brian Lenihan was telling the truth on that score also.
As to the legality of reneging on the guarantee – Honahan said he sough legal advice on that. The only legal advice we should accept should be the result of a court decision and so far the constitutionality of it has not been tested. It beggars belief that it can be constitutional to take money from my pocket to pay for bankers debt.

@Edward v2.0
“BWII and BEB
Why are you so attached to the Irish banking system?”

I think you may find they are employed of the financial sector and Mandy-Rice Davies comment “he would say that wouldn’t he!” can be applied.

@Chris Dornan
“Some of the above comments about how well the economy is doing are merely observing how well the band is playing once the ship has been holed”

Excellent metaphorical response to Jto’s (in particular) comments. Care to expand it to include the taxpayers baling out below decks while the ECB etc. is busy making the hole bigger.

@MH

You may be unaware the industrial hourly wage for electricity/gas workers is double the average industrial wage.

I am aware of that. And fully agree with you that such Elec/Gas/ workers are grossly overpaid. That is why I would collapse the tent as per James Burke suggestion-and I presume Morgan Kelly.
I also have a very near relative who works permanent/ part time (25hrs) per week in a third level institution. Gross approx €300pw. No chance of increased hours.
Yet the people at and around the top of such organizations are paid mega salaries, twice what is paid in Europe.

I will try to look at the CSO report but as stated I don’t buy into the an evaluation based on percentage differentials.

A Poolbeg worker earning €150,000 pa is an insult and a deliberate two fingers to all people paying electricity bills.

Despite my conditional support for the Kelly proposal, if I were a European, I would not concede one red cent until all higher public sector salaries were dramatically reduced, starting with the Judiciary.

@Joseph
I think people are missing something in the economic / debt circle – sure 150,000 is too much for a industrial worker but what happens when you cut his wages ?
He spends less and saves less.
The primary problem as I see it is that Irish peoples assets are chiefly in property and bank deposits – these are not financing the debt.
We have assets that can finance the debt – if we divorce deposits from bank assets.
I continue to think that half of peoples liquid assets should be in Irish Goverment debt and the other half in Gold – so that in event of another double cross from the ECB we will have real money to stick up their fundament.
But thats just my humble opinion

Does anyone know the FT article to which CBI governor, Patrick Honohan, was referring to today on RTE This Week, the article to which he was alerted when he arrived back in his hotel presumably on the 17th November, 2010.

He concluded the FT article required him to intervene on his own account to ensure the stability of the Irish banks. There’s an implication that there might have been a catastrophic bank run if he had not rang in to Morning Ireland on 18th November, 2010 to state that he expected the government to seek a bailout in the tens of billions.

Was this the article that caused all the trouble?

http://www.ft.com/cms/s/aabdc6d6-f285-11df-a2f3-00144feab49a,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Faabdc6d6-f285-11df-a2f3-00144feab49a.html&_i_referer=

Jagdip, I believe it was indeed that editorial which in turn extrapolated scenarios from this analysis

http://www.ft.com/cms/s/0/19cc74a0-f277-11df-a2f3-00144feab49a.html#axzz1LmHhSKQw

@Frank,

Thanks. There seems to be a conflict between Morgan Kelly’s assertion that Patrick Honohan cut Minister Lenihan off at the ankles and on the other hand Patrick Honohan’s claim that he was merely seeking to stabilise the Irish banking system.

As far as I can tell, the FT starts publishing articles online from about 11pm, articles that will appear in the following day’s newspapers. I don’t know at what time, Patrick Honohan read the article or when he concluded he needed to intervene. But say, at the worst case it was the witching hour. Given the gravity of the situation, could he not have put a call into Minister Lenihan at 3am to say that he felt the situation was so serious that an announcement was required.

This is what Morgan Kelly wrote

“At this stage, with Lenihan looking set to exploit his strong negotiating position to seek a bailout of the banks only, Honohan intervened. As well as being Ireland’s chief economic adviser, he also plays for the opposing team as a member of the council of the European Central Bank, whose decisions he is bound to carry out. In Frankfurt for the monthly meeting of the ECB on November 18th, Honohan announced on RTÉ Radio 1’s Morning Ireland that Ireland would need a bailout of “tens of billions”.

Rarely has a finance minister been so deftly sliced off at the ankles by his central bank governor. And so the Honohan Doctrine that bank losses could and should be repaid by Irish taxpayers ran its predictable course with the financial collapse and international bailout of the Irish State.”

Perhaps this has all been squared previously but on the face of it, the intervention without apparent consultation with, or notification to, Minister Lenihan seems curious.

@sarah carey

I suppose there is no consensus – pat rabitte put an end to that today – looks as if the government would need to fall before we could accelerate the closing of the deficit

@ Incognito

“The more I read this blog, the more I am wondering whether I should repatriate the money I have in a mutual fund located in Ireland (Vanguard not to name it – invested in European equities).”

Located?

I presume you mean the IFSC.

Check out who the responsible Regulator is.

“Sovereign defaults can have unpredictable consequences, and I do not want to discover one day that my savings have been stolen by the Irish.”

What us “steal” your money?

Don’t worry the Irish Government has a lot more stealing to do from its own people before they come for yours.

@Greg

“What us “steal” your money? Don’t worry the Irish Government has a lot more stealing to do from its own people before they come for yours.”

If so many people support the idea of someone like Morgan Kelly to basically con the ECB and the rest of the EU, why could they not go a few steps further and con a simple European saver like me?

@ Jagdip Singh

“Perhaps this has all been squared previously but on the face of it, the intervention without apparent consultation with, or notification to, Minister Lenihan seems curious.”

Rather the point is it not.

Don’t tell me Lenihan was “out of range” again.

Honohan stabbed him in the back.

His performance today on RTE was that of a school boy having been caught out snitching of the smokers behind the bike shed.

How is it possible for the Governor of the Irish Central Bank not to come to an agreed statement with the Minister of Finance on a matter of such importance?

They may have disagreed. But a joint statement was required.

It’s not as if he was door stepped.

He was the one who phoned RTE.

His excuse that he feared a run is at best flimsy (the run was already well underway). I think his excuse is just plain old baloney. Made up on the spot. That’s why all the nervous laughter.

But let’s be absolutely clear here.

As I have said before the Governor of the Central Bank of Ireland does not work for the Irish people.

He works for the ECB.

What is Patrick Honohan’s current relationship with Michael Noonan?

Is he being economic with the truth about 2013?

@ James Burke

There is the rub! If everybody can dine a la carte at the EU menu, what is the point of the EU?

P.S. The UK came gave its assistance to Ireland because of the exposure of its banks, notably RBS, to the Irish property collapse.

@ Ceteris paribus

“Re stealing from our own, I see that the pension industry is set to legally challenge the proposed 450 m per year rip off.”

So they should.

I was ridiculed on this blog, about a year ago, when I suggested that they would come after private pensions.

0.5% is only the start.

Here’s my logic.

The government (I refuse to use a capital “G” anymore for this shower of Muppets) is going to “levy” 0.5% for four years on fund values. They claim they are going to use this for “job creation” buy setting up a fund to advance “credit” to SMEs.

Are they going to give the money back after they have made successful credit decisions?

No. They’re going to waste the money.

Why can they not negotiate with the pensions industry and allow them set up their own fund which will lend on the basis of risk and return.

It is straightforward legalised theft.

“With the AIB bondholder challenge already under way it looks like the Gov will be challenged all the way. Wonder how their Wigships will interpret the exigencies of the common good?”

The Four Goldmines is looking Goldier every day.

@ Eureka

“The UK, if it doesn’t back the Greek bailout is signaling a real lack of confidence in the project. It also reflects a market intention to force a default now as opposed to continuing with the charade.”

As I see it the immediate consequence of pushing Greece over the edge, once the common or garden Greek understands what’s happening, is a retail bank run.

They will want to get their hands on Euro notes rather than digits in cyberspace.

The wholesale bank run(s) have already happened and the EU/ECB are trying to contain the damage.

However, once the “common man” looses faith in his government and Central Bank (the protectors of the money system) the money system collapses.

I’ve said it before the only way out of this is for the EU/ECB to recognise the catastrophic engineering failure that is the Euro and print €1.5Tn to fill the holes.

At this stage anything else is for the insane asylum.

To pay core Euro banks for their bad lending by insisting on economy crippling “austerity” is something only the Marquis de Sade could truly appreciate.

I hope there’s a plan B because it’s a mess beyond Ireland. the growth thesis is very optimistic. Where will it come from ? Who is going to buy all the exports when every country’s plan to escape the debt legacy is growth by exports ? Throw in commodity volatility and the dependence of the financial markets on QE2. It’s fascinating to watch but it’s a bordel de merde.

@DOCM
Re: the UK
I’d say it’s more likely they are adopting the German finance ministry view – the bailouts are lies, kicking heavy cans down roads to nowhere. Better to do something about the problem of excessive debt than burning more money in Hyde Park and hoping that some miracle will occur.

@ The Dork of Cork

“I reckon that would be too destabilizing to Euro exchange rates with respect to the dollar and other currencies.”

Well it was a response to Incognito.

And to be clear it was not “investment advice”. It was simply my take on what is going on.

The “money” “system” is broken, in my opinion and, in the opinion of others.

(No. I don’t intend polluting this blog with links.)

I think the reason for this is not Sovereign insolvents & deficits, insolvent banks failing to attract “liquidity”. It is the Derivative Death Star. If that thing is allowed to fire up it will take out half the planet.

http://static.howstuffworks.com/gif/death-star-1.jpg

That’s why Geithner and the US refuse to allow any default. Their banks are absolutely and completely dependent on nobody calling in a CDS bet.

Why? Call one call all. The system implodes.

“My bet is the BIS acting as dealer will mount a cash / physical auction only for Gold on the world market.”

And what in the name of God was Honohan doing in Basle today?

I hope it was a wedding.

“Roosevelt beat the depression by devaluing the dollar against Gold and this depression will be solved using a similar mechanism.”

In short he devalued the currency and forced people to spend. We are not in the same place now.

Globalisation has changed everything.

“Once Gold is 10,000 Euros a ounce there should be a lot more Euro money available to balance Euro credit.”

The Euro will be dead before Gold hits €10,000 an ounce.

If, by chance, it gets there we will already have experienced hyperinflation.

And you and I may be dead because someone wanted to steal the spinach you or I have lovingly grown.

They need to print €1.5Tn now and deal with inflation later.

Gold can only go to €10,000 per ounce in a hyperinflationary depression.

@ James Burke

That was not really my point. The UK is only marginally involved because it is outside the euro (“we always told those Continentals that it would never work, you know”) but, if it believes in the overall European project, the least one would expect is that it would not make life more difficult for those that are in the euro area.

Mind you, the latter are making a good job of messing things up on their own. I have just seen a Reuters report that the Netherlands was not invited to the not so secret meeting. This is hardly accidental.

Wolfgang Munchau has a good article in tomorrow’s FT which concludes on the point I have been banging on about for weeks now.

http://www.ft.com/cms/s/0/3eb6bbc8-796c-11e0-86bd-00144feabdc0.html#axzz1LmpyMLkl

“You cannot run a monetary union with the likes of Mr Sócrates, or with finance ministers who spread rumours about a break-up. Europe’s political elites are afraid to tell a truth that economic historians have known forever: that a monetary union without a political union is simply not viable. This is not a debt crisis. This is a political crisis. The eurozone will soon face the choice between an unimaginable step forward to political union or an equally unimaginable step back. We know Mr Schäuble has contemplated, and rejected, the latter. We also know that he prefers the former. It is time to say so”.

There is, in fact, no need for – or, indeed, possibility of – a political union overnight, just an acceptance by Germany that there is no cost-free solution and that some mutualisation of credit risk across the euro area is absolutely essential to convince the markets. They should simply concede -no matter how domestically politically difficult it is – that the ESM will have the power to intervene in bond markets and, pending it coming into force, the EFSF will be amended to enable it to do so, allowing the ECB to withdraw from its “unconventional” meaures.

However, as the German finance minister has blown hot and cold on the crisis since the start, I would not hold my breath

@James Burke

Cutting numbers in the public sector must be the priority.

@Greg
I disagree – there will be no hyperinflation in Europe.

Ask yourself why oil is trading north of $100 dollars a barrel in a depression ?
Its because Dollars need a yield if they are to remain something of worth.

If the worlds dollar reserves flow into a asset that does not do anything but sit there it will kill the global inflation that we have been living with for the last 60 years.
All commodities will crash to the floor – only Gold will survive.

Greetings,

@ DOCM
I understand your point – just commenting on the other reasons: the UK’s sunk (more than) enough money into Ireland without getting involved in similar escapades elsewhere.

Personally, at the time, I thought that the political wish to accomplish a single currency was the stupidest reason for doing so – they should have gone for the “soft” Euro option. Now they’re stuck with a “hard” Euro without the political unity required. Something’s bound to give!

@ The Alchemist
Possibly – but it were best if they started at the top to get rid of the “executives” and try their best to keep the bottom echelon: the nurses. teachers, etc, who are actually needed to do the real work.

Kindest regards,

James

@ The Dork of Cork

“Once Gold is 10,000 Euros a ounce there should be a lot more Euro money available to balance Euro credit.”

“I disagree – there will be no hyperinflation in Europe.”

I’m afraid I cannot reconcile those two statements.

Perhaps I misinterpret.

However, let me see if I understand.

Gold can go to €10,000 per ounce without hyperinflation?

And I did say a hyperinflationary depression.

Which is a place where economic activity goes to survival level and the value of the “currency” “chosen” by the previous political elite is seen as useless.

So the complete loss of faith in the currency (and that is all currency has backing it) results in the people exchanging that currency for Gold.

So Gold goes to €10,000 an ounce.

It is, I think, logically impossible for food and everything else not to follow Gold.

Why would one, if one believed that next month Gold (or Silver for that matter) would increase by 25% hold any currency?

It would be stupid.

You buy Gold (or Silver or Whiskey or Cigarettes or anything you can get your hands on) and barter later because the “currency” has failed.

That is the only way hyperinflation can happen.

It is impossible for Gold to be “worth” €10,000 per ounce without a hyperinflationary collapse.

Or, if it is worth €10,000 per ounce then a loaf of bread will cost (or is “worth”) €10.

That’s game over.

They must monetise the bank debt. This will not create inflation. The inflation has already happened and is unwinding. But it was asset price inflation and it was Euro regional. The core Euro banks knew what they were doing.

They were chasing yield.

They must monetise the bank debt.

If they don’t the Euro dies.

And certain Germans know it. But the folk memory is too strong.

@Greg et al

(Today’s RTE interview with Honohan can be found here).

His excuse that he feared a run is at best flimsy (the run was already well underway). I think his excuse is just plain old baloney. Made up on the spot. That’s why all the nervous laughter.

Exactly. The idea that there was an imminent retail bank run as a result of an article published in the FT is simply not credible. A few points:

(i) The ‘corporate’ bank run had already occurred and had been widely discussed in the FT and elsewhere for a week or more before the Nov 18 interview. This discussion was based on information published by BoI, ILP and the ICB (e.g. the figure of €130bn ECB support at end of Oct and the start of significant ICB liquidity provisions). As usual AIB were late to the party and had not provided any updates, but the facts of the large loss of deposits were already well known, as was the fact that these were mainly corporate deposits. The run had occurred primarily in Aug/Sep, and the banks claimed that things had stabilized since early October. There was no specific new news or trigger on Nov 17 related to this.

(ii) The idea that any significant amount retail depositors would wake up Thursday, read their FT over their cornflakes, and then decide to go to straight to their bank to withdraw their money is just bizarre and not credible.

(iii) It is clear from his interview that he regarded himself as playing for Team Ireland, not Team ECB, on the basis that the bailout discussions were outside the scope of the competencies of the ECB as defined by Treaty, and thus outside the scope where he must, under law, act under instruction of the Governing Council. (This raises lots of other points too, but that’s for another day). He also claims that his interview had no impact on the discussions. Yet why do the interview at all, if not to have an impact on the course of events? Cowen was furious at the intervention. How could such an obvious rift in Team Ireland not have weakened the negotiating position? In reality his views matched those of the ECB in all important aspects (e.g. who pays), if not in some second order aspects (e.g. loan vs insurance). His intervention was done to help create an environment where his views would prevail.

(iv) Honohan claims today on the bailout “I don’t see it as in itself something that damaged or caused pain to taxpayers”. Huh? A commitment to not to hit unguaranteed senior debt and to recap the banks to the tune of €35bn, doesn’t cause any pain?

(v) He also seems to claim the fact that he consistently underestimated the extent of the problem (e.g. bailout will be max of 20% GDP; Anglo was the problem – AIB is fine etc) didn’t really matter, and had no impact. The fact that the markets could see that there was a huge problem alongside an ineffective and slow-motion response were the trigger for the corporate bank run in the first place, that ultimately led to the bailout. Being consistently wrong does matter.

(vi) He wasn’t asked the obvious question of whether the IMF wanted to haircut the unguaranteed seniors, and what his position was on this. Maybe next time.

The combination of a number of statements and positions that are simply not credible, along with a history of poor judgement, does not inspire any confidence for the future. In many ways at this point it doesn’t even matter, since all major decisions will be made outside the country anyway.

Greg,

“They need to print €1.5Tn now and deal with inflation later.”:

It seems to me that if the EFSF or the ECB took the liabilities of all the distressed banks onto its account, thereby cleaning their slates, this would not be inflationary. The (lost- -mal-invested) money which it would be taking ownership of has already been borrowed and invested- -lost and so has done its inflation.

It would however prevent- -preclude firesales and bargains for the prudent, which in a sense (or sphere of the market place) would have been somewhat deflationary.

There would only be inflation if the institution went a step further and recapitalised the banks. My theory of economics would not necessarily move me to do so. This then would mean that those banks that were redeemed would be effectively in poorer circumstances but those who had been prudent and pensioners and those on fixed income would escape being robbed.

@ Ceteris,
Maybe this post will be good for bonds. 🙂

@Bryan G
The Governor seems to be losing the pr battle. The interview was a bad idea.

Peter Kinane writes,

It is a theory that is almost too unpleasant to express. Yet, a collision between Anglo-Saxon monetary theory and German or Austrian monetary culture would seem to be increasingly inescapable – and I’ve already kinda said that Europe needs to stand on its own feet more on monetary theory, as the current model is rather crazy- -self-destructive.

I understand where you are coming from, and I appreciate the fact, that it is different undercurrent to that of the Euro zone’s own internal frictions. It is another sub-plot in all of the current saga. The more I think about it though from the north American perspective, I think that Ireland is like the Korean peninsula for the 21st century. And just like that unfortunate campaign of the 1950s, it is being fought with the same junk weaponry supplies and high command from an out of date era. BOH.

@ Peter Kinane

If you have a subscription to the FT, the full transcript of an interview with the head of the Finnish central bank, Erkki Liikanen, also in tomorrow’s issue, is worth reading as he deals, in a typically Finnish laconic fashion (they do’nt do blather) with the issue of when the ECB may start reversing out of the situation that inept and dithering politicians, notably Merkel, have put it.

There is no problem with the role of the euro as a reserve currency if for no other reason that third countries do not want to be dependent on just one. The problems are all internal due to the failure of politicians to recognise that it is the governments of the Eurozone that are responsible for fiscal issues, including excessively indebted member countries, not the ECB, a distinction that has been almost totally lost in the debate in Ireland.

… As well as taking over the liabilities, the institution would also take over the securities (on which the loans were made).

@Michael Hennigan

“So what are your cut proposals to eliminate the defict of €18bn in say 12 months?

Remember, you have to allow for a contraction in tax revenues in response to a further tightening of the domestic sector.”

I have a problem with your question.

First of all it misses the point which is that it is arguable that cutting the deificit to zero and opting not to drawdown any further funds from the Troika Loan Facility (it’s not a “bailout”) may be a lot less damaging than persisting in drawing down money from the Troika Loan Facility. The question of where the cuts come from become secondary if you think the pain and suffering caused to the vulnerable and the needy and to businesses will ultimately be less if we bite the bullet.

Secondly, I never agreed with FF demanding that FG and Labour provide fully detailed proposals without the benefit of the apparatus of Government. It is a stupid schoolyard game played around election time where all the parties create fictional plans based on estimates created by the ESRI which are unlikely to be fully correct. I do not want to play this game with you as it is beside the point as to whether such action will ultimately preserve the economic future of our children and the social stability of our state.

Suffice to say that if it is necessary to take this action to safe-guard our economic and social future (apart from our national independence and future ability to determine how our country progresses) then the cuts and tax increases would hurt everybody – the sick, the elderly, the unemployed, the employed, the self employed, people in receipt of public pensions, people in receipt of private pensions, low earners, and high earners. It would be extremely grim. However, that does not mean it is not the best outcome.

Before you say only people with secure state jobs could take such a line or something like that, I will put to you my own view that it is the gravy-trainers, the rent seekers, the comfortable upper middle classes and the comfortable bureaucrats who are least willing to take real pain for the sake of the coming generation. I think the people who agree with you (i.e., that such cuts are so unthinkable that we actually can stop right there and not think about it any more) are those people in the secure jobs that you think are the ones preaching revolution.

I consider life-time professional politicians who have been county councillors and TDs for a long time and who consequently have spent all their time interacting with civil servants and state agencies for most of their adult lives to be the absolute epitome of this class of person. I have plenty of respect for politicians but they are influenced by their own fish bowl.

@MH

BTW, I previously did say that we must at least appear to be readying ourselves to balance the budget if we are going to negotiate for real with the rest of europe. The fact of the matter is that they, reasonably enough, do not care how dire our future will be as a result of this bailout if it saves the core. It is only where we say that we must act responsibly and in our best interests and that it is for them to bear the cost of their concerns that they will actually do a deal that will work for us.

@ Bryan G
“(iii) It is clear from his interview that he regarded himself as playing for Team Ireland, not Team ECB,”

Although having heard the interview once and live I think I agree that Honohan thought he was doing his best “for Ireland”. Difficulty is he is a Central Banker. He was before he took the job as Governor.

It’s a mindset. Central Bankers and Neo-Keynesians believe that they can control the “ebbs and flows” of human behaviour by manipulating the availability of credit (money).

They are, although my own opinion is that they have perverted the notion of cyclical smoothing, incapable of accepting that they can “get it wrong”. Greenspan and Bernanke get ten out of ten for arrogance on that score.

Honohan is now not far behind.

I think, and I think you agree, that what he did was outside the Pale.

Now, I wouldn’t trust Lenihan with my own spit. But I would dearly love to know if Lenihan is the one briefing Kelly.

He has after all been doing a lot of public revisionism lately.

Having said that. Honohan did stab him in the back even if he thought he was doing it for Ireland.

What strikes me is that its now clear we will default, on whom we will default, and all thats in debate is when we will default. Or am I wrong?

@ Dork of Cork

Pay cuts for public servants will mean having to go to the local friendly bank manager and saying that they can’t afford those repayments anymore. Are they really going to repossess all those houses? This is the only way out. If this does not happen, then commercial activity will never increase.

@Issac
Not a very effecient way to work through this misallocation of resourses if you ask me .Public servants may or may not be overpaid – I really have no idea, but looking at total aggregate money somebody better create & spend the stuff.
Horizontal credit money is dead – vertical fiscal money can pay the debts now.
Only money can clear the stock of Goods and assets unless you want to start using the more forceful way of obtaining goods – the gun, which is not very elegant.

@ Eoin Bond

“Perhaps you could counter the argument with something a bit more substantial about why you think that the destruction of the Irish banking system would NOT lead to economic chaos?n You could make a good start by looking at trade finance, overdrafts, credit cards, ATM’s, cash management, cheque clearance, electronic payments etc etc etc…Term loans can be replaced relatively easily, the rest of the infrastructure cannot…”

The banks are like any other private companies, if they become insolvent an administrator will be appointed to asses the situation and run the business while they figure out what’s what. The administrator’s first and only driver is to extract the highest amount of value for creditors – maintaining the value in the branch network and core business franchise would be a top priority in this respect so the trade finance, overdrafts, credit cards, ATMs etc would continue to work as normal. These franchises could easily be sold at a knock-down price to both foreign banks and some of the many private equity firms looking to get involved in Ireland (Chris Flowers for one). All the tricky stuff will be left for the creditors to get what they can out of. Even during the Lehman bankruptcy the healthy franchises were quickly sold off to willing bidders.

To the extent that there are existing legal impediments to this process, the government can change whatever laws it likes. I don’t know whether the core franchises could fund themselves between an insolvency event and their sale to better capitalised buyers – but shouldn’t somebody ask potential parties? Is it impossible at any short-term price?

Even if the ECB wanted to be vindictive, they just another creditor of the banks and as such would be subject to the will of the administrators.

I’m not saying that this wouldn’t cause huge disruptions to the system, but every path we can choose today leads to an unpalatable ending. The Irish banking system was shut down due to strikes in the 1960s and 1970s and I don’t remember us all living in caves during the 1980s. The Irish people are remarkably adaptable and you’re doing them a disservice by operating under the blanket assumption that there’s simply no way we could cope with stress of bank insolvencies.

No Greg , the dollar / Fed needs higher commodity prices so that the speculators / banks can earn their way out of this.
The Dollar & America are different – America needs cheaper gas but they have the petrodollar as their currency – not a match made in heaven.
This has happened before – New York and London are sucking in Arabian and other oil money so that they can live the life they have grown accustomed to – but in the process they are destroying lives all over the planet.

Gold is not a commodity – if it was the CBs would not express it on their balance sheet

Philip says,

What strikes me is that its now clear we will default, on whom we will default, and all thats in debate is when we will default. Or am I wrong?

I guess, that is why I find the, Ireland as the Korean peninsula, analogy works. Everyone who matters in terms of global mechanics, knows what is potentially coming down the tracks. They know how to improvise delaying tactics in the meantime, until they decide when it happens, how it happens and who becomes directly involved or not. Ireland is like a chess piece in a larger board game. Perhaps the commanders in the smoke filled rooms, are wondering what kind of rules will apply to this new kind of game of economic armageddon. My hunch though, is that we it happens, it will happen so fast and be over, before any of us have a chance to make our heads stop spinning. BOH.

It is the cite tag Greg:

<cite> Irish Daily Mail </cite> == Irish Daily Mail

New to me.

@Greg

It’s just HTML tags. The blue is a hyperlink created with the <a> tag. (Beware of inserting more than one hyperlink and seeing your comment trapped for hours in moderation.) The newspaper names appear in bold because they’ve been marked with the <cite> tag: they should of course appear as italic, but the stylesheet produced by this blog software inexplicably styles them as bold. Some other HTML tags work too.

@Greg
No worries Greg – people get very confused when you mix MMT thinking with Gold, but that is how the hybrid Euro is structured – its a crazy system.

The funniest reactions are when you mention that your taxes do not fund the state – people are almost guaranteed to go ballistic.

Rumours will proliferate in the coming months. I would need something concrete to lend credence to the rumours. If our gov’t is seriously contemplating bailing out of the Euro Zone, EU or sovereign debt obligations it has to do some house keeping. First balance the budget, second place the order for the new currency. The lead time for currency will be 60 to 90 days, there will be leaks. The Gardai and the armed forces will have to be beefed up, particularly in the area of crowd control. Some gov’t buildings will be hostile crowd proofed, sand bags, barbed wire and so on. When it happens it will be sudden but not unexpected. As I see it the gov’t is quite comfortable with the current ECB/IMF arrangement. There is a lot of carping about interest rates and the unfairness of it all but that is the usual gov’t displace the blame tactics.
Comparisons to Argentina and Germany are not valid, the Argentinians are nationalistic, hard bitten people who are accustomed to governments failing and currencies collapsing. Germany’s travails are caught up in wars and the aftermath of wars. In both countries there would have been a fajr share of schadenfreude at the thought of stiffing the foreigners.

In Ireland we did the dirty deeds in leather upholstered board rooms and in the dark areas of well furnished pubs. There is no obvious enemy to blame for our problems. Unless we blame the ECB for showering us with cash from 2007 up to the present day. All of it at well below market rates. It has not been necessary for this gov’t or the previous gov’t to balance the budget largely thanks to the largesse of the ECB. Expect dithering, fumbling and bumbling for the next few months. The day of reckoning will occur, at the moment I am not willing to face up to it.

@ Bryan G

“(iv) Honohan claims today on the bailout “I don’t see it as in itself something that damaged or caused pain to taxpayers”. Huh? A commitment to not to hit unguaranteed senior debt and to recap the banks to the tune of €35bn, doesn’t cause any pain?”

Well Duh?

Just another scumbag taking €500,000 a year.

@hoganmahew

You chaps seem to have selective memories of the febrile atmosphere that week…..If talk-to-Joe had put the dots together on the back of some finance guy being on toady-PK, there would have been queues outside the banks

It wasn’t the first newspaper article to question the strategy of saving the banks at all costs, and I see no particular reason why that one, on that day, was so special or spelt imminent doom. The option for “Patrick” to speak to the nation at short notice was always there if need be, if revealing that a bailout was in the works was all that was needed for public reassurance, which seemed to be his thinking.

Honohan can’t have it both ways: I had always assumed that his position and actions were to ensure that the views of the Governing Council prevailed, which is his legal duty under the Treaties for matters within the competence of the ECB. However today he explicitly rejected that scenario, saying that the bailout was outside this scope. This would imply that he was negotiating on behalf of the “Irish side”. However it just shows the absolute disarray of the negotiating team that a unilateral midnight decision that undercut Lenihan’s position in that way could happen as it did.

MK’s article said “the IMF were scathing of the Irish performance”. It isn’t hard to see why.

BTW my guess is that the source is a US-based IMF staffer. The WSJ did a profile on MK a few weeks back and he’s likely to be in contact with reporters there. Why the revelations now? It could be that the IMF know there is a huge battle brewing on restructuring Greek debt with the ECB on one side and the German chancellery on the other and the IMF are with the chancellery. Or it could be that some reporter just asked him or her what went on during the Irish bailout negotiations and they got some direct answers.

2011 2012 2013 take your pick when the defualt is trigered at which time Europe may be ready at their terms then the chance that Ireland may be evicted from the Euro at that time ?

also the FDI companies here in Ireland seem to have many ways in calculating the Coperation Tax many right offs to reduce the CT bill how about closing a lot these loop holes

How are you doing the blue and changing font?

˙sʎɐp ǝsǝɥʇ op uɐɔ noʎ ʇɐɥʍ buızɐɯɐ s,ʇı

@Bryan G
I agree with you that it was probably from the IMF. Sour grapes are an element of their response – imagine being out-bureaucracied.

I heard John McHale this morning on Moaning Ireland. He made a good case for the risks of an immediate cut in the deficit and an immediate end of support to the banks. Unfortunately, the alternative is to expect a change in the bailout regime.

I think this is a riskier strategy. We are betting on a unanimous political consensus being extant at the time that will be indulgent (or at least not be anti) Ireland’s prospects and willing to pony up the shortfall that a failure to return to funding markets will result in.

This is not only by no means certain, it is looking quite unlikely. We should watch Greece very closely to see what extra conditions are placed on it.

@hogan,

I can see the risks you highlight, but for some time I’ve being trying to make th case that the EU built the fire-break between the smaller peripherals and the broader core for utilitarian and pragmatic reasons. It is trying to shore up political support in the broader core (‘the least pain for the greatest number’) to engineer the concessions that will be required to bring the peripherals back in. And it is a long way from bring the malign forces of financial capitalism under any sort of check or restraint, so it has to make haste slowly. I know all this, like Waterloo, could be a damn close run thing, but that’s my sense of how the game is evolving.

And I know it doesn’t butter any parsnips in Ireland.

If we break free from the bank reparations deal or if greece defaults or some other scenario leads to the break up of the Euro then do the following apply?

1.The Maastricht treaty ceases to exist and as each subsequent EU treaty is layered upon and dependent on the previous treaties then they too fold.

2. This would mean the end of the Nice and Lisbon treaties .
Freedom to travel and work which applied to the Eastern Bloc countries citizens would cease and all liabilities to their citizens such as social welfare payments, childrens allowance etc would also end.

@ Eoin Bond

“Absent those liquidity and solvency supports (ie the banking guarantee we are wishing we could now undo), a bank is toast before the end of business on Day 1, ie liquidation rather than administration. This is more or less the main reason we are where we are right now. We do not have a version of the FDIC here in Ireland, or even Europe for the most part.”

As I stated in the comment: “I don’t know whether the core franchises could fund themselves between an insolvency event and their sale to better capitalised buyers – but shouldn’t somebody ask potential parties? Is it impossible at any short-term price?”. As I said, this is clearly a problem – here’s a solution off the cuff – freeze deposits for a week, or two weeks – that might give the administrator time to separate the branch network/deposits from the more toxic stuff. A week or two of closed banks would be a blow to the Irish economy but hardly a mortal wound. I’m neither an insolvency practitioner nor a banking regulator so maybe this doesn’t work, but I thinks it’s likely that if we actually start looking for a solution to this problems, one might present itself (to be clear, I’m advocating doing the looking now, not after the fact).

On the ECB as subject to the will of the administrators – “do you honestly believe that? Seriously?”. Yes. The worst the ECB can do to us is withdraw their liquidity, if we push the banks into insolvency this is a moot point. The banks other creditors are protected by law. What is it precisely you expect the ECB to do? Are they going to hire mercenaries and take the Irish branch network by force? Does the ECB have a standing army I’m not aware of?

I am well-aware of the ongoing court cases relating to Lehmans and the unfortunate funds that use them as prime broker (I know several of the unfortunates myself) but your point is tangential. As I alluded to in the post (“All the tricky stuff will be left for the creditors to get what they can out of. Even during the Lehman bankruptcy the healthy franchises were quickly sold off to willing bidders.”), I’d fully expect court cases to go on for years, but that has little or nothing to do with the operational side of the business, which would have been sold/carved off immediately.

“The government can change whatever laws it likes” – Eh, no it can’t. Why do people keep spouting this factual error? The constitution exist for this very reason.” Sorry, I should have said: The government can change whatever laws it likes within the bounds of the constitution. I’ve just had a quick look at the constitution and there doesn’t seem to be much in there about banking regulation, so my point remains the same.

We could go backwards and forwards on this all day with you trying to present problems and me trying to come up with solutions, but my position remains I do not buy the assumption that we are held entirely hostage by the banking system. To my mind, this belief system is a continuation of the Irish political disease which has gotten us into this mess… if something sounds really difficult, those responsible for decision-making just say it can’t be done and any questioning is immediately dismissed. We always have a choice. If there is a growing consensus that Ireland’s debt burden is unsustainable, then I for one would like to hear analysis that centers around: (i) stopping the hole digging; and (ii) finding actual solutions to the problems that don’t involve some external deus ex machina.

@BWII
I think you’re an eejit. In fact, I know it now, if you think that is a line that only D_E has been considering.

@ hogan

Withering repartee

@Edward V2.0
““The government can change whatever laws it likes” – Eh, no it can’t. Why do people keep spouting this factual error? The constitution exist for this very reason.” Sorry, I should have said: The government can change whatever laws it likes within the bounds of the constitution.

You were right the first time. The law implementing the guarantee was never tested for it’s constitutionality through the courts. The constitution has an article on private property which – prima facie – seems to be contravened by the guarantee.

@AMcGrath
“the overpayment is mostly concentrated at the higher (his own) level and there is where the heaviest cuts must be made”.

Agree absolutely. The budget problem could be solved tomorrow by setting a max salary of about €100k for the public sector and taxing any incomes above this amount in the private sector at a marginal rate of say 80%. This might be acceptable to some/enough/most if it was justified as a temporary measure till the deficit was reduced. It would need to be accompanied by measures to stop the unpatriotic pursuing loopholes, shifting residencies etc.

@hogan,

I agree we are resting on a series of ‘ifs’, but the consensus here seems to be that the current ‘support package’ will lead to inevitable disaster and default. It seems to be encouraging paralysis in the sense that, regardless of anything we might do to comply with the conditions attaching to this package, we’re buggered anyway. This obviously suits many people because anger can be directed at external forces and they can avoid any obligation on their part to participate in very necessary reforms that would benefit the economy. It’s all just convenient displacement activity.

We can’t just say this isn’t going to work and, because we believe that, we’re not going to try to make it work. It’s very early days and the key EU players will need a lot more evidence before they will be minded to make significant changes. And they will need evidence that we are making a serious effort. The irony is that many of the structural reforms that are conditional in the support package are things that should have been kicked off 2 years ago. They have the potential to generate significant benefits and, in actual fact, they don’t go half far enough.

I know things seem to move at a snail’s pace, but I’m sure you realise that that’s how the EU operates. The Greeks are now getting some serious attention on the anniversary of their entry to the treatment room. I doubt that high yields on thin trading of Irish sovs is going to force a major change in the current support – other than some easing of the interest cost.

Indeed, as an example of something useful and as I mentioned on another thread, in any engagement with Europe to ease the extent and burden of the EU/IMF support package, the Government could seek a derogation from some of the more absurd and costly elements of the EU’s energy market liberalisation process and climate change policy to allow it to tackle more effectively the cumulative absurdities that national policy and regulation have bolted on to these over the last decade. There is potential to generate up to €1 billion of annual cost savings in this area alone – not to mention privatisation proceeds.

I know it is a huge risk, but demonstrating a willingness to get stuck in is much more likely to persuade other EU politicians (irrespective of their political compexion) to cut us some slack, than saying we’re going to do nothing becasue we’re convinced this won’t work. But it’s far better than venting our spleen, digging in our heels becasue the probability of default will increase to unity – and any sympathy will have evaporated.

@ The Dork
“Tax does not fund the budget.”
???

“Irish Finance Ministry Says Debt Restructuring Report Outlandish

May 8 (Bloomberg) — An Irish Finance Ministry spokesman said a report that Ireland may restructure its debts is “completely outlandish.””

JTO again:

So the Irish Mail on Sunday story was a hoax.

The Der Spiegel story on Friday about Greece was a hoax.

Lots of people, no doubt the majority on a site such as this, will claim that, in any clash of opinion between politicians and journalists, it is likely to be the politicians that are lying. However, I reckon that it is far more likely to be the journalists that are lying. The politicians are subject to extreme scrutiny. The journalists are not.

Financial journalism is probably the activity most prone to corruption in the world today. By publishing a story at an opportune moment in time and working in collaboration with his buddies in the investment markets, a financial journalist can enrich himself beyond his wildest dreams.

The bank accounts of all financial journalists should me made available to the public, along with information on whether they made a profit on the stories they publish. I’ll wager quite a few financial journalists made a killing on that story about Greece on Friday night.

The fallout from Morgan’s nuke is unbelievable as are some of the popular notions it has radiated.

One such popular notion is that if we stuffed the banks up the ECB’s fundament and removed our deficit the ECB/EU would be powerless to retaliate and our economic life would continue in splendid isolation.

How utterly naive. Such a move would be a declaration of economic war and we would defo be seen as the aggressors. The retaliation? Economic and monetary sanctions by the EZ/EU, with unanimous backing.

According to Morgan’s ludicrous proposal if we do not need to borrow from foreigners, then we can pursue a truly Sinn Fein economic policy. But how are we going to buy those Mercs, the oil, German sausages, French wine, etc. etc. if the EU/ECB has imposed economic/monetary sanctions on Ireland.

There are very, very few economies who can fantasise about a Sinn Fein economic policy. Ireland is probably the worst so placed in the whole planet.

@Brian
Of course – its merely a accounting entry.
A goverment just asks a bank for a piece of paper – neither the exchequer nor the bank goes into the tax office to collect the money.
The money is already there – at any given time there is a money stock.
In a situation of static money supply the bond holders will at first slowly and then more rapidly aggregate all the money as the exponential interest function goes parabolic until the non bond holders have nothing.

That is why the goverment is having difficulty taxing – although its a accounting entry the Irish have less and less money that can be taxed.

The problem is that the Irish or at least a broad enough section of them have not much assets in Goverment money.
Goverment money is the only thing that can expand now – in this monetory system the money stock must increase – if it does not the economic gears get meshed up into useless junk – that is what is happening to Ireland now -the ECB is trying to limit the amount of goverment money when credit money is dying.
The ECB is trying to take us out.

@Mr. Bond

Irish Times, May 9: “Minister criticises economist’s ‘prescription'”

Mr Rabbitte also expressed the opinion that the debt should be rescheduled.

[…]

He said “the foolish thing about that is there is now an immediate and present danger affecting three member states . . . If a system is deemed necessary from 2013 onwards, why can it not be accessed immediately?”

Bloomberg, May 9: “Irish to Avoid ‘Doomsday,’ Honohan Says as Rescheduling Mooted”

The country’s loans will be repaid in line with their terms and conditions, Eoin Dorgan, an Irish Finance Ministry spokesman, said yesterday in a phone interview after Rabbitte’s remarks.

I put it to you that Rabbitte’s and Dorgan’s statement are at variance. Do you accept this?

@ Eoin Bond

We’ll have to agree to disagree on this one (I have a rebuttal for each of your points if anyone would like to hear them but this could go on forever). Your scenario has just as many assumptions as mine and I while I accept that it is a potential outcome, it is not a predestined one, and in my opinion it is not the likely one.

Since the beginning of this crisis the people of Ireland were told at every step that Sate had no choice, when in actuality it did. It still has a choice, as summed up by Brendan Keenan in the Independent today: “It would be an interesting question to put to the vote. Would you prefer a 20pc cut in living standards now, with the possibility, but not the certainty, of recovery; or would you prefer something more gradual, with the possibility of “utter ruin” at the end of it?”. Maybe his 20% cut is too low or its two high, but I’ve yet to come across a modern economy that reverted to the stone age through bank failure, while the number of “lost decades” appears to be growing.

http://www.independent.ie/opinion/columnists/brendan-keenan/brendan-keenan-government-will-put-off-dealing-with-apocalypse-2641038.html

400+ comments! I knew we could do it.

Eoin, I don’t see people stocking up on cash as a symptom of real fear. When they start buying firearms and forming militias, that’s fear. You story is full of holes. The BIS, the Bank of England and the Fed will continue to function even if the ECB throws a hissy-fit.

@Paul Hunt
“I know things seem to move at a snail’s pace, but I’m sure you realise that that’s how the EU operates.”
This is a serious problem, though. Not only for us, but for the EU as a whole. Indeed, just because the EU operates as a snail’s pace, it doesn’t mean that we have to.

Eoin,

You’re shifting your ground. Your scare-story involved a freezing-up of all settlement mechanisms: “a full freeze on any Irish banking systems payments in or out of the country.”

That’s not simply a refusal of aid — you were talking about severe economic sanctions. That’s just scare-mongering. The ECB simply doesn’t have that kind of power.

@Bond Eoin Bond
Its more then psychological – people may not understand the mechanics but its a gut feeling.
The Goverment should be preparing to seperate the utility / checking accounts from term deposits and hopefully using those deposits as I have suggested.
My conspiratorial little mind tells me the authorties have used NAMA to help create the fiction of deposits backing real assets when in fact they are but a illusion.
The authorties has used peoples fears of negative equity in their homes against them – sustaining the illusion of wealth so that the core banks can get a few more years of recapitalisation on their books.

It really is quite a spectacle
http://www.youtube.com/watch?v=WxW6t8-1UA8

Looking back to look forward, here is Karl Whelan talking about the budgetry adjustment for 2011 in relation to the deficit.

http://www.irisheconomy.ie/index.php/2010/10/22/sticking-to-2011-deficit-goal-of-10-requires-e7-billion-adjustment/

The target suggested at the time was a 7bn adjustment to get the defecit down to 10 % of GDP. “Hitting the 10% target will probably require about €7 billion in adjustment.”

The Department of Finance talked about a 6bn adjustment, and contained this paragraph on the impact of the adjustment.

“Imports are projected to increase in line with final demand so that in overall terms, real GDP is projected to increase by 1¾% next year (GNP by 1%). This takes account of budgetary adjustments amounting to €6 billion, which are estimated to reduce the rate of growth by
somewhere in the region of 1½ – 2 percentage points. Nominal GDP is set to grow by 2.5% in 2011, implying a GDP price deflator of ¾%.”

http://www.irishtimes.com/focus/2010/budgetary-outlook/index.pdf

From memory the actual adjustment was more like 5.6bn.

So to people more knowledgable than me, is there any way of telling yet what impact this is actually having, on GDP and/or the deficit?

I note that already the new MoU suggests that as things are not working out as expected we’re already looking at 5bn this year, rather than the 3 and a bit originally projected.

It might throw some light on whether cutting is actually working to close the defecit, and what the impact attempting to close the gap in one year might even look like.

@Gavin
Didn’t an IMF staffer publish a review late last year of about 300 national busts and found that deflation worked in only a handful of cases (including Ireland in the eighties)?

@BWII
I can confirm that I absolutely am not Tony Foley :-).

It is basically common sense, we do have to close the deficit to zero, the choice is the pace of implementing the measures.

@JtO
If you think that Greece will not be restructuring sovereign debt sometime in the next few years then I think that is one forecast you are going to get very wrong.
And the same will probably apply to a lesser extent for Portugal and Ireland.

@ JTO

“Lots of people, no doubt the majority on a site such as this, will claim that, in any clash of opinion between politicians and journalists, it is likely to be the politicians that are lying. However, I reckon that it is far more likely to be the journalists that are lying. The politicians are subject to extreme scrutiny. The journalists are not.”

Exhibit A (from link below):
For Jean-Claude Juncker, the prime minister of Luxembourg, the threat of immediate market turbulence means the usual norms of transparency don’t apply.

“When it becomes serious, you have to lie,” Juncker, who as the chairman of the regular meetings of eurozone finance ministers is one of the currency union’s key spokesmen, said in recent remarks.

Even confirming the existence of discussions on explosive financial issues can quickly turn them into self-fulfilling prophecies and have serious consequences for a country’s economy by driving up borrowing costs.

“If you are pre-indicating possible decisions, you are fueling speculation on the financial markets, throwing into misery mainly ordinary people whom we are trying to safeguard from this,” Juncker said.

http://ca.finance.yahoo.com/news/Market-jitters-bring-capress-2621033042.html?x=0

Of course, Gabriele Steinhauser from the Associated press might be a liar too…

@Anonym
“I put it to you that Rabbitte’s and Dorgan’s statement are at variance. Do you accept this?”

O course they are at variance. The Governor hinted that the debt level may be unsustainable if we don’t meet growth targets. With all the downward revisions he may as well have agreed with Pat Rabbit that we will need restructuring.

But I agree with Eoin Bond that chaos in our banking system is not the way- at least the zombie pillars are functioning.
As regards the constitutionality of the bank guarantee – can anyone see a full Supreme Court panel holding that the guarantee was unconstitutional?
The exigencies of the common good will always trump constitutionally mandated private property rights.
Turkeys don’t vote for christmas. Judges don’t vote for chaos.

People need to understand how the shadow bank sector obtains a surplus .
They can produce money at will but require indeed need that we pay interest on private debt as they cannot produce this.
The primary mechanism to do this is to inflate unproductive assets and extract a rent or interest off this.
This deindustrilisation / debt strategy keeps us in our little box.
They essentially use peoples greed as a weapon against us all
The way to fight these bastards is not to cut our money supply which will merely transfer more wealth to the banks , but to destroy the value of assets that they require to get a yield.
Houses are essentially worthless as they do not produce anything – lets learn to accept this and stuff the losses in their faces.
If we do not do this they will have repositioned to a new strategy of obtaining all of the money and thus getting all of the interest on our money

Greetings,

@ Brian Woods II

Methinks Dreaded-Estate was on Morning Ireland. Tony Foley argued that since we have to close the deficit anyway, better doing it now. That is a line pretty unique to D_E in this blog.

Or maybe Tony Foley’s reading this thread!! (Hopefully not for ideas…)

@ All

At risk of sounding Pythonesque…

Apart from restructuring the debt repayments/rates, tax reform to increase revenue, withdrawing cover for levels of bondholders, addressing public sector pay, etc…

Is there a case for Ireland – and, perhaps, the other PIGS – switching to a “soft” Euro: returning to (a new version of) their old currencies (the Punt, in Ireland’s case) to allow more elbow room (devaluing, etc) to deal with the economic issues?

This woud not mean totally withdrawing from the EZ, like those countries which haven’t joined, just the currency aspect of membership.

I realize that there’d be administrative costs, etc, but would it be worth it?

Kindest regards,

James

Ger,

You are falling for the spin that there was a guarantee in 2008 that is still in place. It was a Guarantee until Sept 2010 more or less and it stopped of its own accord. Term deposits taken out at the right time remained covered until the end of their term though – so it isn’t straightforward.

MK tries to point out that the decision to issue another shiny new guarantee to kick the banking can, expensively, down the road, was made on the assumption (via the joke stress tests, transparently so for some of us who are not at the Central bank) that the banks were not completely insolvent.

Bank resolution should have been prepared instead of pretending there would not be a bank run when the original guarantee ran out.

If we accept that a central tenet of Kelly’s piece – the size of the eventual Government debt – was factually wrong (as he double-counted €35 bn for bank recapitalisations and then threw in the whole of NAMA’s debt for good measure), surely this completely undermines his case that the projected future debt level is unmanageable? The fiscal deficit can be closed easily enough within the 4 years projected in the troika plan (and of course could be done more quickly, although not ‘immediately’ as Kelly claims). So what are we left with that is unmanageable? Further bank losses? My recollection is that the markets largely believed in the last stress test. Let’s not assume that because Greece is in deep deep trouble, we have to follow them.

Only very slightly flippantly, I think possibly Hugh Hendry is principally to blame for left leaning politicians lining up so determinedly to raid their tax base to prevent capitalism from imposing losses on private investors.

They hate Hugh and people like him. They know people like Hugh are likely to be long peripheral bank CDS contracts. Hugh wound them up too much and they will do almost anything to make sure he doesn’t make a profit.

The capitalists at the banks are much more clubbable and many went to school with said politicians. End of.

The unacceptable face of capitalism is the impolite one that you wouldn’t inmvite to a dinner party.

@Gavin
Found a reference to the IMF paper:
“SLASHING GOVERNMENT spending to reduce debt burdens will have unusually damaging effects on growth because of the weak global economy, according to International Monetary Fund research.”
http://www.irishtimes.com/newspaper/finance/2010/1001/1224280079771.html

“The report suggests a reduction of 1 per cent of gross domestic product in the fiscal deficit will reduce GDP growth by 0.5 per cent and increase unemployment by 0.33 per cent within two years.”

@Paul
“highly technical and complex….. speak in riddles”.

No wonder I didn’t understand a word – IANAE.

@ Ninap,

Good post. (Where were you 500 posts ago?)

As someone of Irish-spaniard background, with some financial and engineering experience in Spain and in Netherlands, a few issues strike me. First, I think we must lance the boil of incipient rebellion. Realistically there is only one way forward, and that is unity. Second, the oldfashioned meaning of “catholic” was universal and inclusive and we must cleave to this in Europe. there is no point in torturing ourselves on the rack of austerity when we know that we cannot confess!

As Indicated earlier, I believe that

1. Ireland needs a referendum on private banking debts

2. A debt audit to reject odious debts that are forcefully imposed on the people of this nation by the neo liberal dictate (Ecuador)

This is a encouraging start:

http://www.debtireland.org/

http://www.cadtm.org/Can-Europe-escape-the-debt-trap

Greetings,

I’ll take the silence as a collective withering look.

*sits down, red-faced*

Kindest regards,

James

@ Paul,

“Or so say the proponents of Modern Monetary Theory. It all begins with what money is. The explanation has to do with power and social obligation. It is convincing, …”:

Oh dear, I’d call it stupefying nonsense. Anyway, given the stress the G7 of old is in, I would definitely say, as I already did in another thread, a return to first principles is in order and that academia now does not know its head from its posterior. But perhaps like governments, reform must be preceded by outright collapse.

Oh, it appears to be fixed, two posts of mine blocked yesterday. I’ve blogged here on the points I was trying to get across re Honahans piece on RTE.

Re bailout and walking away from the guarantee:

http://colmbrazel.wordpress.com/2011/05/09/irish-swan-song/

“The matter should have been referred to our Supreme Court by Honahan, by Lenihan/Cowen, by President McAleese. We got no information, no White Paper to educate the Irish people prior to a referendum? Citizens were not given the chance in this undemocratic, plutocratic kleptocracy of ours.”

On the question of double counting raised by ninap above, I side with MK and don’t believe he’s double counting, I believe Honan is under counting, with the usual silly arithmetic, and I don’t believe the results of the recent stress tests are as reliable as they are claimed to be. Look em up, there is little analysis on CDS positions for example. They are predicated, for example, on a property market presently balloned in place by NAMA ‘no firesales’

Re NAMA, its professional of MK to regard taxpayers on the hook for the whole of the NAMA bonds given their damage to the Irish banks and economy, but that’s another matter.

My main point is to ask under FOI, or otherwise, let the evidence be produced for his case against reneging on the guarantee, allegedly under legal advice to the Government. Let’s see that advice.

My contention is given the shenanigans emanating from Anglo, the case of a monumental fraud perpetrated against the Irish people, is more likely to have success, than a denial by the courts of our right to walk away from false guarantees made illegally under false pretences, on our behalf.

To suggest otherwise, by Honahan, is at best irresponsibly mistaken, at worst, a downright lie.

The guarantee and bailout are both clearly in breach of Article 17.2 of the constitution:

“Article 17.2 it states: “Dail Eireann shall not pass any vote or resolution, and no law shall be enacted, for the appropriation of revenue or other public moneys unless the purpose of the appropriation shall have been recommended to Dail Eireann by a message from the Government signed by the Taoiseach.””

Clearly, the facts in support of the guarantee were neither laid before the government at the time of the guarantee, nor laid before the Dail at this time. We still havn’t got those facts given missing documents and disappearing logs.

Judging from Lenihan’s intervention recently re the ECB shafting him, Honahan needs to be challenged on the legality of his actions under 17.2, as well as their correctness.

@Morgan Kelly

“Nobody would lend to Irish banks, so that the maturing bonds were repaid largely by emergency borrowing from the European Central Bank: by November the Irish banks already owed more than €60 billion.”

“On one side was the European Central Bank, unabashedly representing Ireland’s creditors and insisting on full repayment of bank bonds.”

“In the circumstances, the ECB walked away with everything it wanted.”

Kelly’s story is basically that the ECB, according to him duty bound to provide last-resort liquidity to Irish banks, reneged on this duty, conspired with bond holders and blackmailed Ireland to bail out European banks.

A nice narrative, but grossly misleading.

The ECB had and has no duty to provide emergency liquidity to Irish banks. Provision of emergency liquidity is not an ECB task. Emergency liquidity is a task for the national central bank, in this case the CBI.

ECB provision of liquidity to Irish banks was not emergency liquidity but took place under the umbrella of monetary policy operations, the rules of which are described in ECB’s General Documentation (http://www.ecb.europa.eu/pub/pdf/other/gendoc2011en.pdf?29c2d8627c557654d3cabc5d5a30c6a6).

The only (admittedly fairly valuable) card the ECB had in the negotiations on Ireland was the access of Irish banks to its monetary operations.

The General Documentation (GD) describes the general eligibility criteria for access to ECB monetary operations (p. 15). Second condition reads “Counterparties must be financially sound.”

Now, one could debate when was the last time any Irish bank was financially sound. But suppose the banks would have gone on and defaulted on their senior bonds. Would there be any way to argue that a “financially sound” institution would default on its bonds? Of course not, and obviously the ECB would have had to stop its lending to a defaulting bank.

So, to maintain Irish banks’ access to ECB monetary policy operations, the Irish government had to recapitalize and keep them solvent. The other, less attractive, alternative was to burn the bondholders and do without ECB liquidity. The fact that these two consequences were connected was not due to the ECB conspiring with bankers, but due to the ECB simply trying to apply the rulebook that was written years before the Irish crisis to protect the institution from financial risk and political pressure.

A second reason for the ECB grow concerned about its lending to Ireland relates to the collateral provided by Irish banks. Irish banks’ pledgeable assets consist mainly of securitized loans, Irish government bonds, NAMA bonds and other Irish state-guaranteed securities.

For risk-management purposes, the ECB GD excludes collateral which has “close link” to the counterparty bank: “Irrespective of the fact that a marketable or non-marketable asset fulfils all eligibility criteria, a counterparty may not submit as collateral any asset issued or guaranteed by itself or by any other entity with which it has close links” (p. 53).

The “close link” concept was originally put there to exclude banks using securities issued by their subsidiaries, parent company, or otherwise closely connected entities, but at this point, it fully applies to the relation between the Irish state and the Irish banks. If one defaults, the other one will follow. Hence the protection provided by Irish state guarantee on an Irish bank liability is highly questionable.

All in all, by providing liquidity to troubled Irish banks against questionable collateral, the ECB has stretched its rules to an extraordinary extent. It clearly does not consider keeping entire banking sectors (entire countries) afloat as part of its mandate, but it has done it, since there has been little alternative. The hostility it gets in return does not strike me as deserved.

@James B

Didn’t read it fully, have now. No withering look should be forthcoming from the thoughtful.

John McH raised the question of liquidity for compensation of bank deposits with limited ECB cooperation on another thread last week. The Irish CB exists and if very confrontational circumstances it can do things should it be minded to.

Your point is no too dissimilar and is worthy of a thread of its own.

You should bear in mind that the difference between a bond or IOU and money is that money can be used to pay for goods and services. California has a history of this.

Should there be a conclusion that Morgan K is 50% or so overpaid bearing in mind he works for a more or less bankrupt state and should such employees be unwilling or unable to take a pay cut to assist with the state’s international negotiating position, then He might be willing to or encouraged to take part of his salary in the form of Irish sovereign IOUs which are, through legislation, legal tender within the country for certain goods and services.

This is a de facto parallel currency. Ireos alongside Euros.

@Anonymous,

I presume you are a new voice here and, if so, one that is very welcome to counteract the mountains of claptrap. The ECB was always going to be caught in the ‘damned if it did, damned it it didn’t’ trap. The implications of allowing the entire domestic banking system of a Euro member- even a small one – to go down the pan were, and are, impossible to assess with any precision. Being the only EU institution with sufficient capability and legal empowerment it has stretched both to the limits. Having gotten the donkey to the top of the minaret it should not be getting support, rather than brickbats, to compel the negligent politcians and policy-makers to put in the heavy-lifting that will get the donkey back down.

Greetings,

@ hoganmahew

I seem to remember your doing so.

My main reason for doing so was to enable a “better” deal from the IMF – at, I trust, a lower overall rate of interest than at present.

[Granted, a debt restructuring within the current agreement would be preferred – ie, by reducing the rate by 1% to be in keeping with the Greek’s bailout rate, as is being proposed.]

However, as I intimated earlier, I didn’t agree with the unseemly rush to implement the EZ in the first place, where European economies of varying shapes and sizes (in terms of economic fitness) made a mad dash to reach the “finishing line” of 2000.

It seems to me that admitting this error would be the wiser thing to do and go back to what they should have done – implement a “soft” Euro first, and only when economies were best placed to do so, a given country would then switch to a “hard” Euro, if desired.

As it is, some – like Germany – may be able to retain the Euro, others – like Ireland – may not.

Needless to say, this is just my dilettante opinion.

PS – I see that Professor Kelly has taken a pounding in today’s media: the Independent, in particular.

Although George Garvey (page 17) does point out that Prof. Kelly’s articles assume Ireland’s “membership of the Euro as fixed and non-negotiable”.

Hence, another reason for my question: how would switching to a “soft” Euro affect our ability to get ourselves out of this mess?

Kindest regards,

James

@Anonymous,

ECB provision of liquidity to Irish banks was not emergency liquidity but took place under the umbrella of monetary policy operations…..oh really, so nobody else would lend to us, but this doesn’t mean they provided ’emergency funding’

No time to go through the various points you make accept to say they come down to 3 points of interpretation; 1) they were saving their own ass; 2) they were saving our ass; 3) they were saving both our asses.

As I’ve given my reasons for supporting 1) elsewhere, I won’t boringly repeat them here.

I do believe the points you make evidence a case of Stock:-)Holm syndrome. I’ve said this before: “The German Ein Danaergeschenk is a “fatal gift” that brings misfortune or causes problems. For some reason, English doesn’t normally speak of a “Greek gift” and German doesn’t warn against “Greeks bearing gifts.”

The main evidence against 2) and 3) is our pleasant present peasant cruise along to default…

@James Burke
I’m looking at it a little differently – how would a domestic currency encourage domestic demand growth without leading to unsustainable imports (unsustainable from the point of view that the economy needs to keep more of its export income here to offset debt and interest repayments).

It greatly simplifies expenditure adjustments in some ways. If government payments are in scrip, and that scrip is floating and adjusts downwards to the euro, there is an effective reduction in payments.

No doubt there are problems with this, but aside from the incredible fuss it would cause, I can’t see them.

@Anonymous

This isn’t the first time the ECB or EU has bent or broken rules and so it shouldn’t be called upon now for retribution.

Take a look at the Maastricht criteria when countries were first considered for the EMU – based on…

Price stability
Fiscal Prudence
Successful EMF membership and
Interest rate convergence

The EU bent a lot of these rules to allow countries in on an expectation that they were ‘developed’ enough and could keep up with the pace. Well guess what…some weren’t up to it.

because they bent the rules for us doesn’t make them Samaritans – it might just highlight a slightly thin policy proposal on their part for dealing with a crisis!

@Anonymous
There is always a alternative.
Why does money have to be linked to fictitious bank balance sheets ?
You seem to forget the role of a CBs has always been to bail out banks and not the physical economy.
I must say both yourself and Paul Hunts faith in the ECB is touching.
Banks have no role if they do not provide credit.
Brinks could preform the private deposit function role of Irish banks now with less cost and risk and some private banklink operator could service checking accounts for a small fee.
My post office can hold my long term deposits

I will say it again – the situation is a bloody farce and if the executive was a real executive here they would be striving to make it offical.

The Geithner story is plausible. He saw, at first hand, the damage that could be done to and by the huge layer of, largely useless, financialisation that the global banking and shadow banking system has spawned when a bank, Lehman Bros, that didn’t at first sight sight seem hugely significant in the overall scheme of things, was allowed to go under. And remember that the US had exported some of its more dodgy financialisation activities (outlawed by the post-Enron Sarbanes-Oxley Axt) to London – with significant infection of the EZ banking system. Nobody wanted a European version of Lehman Bros as the whole global financial system could have seized up again. If lil ole Ireland’s entire domestic banking system was effectively insolvent, then tough. The Irish taxpayer would be on the hook and the EB sticking plaster would be applied – as it wouldn’t be allowed to go under.

@ Gavin Kostick

Another analogy from my youth is Disney Dollars – freely exchangeable for goods and services within the realms of Disneyworld, but only good for a souvenir outside of those walls. 🙂

@Colm Brazel

“..oh really, so nobody else would lend to us, but this doesn’t mean they provided ‘emergency funding’”

Thanks for the sarcasm. “Emergency liquidity assistance” (ELA) is actually a quite well-established concept. It is liquidity for illiquid but solvent financial institutions. Just google around. The classic reference is Bagehot’s “Lombard Street” from a century and a half ago.

But, in a way, and without meaning it, you point to an important fact.

By its rules, the ECB is not supposed to do ELA. But, as it happened, little by little it was drawn to do things that looked more and more like ELA to Irish banks. Obviously, it did not like it. When it finally got enough, pointed out to the Irish government that all this was really not within its mandate and that it would very much like to get out of Ireland, the crowd started to shout “blackmailing!” and “hostage taker!”

You also make a factual error. It wasn’t true that nobody else (but ECB) would lend to the Irish banks. The Central bank of Ireland did and does, on its own account, provide ELA to Irish banks.

In short, the division of labor is this:

1. The ECB lends to liquid and solvent banks (monetary liquidity).
2. The national central banks lend to illiquid but solvent banks (ELA).
3. National governments deal with illiquid and insolvent banks (bank resolution).

The limits to the ECB’s authority are there for a good reason. Common monetary policy is potentially a fantastically powerful vehicle of fiscal transfers between countries. But the drafters of the Treaty specifically did not want fiscal transfers (hence the no bail-out clause etc). Thus the ECB was structured so that it is only mandated to do (virtually) riskless operations, not bailouts or other fiscally costly operations-

“they were saving their own ass”

But of course they were! At least trying to. What would you expect? The ECB is an institution with a clear and narrow mandate and no political authority to improvise. For the governing body of such an institution, going outside of its mandate may carry legal consequences. Obviously, they would very much like to go back to their normal business and make Ireland someone else’s problem. So far, they have not done that, because everyone else tells them they must stay in Ireland.

To digress a little from our problems…it looks like poor old Greece is really losing the plot-
“Meanwhile, Greece attacked the rating agency for hitting its sovereign debt with a two-notch downgrade today, saying the agency’s ‘reliability’ was in doubt.

‘Their reliability is placed in doubt,’ the Greek finance ministry said, arguing that there had been no deterioration in the country’s economic figures since the agency’s last evaluation in March.

‘Decisions by ratings agencies must be based on evidence,’ the ministry said of the move which came a day before Athens intends to issue a batch of six-month treasury bills worth €1.25 billion.

@James Burke
“One of my reasons for suggesting a “Punt Nua” is that it would be implemented with the devaluation incorporated into it – much as the original Punt dropped off the value of Sterling on its implementation.”
I don’t think you can credibly do that – you can’t turn around immediately to, for example, a university lecturer and say “you know your salary that was worth 40k euro, well, now it is worth 30k euro, but in 40k punt nua.

I think you have to start from the position that they are equal in value and let demand do the lifting (or dropping…) for you.

This thread reads like a thriller and has me as scared as hell! However, it is good to read the diverse opinions re MK’s bombshell article.
Am hooked but need a break and a shower but am compelled to return again later.
Thank you all.
James

@Brian Flanagan

DMcW had some thoughts in the SBP as to how “leaving the euro” might work at

http://www.sbpost.ie/commentandanalysis/greeks-turn-tragedy-into-a-drachma-56157.html

JTO again:

McWilliams writes in this article:

“The other way is when you do a deal and default. Obviously, this is what the Greeks will do this weekend.”

So, did they do as McWilliams wrote was obvious they would do?

I must have missed it, having been at Old Trafford most of yesterday. But, if they did, I’m surprised it isn’t making more headlines today.

@James Burke

I note that a report today indicates that Germany’s export figure has hit a new record.

It would be nice to emulate that.

JTO again:

It is very likely that Ireland has allready emulated that. Exports in 2010 A4 were just 1% short of a new record. Based on the PMIs, it is very likely that they will grow by more than that in 2011 Q1 over 2010 Q4.

@Eureka

How can there be so many conflicting views on this?

JTO again:

A clue is to be found in another link within the link you gave.

http://www.presseurop.eu/en/content/article/643581-easy-target-hoax-reports

Excellent article, under the heading “Rumours that are borderline criminal” – it contains the following:

“For several weeks, erroneous information about the Greek economy has been circulated to destabilise Athens. The latest hoax to date was Spiegel Online’s 6 May publication of a report about a secret Eurogroup meeting to discuss Greece’s exit from the euro. The question is: who stood to gain from the crime?”

“A session held by The Institute of International Finance — which brings together banks, investors, monetary and financial institutions — was marked by major rumours. Their source, American economist Nouriel Roubini — the man that rose to fame when he successfully predicted the subprimes crisis who is also the President of RGE, an analysis firm that provides (expensive) advice to investors — was at pains to convince everyone that an imminent restructuring of Greek debt was on the way.”

“Announcing that his information was based on a series of meetings with the Greek Finance Minister, he hinted that such a deal had already been the subject of secret discussions, even though the Minister in question Georges Papaconstantinou had only a few minutes earlier made a speech in which he insisted there was no question of restructuring.”

“Roubini wants to orient the market: as he puts it, a bet on Greek default cannot fail to come in. And the fact is, if every one presumes this is the case, his forecast will become a reality… On the same day, Dow Jones Newswires cited anonymous sources that reproduced Roubini’s point of view in an piece entitled “Greece Proposes Repayment Extension Of Its Debt,” which added to the credibility of the American economist’s remarks. Then “the news” was picked up by the financial press.”

“It took several days to calm the ensuing storm on the capital markets. On Friday 6 May, the same process began all over again when the website of the German weekly Der Spiegel “revealed” that a ”secret meeting” of Eurozone finance ministers was to take place on the same day in Luxembourg. On the agenda, discussions of “Greece’s request” to exit the euro. No sources were cited, but that did not prevent press agencies from taking up the story, or a subsequent slide in the euro.”

“The finance ministers of Europe’s G20 members (Germany, France, Italy and Spain), along with Eurogroup President Jean-Claude Juncker and the President of the European Central Bank Jean-Claude Trichet, were meeting to discuss the Greek adjustment plan with Finance Minister Papaconstantinou — in other words, a routine crisis meeting. ”We did not discuss a Greek exit from the Eurozone, because we believe this option would be stupid,” explained Juncker. Greek Prime Minister, Georges Papandreou, later insisted that the rumours were “borderline criminal.”

“But who stands to gain from the crime? Investors who are currently holding anti-Athens positions. Especially those who have bought Greek credit default swaps (CDS), who will lose their investment if default does not happen. Or those who are indebted in Greece or who have withdrawn money from the country, who have every interest in a return to the drachma. The rumour mill is set to keep on turning.”

My Dear Eureka, the facts are that large numbers of people stand to lose a great deal of money if Greece, Ireland, Portugal etc do not exit the Euro, devalue and default. It is naive in the extreme to believe that they do not pay financial journalists and economists to write articles to advance their cause. If you came from north of the border, you would not be so shocked to learn this.

@Eureka, James, James

You don’t have to remove the Euros. You use the parallel currency – “Ireos”, say – to simultaneously reduce costs in the economy and government payroll bills.

It is a way of breaking the stalemate over the reduction of costs and salaries in the economy that would have happened automatically had the Punt been kept. Currently much of the private sector has “adjusted” sufficiently or been made redundant. Most of the public sector and the protected and connected private sector are using every trick in the book (delay principally) to try to make sure they are last in the queue. It is rational behaviour.

If private sector employers can pay 100% of salaries in Euros because they have sufficient hard currency earnings then those employees – who may have had a pay cut already in Euro terms – catch up again.

It is an alternative to the state borrowing Euros it cannot repay to pay high salaries to employees who require high salaries, pensions, UB etc, to pay the high costs in the economy which result from so many goods and services being provided expensively by state, semi-state and some private companies who have to pay high salaries because….etc.

@James Burke
“thus improving exports to all those markets”. A collapse of the exchange rate would certainly decrease the imports, as the Irish standard of living would be dramatically lowered ,but why would the exports significantly improve ? Do you really think that the international firms that make most of the Irish exports would lower their prices since the price elasticity of most of what they sell (pharmaceuticals, IT services ,etc..) is very low and the competition from other European countries nearly inexistent? Furthermore the transaction costs would increase tremendously( who would like to detain a currency whose reason to exist is to loose value?).

@ JTO

Well it didn’t take long for the ‘blame the short sellers’ nonsense to start up again. Please. I suppose it is the same short-sellers that were responsible for ruining the Irish banks. If they are on the loose then perhaps I need to dust off my tin foil hat…

The article you point to states:
“The finance ministers of Europe’s G20 members (Germany, France, Italy and Spain), along with Eurogroup President Jean-Claude Juncker and the President of the European Central Bank Jean-Claude Trichet, were meeting to discuss the Greek adjustment plan with Finance Minister Papaconstantinou — in other words, a routine crisis meeting. ”We did not discuss a Greek exit from the Eurozone, because we believe this option would be stupid,” explained Juncker. Greek Prime Minister, Georges Papandreou, later insisted that the rumours were “borderline criminal.””

So Jean-Claude Juncker is your voice of honesty and reason? Perhaps you missed my earlier post in the sea of comments, but Jean-Claude Juncker is a liar – this is not my opinion, he has stated so himself, as follows:

“When it becomes serious, you have to lie,” Juncker, who as the chairman of the regular meetings of eurozone finance ministers is one of the currency union’s key spokesmen, said in recent remarks.

Even confirming the existence of discussions on explosive financial issues can quickly turn them into self-fulfilling prophecies and have serious consequences for a country’s economy by driving up borrowing costs.

“If you are pre-indicating possible decisions, you are fueling speculation on the financial markets, throwing into misery mainly ordinary people whom we are trying to safeguard from this,” Juncker said.”

http://ca.finance.yahoo.com/news/Market-jitters-bring-capress-2621033042.html?x=0

@Anonymous.

Re your three points on the division of labour for ECB liquidity. I think you are one step ahead of the curve on each.

“1. The ECB lends to liquid and solvent banks (monetary liquidity).
2. The national central banks lend to illiquid but solvent banks (ELA).
3. National governments deal with illiquid and insolvent banks (bank resolution).”

I would argue that in your point 1. above, a liquid and solvent bank does not need access to liquidity. A solvent bank suffering from liquidity problems should be a point 1.

Point 2. should read ‘ ELA is given to insolvent banks that are considered to have to have a chance of trading out of their insolvent position (I have heard this referred to as ‘soft form’ insolvency) ‘ The only reason ELA exists is because the rules of the ECB mean it cannot lend to insolvent institutions.

Point 3. is for banks that are completely catastrophically bust.

@Anonymous

re “You also make a factual error. It wasn’t true that nobody else (but ECB) would lend to the Irish banks. The Central bank of Ireland did and does, on its own account, provide ELA to Irish banks.”

Err, not a factual error, ICB not counted by me as LOLR as its a domestic, ‘nobody else’ means ‘non domestic’ lender by me above. Plus the 1% lending of the ECB to Irish banks should be underwritten by collateral in the Irish banks, the fact the ECB is pulling back and trying to extricate itself from this type of funding should be a warning that collateral is no longer acceptable by the ECB, or it doesn’t like the 1% base support to continue. But consider the former possibility, that ECB doesn’t like the look of the Irish collateral.

Enter the Irish Central Bank ICB to the rescue. We’ll accept the collateral of the Irish banks.

See thread below that examines the topic. So the Irish banks now borrow from the ICB based on their collateral.

And what collateral has Anglo got. Well, its got billions in promissory notes issued by the Government with interest hidden and payable beginning some years from now, but hidden for the moment.

For example, ICB prints money for the Irish banks based on collateral no longer acceptable by the ECB, which is based on promissory notes issued by the Irish government:

Enjoy the party well described by Burgess here:

“Let’s take Anglo.
The Irish Government has lodged €25 billion in Promissory Notes.
This is an asset and a liability of Anglo. It is money owed to the government and it is money owed by the government.
If the Central Bank puts €20 billion into Anglo, they would have got the Promissory Notes as security.
So the Central Bank can demand that the government pays it the €20 billion. ”

http://www.askaboutmoney.com/showthread.php?t=151340

http://bit.ly/dI258F

But the Irish government is bankrupt, but not if its backed by the ECB, but the ECB has pulled liquidity and forced the ICB to issue liquidity, which means the Irish government is bankrupt, but it can’t be if its backed by the ECB.

Now don’t go down to the IFSC to check the assets in the IFSC used as collateral by the ICB to issue liquidity to Anglo, you are not allowed to go there!

Welcome to truthiness and scambling debt engineering Irish style.

So when do we have the Irish Default party begin?

Meanwhile frontline services to kids with disabilities get cut with staffing up to 33% cuts and subsequent stress on staff, services, children……

Lets clean out the banks and rid ourselves of toxic Anglo, AIB etc and create some good banks based on the Bank of North Dakota and end the above scambling gambling scams.

@Edward v2.0

I don’t doubt that lots of politicians lie.

My point is that lots of financial journalists, economists, ratings agencies also lie, especially when it is to their financial advantage to lie.

Lots of short sellers, as you call them, stand to lose a great deal of money if Greece, Ireland, Portugal etc do not exit the Euro, devalue and default. That is a fact. In the past couple of years, there has been a large outflow of capital from Ireland. Again, the people behind it stand to lose a great deal of money if Ireland stays in the Euro, does not devalue and does not default. That is a fact.

You may have such a deep faith in the goodness of human nature that you genuinely people these people would never pay financial journalists, economists etc, to write articles designed to advance the scenario in which they avoid losing a great deal of money and, instead, make a profit on their gamble. I am afraid that I don’t.

All financial journalists, celebrity economists etc, who have the power to influence public opinion in these matters should have their bank accounts open for public inspection. If a financial journalist or celebrity economist stands to make a profit from Ireland exiting the Euro, devaluing and defaulting, and he writes newspaper articles advocating that course of action, then the public are entitled to know. If he’s innocent and stands to make no financial gain from the course of action he is advocating, then he has nothing to fear, and would actually benefit from the public inspection of his bank accounts revealing that he had no financial stake in the course of action he was advocating.

I would love to inspect the bank accounts of that Der Spiegel journalist.

@all

Greece, Ireland, Portugal, Greece, …? Does the sequence continue?

http://www.spiegel.de/international/europe/0,1518,761435,00.html#ref=nlint

Morgan Kelly certainly livens up the public sphere … but doesn’t look like we will front page headlines on Der Spiegel anytime real soon, judging from the response from those peddling the dominant discourse. Serfs remain hung out to dry …

@the alchemist, michael h, overseas commentator

You do not need to leave the euro. The alternative to some payment of local salary bills and accrual of costs in a local parallel currency is as no less than Paul Krugman said – years of grinding deflation. Only it is deflation that least affects the parts of the economy that are in the most need of reform.

If you want pharmacists (the shops that have the highest charges probably in Europe overseas commentator, not the manufacturers), lawyers & accountants on government contracts, politicians retired bank executives and their golf club memberships, the worlds highest paid electricity workers, senior civil servants etc, etc, etc to be less expensive in international terms – then I would like to hear of an alternative way of achieving this that will not take until after the state has gone bust. If you think these sort of domestic costs can just remain high and it doesn’t matter to the economy then there are countless formal and informal lobby groups in Ireland who will cheer you to the rafters while simultaneously keeping their heads buried in the sand.

On that Friday Night meeting …. (to which we were not invited …

‘The center-left Süddeutsche Zeitung writes:

“Seldom have we seen politicians acting as irresponsibly as they did on Friday evening. In Berlin, Brussels, Paris, Rome and Luxembourg, officials were silent, deceptive or just plain lied. And all of that just to keep secret a meeting of a few finance ministers at which — as would later be said — only a few opinions were exchanged over Greece … and where no decisions were made.”

“Within a matter of hours, the governments of the euro countries managed to fritter away the last remaining trust the people of Europe still have in the bailout action. Who in the future is supposed to believe that Greece isn’t interested in leaving the euro zone if Luxembourg Prime Minister Jean-Claude Juncker, who heads the Euro Group, is taking the lead on the deception? First he denies in writing that the finance ministers have even met in Luxembourg. Then he publicly swears his loyalty to Greece. Then it emerges that he personally invited his colleagues to the meeting.”

“Any reasonably interested European will now be asking, in astonishment or anger, just how dramatic the situation really is in Greece. Is the country on the verge of bankruptcy despite all the aid and statements to the contrary? That would also mean that another promise would come undone, namely that the Greeks will pay back all the loans to their partners with interest and compound interest. If they don’t pay, then taxpayers will definitively get stuck with the bill.”

“One thing is certain: Trust can only be regained if there are consequences as a result of Friday’s deliberate deception.”

http://www.spiegel.de/international/europe/0,1518,761475,00.html#ref=nlint

David McWilliams “What we should do is announce that all contracts are now in Irish Punts at a one for one exchange, so no default there, then we would say the Irish Punt is now floating”

Pat Kenny: “And the punt would fall to 10% of its value”

DMcW “Well maybe not that much but yes and our debts are immediately reduced without default”

Pat: ” And our exports would go through the roof”

David: “Exactly Pat. Happens all the time”

Jayz, more and more of this mutual cuddling session. What utter nonsense. Ireland does not have an exchange rate problem. Declaring that what we used to owe in euros we now owe in punts and letting the punt fall like a brick IS default” Not only in substance but in international law which prohibits the redenomination of external loans.

This is really starting to get in one me, how Morgan Kelly and David McWilliams can hold prominent media spokespersons spellbound with their madness.

@JtO
“I would love to inspect the bank accounts of that Der Spiegel journalist.”

I agree that everyone can have their own agenda but sometimes they are also just reporting the facts and stories they have been told.

Simple question, do you believe that Greece, Ireland and Portugal will get through this without some debt restructuring?

@JohntheOptimist.

“If a financial journalist or celebrity economist stands to make a profit from Ireland exiting the Euro, devaluing and defaulting, and he writes newspaper articles advocating that course of action, then the public are entitled to know.”

This is a new low in snide innuendo against those who dare to contradict the deaft consensus of Irish economists. Since the term ‘celebrity economist’ has been used to describe only one , or possibly two Irish economists this statement is shameless and cowardly , since it comes from an anonymous contributor.

@Colm Brazel

“Err, not a factual error, ICB not counted by me as LOLR as its a domestic,… ”

Then you have a funny way of counting, because the Irish Central Bank is the only LOLR Irish banks have. You might wish it be otherwise, but wishing doesn’t make it so.

I recommend this piece by Willem Buiter (you know who he is, don’t you?) on who does and who doesn’t do last-resort lending (ELA) in Europe:

http://www.nber.org/~wbuiter/ela.pdf

The article provides an interesting chronology of events leading up to the Irish bail-out. However, I feel it underestimates the effects of the collapse of Lehman Bros on financial markets, in that after such a catastrophic and unexpected event it was practically inconceivable to allow any European bank to default due to similar and even worse consequences for the markets. ( Prof Kelly fails to mention the untimely remarks of Angela Merkel and their effect on Irish funding costs ).
As a point of fact: Timothy Geithner was not responsible for the bail-out of AIG, but his predecessor, Hank Paulson. Nor will US taxpayers assume this burden, as the coming IPO of the company will probably result in the US Treasury reconvering all its funds used for the bail-out.
The suggestion that NAMA should by abolished and loans given back to the banks is also inappropriate in my opinion. The good bank/bad bank figure has worked well in every situation it has been employed and there is no reason it should not work in Ireland. ( preliminary results are showing this ).
I wonder why Prof Kelly does not employ net versus gross figures for his calculation of Irish indebtnedness, and why he does not consider the alternative of restructuring which is what most are pointing to. It is also strange he should consider Ireland`s export prowess as being a phenomenon of the 1990s, when only last year the country had the second highest trade surplus in Europe !
In spite of this, extreme views are always welcome because of their thought-provoking nature. Next time, however, I believe Prof. Kelly should offer more plausible and realistic solutions to Ireland`s debt problem.

John the appalling : in this thread you have
Called Morgan K a lunatic
Compared him to Osama, a mass murdering terrorost
Suggested that he is raving and psychologically disturbed
accused two newspapers of fabrication / hoax
suggested that financial journalists are corrupt and/or engaging in market manipulation
eulogised over the reelection of a polity which is designed to FORCE compromise between warring factions over one where whatever its faults hasnt had a civil war in 90 years
implied that those that commentate on the issues (and DARE to take an opinion different from that of an anonymous poster) should be required to exhibit a level of fiscal openess not foud elsewhere because they are probably tools of corruption.

Googling your posts you have remarked a few times that you have loads of irish govt debt. Forgive me if I sense a shrill panic emerging from your posts that perhaps just perhaps the high yields on same may be a premium for risk, and that the horrid risky thing is now closer. But, as you hide behind a (ridiculous) name, we will never know.

Some moderation on this site, in all senses, would be useful. If one wants conspiratorial ravings one can go elsewhere.

@ DORK,

“I am not a salesman for MMT – I hate the friggin thing.”: If I may say so, am glad to hear.
“But it is the architecture of the monetory system and nobody can really deny the reality of it …”: If the theory is ‘popular’, there may be a chicken and egg quality to this theory and the practise. And if it is popular, all the more reason for a revision of first principles. (And how is it working for the EU and … ?)

@ ceteris,

I have not picked up on the points you raise, but as I read him, I think JTO makes much sense.

@ JTO

I have no doubt that all kind of skulduggery goes on in the murky world of financial journalism, but my comment refer to the specific case you’ve pointed towards – the Der Spiegel article alleging that Greece was having secret discussions with the EU on a potential restructuring. It’s clear from the article you posted that either: (a) Nouriel Roubini and the Der Spiegel reporter were lying before the fact; or (b) Jean-Claude Junker and G-Papacon were lying after the fact. The article assumes that the former were lying and the latter telling the truth, as apparently do you. I come to a different conclusion, based upon the following:

Nouriel Roubini is a well-respected Professor at NYU who makes a good living being as economic consultant on the side. What is the upside to him of lying? Maybe he accelerates the default of Greece and his clients make some money sooner than they expected. From the articles and newsletters of his that I’ve read, he is absolutely convinced that Greece will default, so from his perspective it’s just an acceleration of the trend not a change in direction. What are the downsides to being caught lying? He’ll lose the credibility he’s spent years building up, will stop getting calls to go on CNBC or write opinions for the WSJ and his consulting business would suffer badly.

Jean-Claude Juncker has publicly stated that he feels it is his duty to lie to the people of Europe for their own protection. What is the upside to him of lying about discussions with Greece? In his mind he will save Europe from Armageddon. What are the downsides to being caught lying? Nothing. He can say he lied for the sake of Europe and actually feel patriotic about it.

Again, the Der Spiegel journalist has little to gain by lying but lots to lose. G-Papacon has everything to gain by lying and little to lose.

I love a good conspiracy story as much as the next fella, and maybe Roubini was lying and somebody paid the Der Spiegel journalist to plant a story, but the more likely scenario is that they were both telling the truth.

@ ceteris and Philip,

Sorry folks, I mis-attributed.

@overseas commentator

That is not the same thing as paying the 50% of Morgan’s salary that he says is too much for the state to afford in IOUs which can be used only to purchase local goods and services. The alternative is to borrow that 50% in Euros from abroad – which the country probably cannot repay, in order to keep him very very highly paid in comparison to counterparts in the countries lending those Euros.

Yes it would be simpler to just get pay cuts and cost reductions in Euros all-round but the reality is that the mechanisms within the Irish economy for resisting that are proving so effective that it is probably just not realistic to expect it to happen other than at a glacial pace.

California temporarily issues IOUs to pay its local debts, salaries etc sometimes when it cannot borrow more money. You could do a similar thing in Ireland but given the additional difficulties, it might be very useful to actually mandate that those IOUs could be used for some local purchases. You might put a redemption date on them – say a promise to pay the bearer 1 Euro in twenty years time.

@Dreaded_Estate

Simple question, do you believe that Greece, Ireland and Portugal will get through this without some debt restructuring?

JTO again:

Fair question. I have no idea. I can not predict the future. Neither can anyone. Your own forecasts for residential rents in 2010 were somewhat wide of the mark. You predicted that they would fall by 10 per cent. They stayed flat. The future is inherently unpredictable. I do not pretend to be able to predict it. But, neither can you.

In relation to Ireland defaulting, it is ultimately a political choice and a moral choice, not an economic one. Ireland has absolutely no economic need to restructure debt or default. Ireland has a record of high economic growth going back over half a century, which is unparallelled in the EU. Even achieving growth one half its long-term average would result in the debt problem melting away within a few years. But, it ultimately depends on how successful loons like McWilliams and Kelly are in panicking the public into going down the political and moral route that they advocate.

Debt interest repayments are much smaller as a percentage of GDP/GNP than in the 1980s. There was no default then. Real GDP/GNP per capita is 3 times what it was in the 1980s. People are far better off now than then. If the previous generation, which had a standard of living one third that of the current generation, and which had far lower personal wealth, far worse housing conditions, far poorer employment prospects, far lower education levels, far poorer infrastructure, far lower social welfare benefits, far higher taxes, and so on, not to mention a war in the six counties, if they did not contemplate defaulting on the country’s debts, which were greater then than now, then there is absolutely no reason why the relatively well-off current generation should do so.

In addition, looking at the current performance of the economy, there is an emerging balance-of-payments surplus (meaning that Ireland Inc’s net debt is now falling), manufacturing output and exports are soaring, inflation has been the lowest in the EU27 every month for almost 4 years, competitiveness is rapidly improving, FDI investment is growing rapidly, tax revenues are ahead of the December 2010 budget target (remember, all the pro-defaulters claimed back then that the austerity package meant that the December 2010 budget target for tax revenues could not possibly be met – I’m not even sure that you weren’t among them), monthly redundancies have been falling continuously for 2 years and are now half 2009 levels, monthly job vacancies (as reported in Irish Employment Monitor) have been rising continuously for 2 years and are now twice 2009 levels, the live register has been falling almost every month since September, agricultural incomes are soaring, tourist numbers are recovering, and so on. Hardly supporting evidence of Messrs McWilliams and Kelly’s view that the economy is collapsing.

Regarding overall economic growth, both McWilliams and Kelly have said repeatedly that GNP is the aggregate that matters. Thus:

David McWilliams wrote:

“Forget GDP – As Constantin Gurdgiev points out – it is GNP that actually matters because that is a more realsitic figure of the income that is kept accumulated.”

Morgan Kelly wrote:

“Gross National Product (GNP) is a better measure than GDP (gross domestic product) of the value added accruing to residents of the country.”

So, they both say that it is GNP that measures how well the economy is performing. But, the latest CSO figures show GNP up 4 per cent between 2010 Q1 and 2010 Q4. Their response is to simply ignore the GNP figures and claim that the economy is in meltdown. Perhaps you can explain the logic (a concept to which northerners attach much greater importance than southerners) of Messrs McWilliams and Kelly both saying that GNP is the aggregate that matters, then, when GNP grows by 4 per cent in nine months, both turn around and say that the economy is in such a state of meltdown and ruin that the only course of action which can save it is the drastic one which they are now advocating.

So, I dismiss completely the economic arguments for a default, euro-exit, or whatever. And I repeat that those financial journalists and celebrity economists, who advocate it, should have their bank accounts opened to public inspection, so that the public can judge whether or not they have any financial stake in advocating it.

However, as I said above, it is ultimately a political and moral choice and, clearly in recent decades, as the amoral, anti-nationalist, anti-religious, corrupt, and utterly useless Dublin 4 mentality has strengthened its control over the Irish media, the chances of the public being panicked into following the course of action that loons like McWilliams and Kelly advocate, are increased. So, I don’t rule out the possibility that they could win, although, on balance, the probability is that they will not. However, the fact that these loons are given the time of day at all is an indication of a serious malaise in southern society. I am posting from what is theoretically a part of the U. Kingdom, where debt as a percentage of GDP and the budget deficit are very close to the levels south of the border, although, unlike south of the border, the balance-of-payments is still in deficit. Yet, the idea that northern equivalents of Messrs McWilliams and Kelly could spring up, scattering manic predictions of doom all over the place and and advocating courses of action so drastic and absurd that the economic reputation of the region would be destroyed for a generation, is laughable. It simply could not happen – probably something to do with the Northern Protestant ethic, which, whatever its faults, certainly equips one to spot chancers, spoofers, and snake-oil salesmen, when they turn up.

Sorry – should have attributed above -Timo Soini in the WSJ online

Timo seems to be following DMcW and MK.

“Fortunately, it is not too late to stop the rot. For the banks, we need honest, serious stress tests. Stop the current politically inspired farce. Instead, have parallel assessments done by regulators and independent groups including stakeholders and academics. Trust, but verify.

Insolvent banks and financial institutions must be shut down, purging insolvency from the system. We must restore the market principle of freedom to fail.

If some banks are recapitalized with taxpayer money, taxpayers should get ownership stakes in return, and the entire board should be kicked out. But before any such taxpayer participation can be contemplated, it is essential to first apply big haircuts to bondholders.

For sovereign debt, the freedom to fail is again key. Significant restructuring is needed for genuine recovery. Yes, markets will punish defaulting states, but they are also quick to forgive. Current plans are destroying the real economies of Europe through elevated taxes and transfers of wealth from ordinary families to the coffers of insolvent states and banks. A restructuring that left a country’s debt burden at a manageable level and encouraged a return to growth-oriented policies could lead to a swift return to international debt markets.”

@Peter

You make a forceful point – a mechanism of Europe taking our taxes directly to service the interest on their money would not make much difference really.
I am not sure about this – but when the Goverment said back in the autumn that it had enough cash to continue for some time and was subsequently ambushed by the ECB.
Was in counting tax receipts or did the NTMA not have the bank paper ?
I am sure the NTMA must have the paper first – tax receipts merely measure the falling velocity of money

It may be a event that may prove my point or perhaps not.
I am sure Karl or John must know.

Anyhow if the goverment can or cannot access tax receipts and the money it obtains is external – surely over a period of time the amount of money in the economy would decrease to service the interest.

A solution to this is to use internal money to fund the state and recycle the interest income rather then see credit deposits disappear as they become money and then disappear to the continent.

Try to imagine a Irish economy where all deposits are goverment money and the ECB is left with the assets – there would be no credit to pay for its “assets” and it would have to take a loss while we peserve the quanity of money in our economy.
Chicken and egg maybe right however.
I guess theres no point in getting our knickers in a twist about this as the ship is sinking anyway

@christy

grins, this thread is open until 2013, when the germans and french got what they wanted.

@ Christy

‘I wonder who will get the last word in on this thread?’

Well traditionally Micky Hicky rolls in after 2 am, but Michael Hennigan is a very early riser. Hard to say. As the Dork of Cork can argue with an empty room, I’d say he’s worth a punt.

PS
Jesse cafe American engaged in a brilliant rejection of MMT a few months ago entitled “The Emperor rampant and barking”
I recommend its conclusions.
jessescrossroadscafe.blogspot.com/…/modern-monetary-theory-emperor- rampant.html

@hoganmahew

“Erm, 2 is just not true. The ICB can only lend to solvent banks. That is why we have promissory notes…”

Please go back to my post and read again what I wrote: illiquid but solvent.

3. is also patently false as the Irish government has not been permitted to deal with its insolvent banks – “you must save your banks”.

Of course the Irish government was permitted to deal with its banks. It just was not willing to accept the consequences, such as the fact that the ECB cannot, by its rules, lend to banks that are in default.

@ceteris paribus

“As former Finance Minister Brian Lenihan recently revealed, Ireland was forced to take the money.”

Can someone explain to me how exactly was Lenihan forced to take the money? Did they put a gun at his head? Did they speak rudely to him?

Nobody forced Lenihan to take money. With money quickly escaping the banking system, Ireland desperately needed money. What he means is that he would much rather had just kept financing the country and its banks from the ECB. 1% interest rate and no conditionality is politically a lot nicer than the EU/IMF program.

The problem was that the rest of Europe was not willing to offer that. It was the lack of other financing options that forced Lenihan to take the program.

@Anonymous
“Please go back to my post and read again what I wrote: illiquid but solvent. ”
My apologies – I have dancing “in” syndrome.

I wrote above,

How sure can we be that Anglo wasn’t simply a target by the same wolves who took down Lehman etc, and that they had already preempted the specific kind of text book stunt the Irish government would attempt?

One more question to the community, if I may. Why are we so sure it was the Europeans who were pulling the strings of the Irish government on the night of our banking guarantee? Would it not make a lot more sense, if it was Geithner and his buddies doing the string pulling instead? I have to say, it has the hallmark and the thumb print, of a Wall Street kind of move all over it. BOH.

@Anonymous,

Re, Look, I’m not talking about LOLR, I’m saying the markets have us at junk status, so we’re excluded from them full stop.

Re

http://www.nber.org/~wbuiter/DoN.pdf

Yep, Buiter well worth reading, eg

“A viable and dynamic EA requires

i) a much larger liquidity support facility,

ii) restructuring of the unsecured debt of EU zombie banks and recapitalisation of the systemically important ones among them,

iii) restructuring of the debt of insolvent EA sovereigns.”

But read with caution. His views are pye in the sky as far as Trichet/ECB policy is concerned. Also recent news re Geithner opposing burning bondholders in Irish banks, means the dynamics of debt go beyond the ECB to include the Fed.

Perhaps Ireland should remove itself from the euro and become the 51st dollar state and get Geithners QE funds of last February to bail us out. Lol:)

Part of the problem is that the trash appearing across the EA just can’t be hidden anymore, its even coming up out of K Club gold courses:)

@ DORK,

Sorry again but as well as not denying, I did not subscribe. Further, we have not communicated – achieved much connotational empathy – on what I was saying about theory and practise; it is a very difficult concept to convey to the classical world mindset, that they are interdependent – all is- -am effect through featuring ‘forces’, both theory and practise, though perhaps ‘the centre of intensity’ shifts back and forth between those featuring ‘forces’- -faculties. Sorry, but it’s not the easiest concept to just jump into – from a classical philosophy framework.

Perhaps an example will help: In the flat earth model of the world, the practise or ‘physical’ or ’empirical’ data was that the sun crossed the sky day after day. So, a theory about such recurrent practise may have been that the sun returns in a sun-boat to the place from whence it riseth. And so the theory and the practise … how would I say … effect through similar ‘forces’, indeed express each other. But it is a circularity.

Likewise, the classic philosophy system is a circularity, though, prior to me it did not recognise itself as such, perhaps as the flat-earthers did not recognise the inherent circularity of same. According to my philosophy system, all concepts are features of a system and do not translate or transfer across systems.

And so I would say that not only has the world a circular posture but it is not aware of its condition- -circularity. 🙂

To the main thrust of your apparent subscription to MMT:
Again, it is a model. I do not subscribe to any of its concepts – much as the concepts of the flat earth model do not feature in the helio-centric system.

The thing is to conceptualise whatever models feature, formulate new ones if possible, and then collide them and see which thrives and which decline(s).

I have a general idea of MMT. This not to comment on what is the architecture of the EU; what expresses in one facet of the nature of things as a flat earth, for another facet is- -am a helio-centric architecture.

I put forth the first principles of my theory previously and which I recommend as a model by which to operate (and which, I think, would be naturally characterisitic to Germany – though currently they largely are part of the Anglo-Saxon (rather Keyenesian) system.

Here, slightly edited:

A society’s money- -currency represents its tradable wealth (and developed as an alternative to barter). (This former is something A. Greenspan did not seem to know in a 1966 paper, where he talked of it as a means of exchange and store of wealth). Changing the quantity of money without changing the amount of wealth only changes the value of the currency and the wealth of those who hold the currency. Vica versa: changing a society’s quantity of wealth changes the value of its units of currency.
Some of this wealth- -currency is deposited in a bank for a rate of interest and the bank loans it to others for a fee, at perhaps, normally, X amount of loan per Y amount of deposit. (Are our banks now allowed only loan 80 of ever 100 euro?). If banks want more than this (capital) then they borrow the extra.
If wealth grows, then the quantity of money may be increased accordingly. (Of course if things go askew, as currently, then that’s another issue).
The quantity of money may be increased also by approx. 3% per annum to encourage keeping it working and also as a means of redistribution of wealth.
Other than that I see little reason for changing the society’s quantity of money, except perhaps in times of extreme stress such as war – in which case it is directed to survival as distinct from affluent consumption.

@ BOH,

“I have a serious question for most attendees here. Anyone here listen to Vincent Reinhart discussion on Econtalk, on his theories, that government intervention in the 1990s, came to be seen as a ‘free lunch’ for the government. That is, they could move in to guarantee debts, and the guarantees would never be called, so that the government got to be the hero without having to invest a dime.”:

Without having heard of that principle, I came up with it myself and have it posted above. Probably time and a good excuse to show it again, much as above:

* It seems to me that, should radical measures become necessary, if the EFSF (European Financial Stability Facility) took the liabilities of all the distressed banks onto its account, thereby cleaning their slates, this would not be inflationary. The (lost- -mal-invested) money which it would be taking ownership of has already been borrowed and invested- -lost and so has done its inflation.

It would however prevent- -preclude fire-sales and bargains for the prudent, which in a sense (or sphere of the market place) would have been somewhat deflationary.

There would only be inflation if the institution went a step further and recapitalised the banks. My theory of economics would not necessarily move me to do so. This then would mean that those banks that were redeemed would be effectively in poorer circumstances but those who had been prudent and savers and those on fixed income would escape being robbed.

The Facility would also take over the (inadequate) securities/assets underlying the liabilities. These should probably be moth-balled for a few years and then gradually marketed or else put to entirely novel uses.

Of course, it is not friendly to concerns about moral hazard. *

“The only trouble was, the year was 2008, and that old move was not fooling the markets any longer. Reinhard proposes that it was the saving of Bear Stearns, which really blew the whistle for the free-for-all to truly begin. “:

One has to have one’s own currency to do it. The USA could do it, Mexico, but not a party to a common currency such as our CB. However, the ECB or EFSF could do it, hence my presenting the option.

Peter Kinane wrote,

One has to have one’s own currency to do it. The USA could do it, Mexico, but not a party to a common currency such as our CB. However, the ECB or EFSF could do it, hence my presenting the option.

I suppose, the real conclusion we are coming to after 500+ comments, is that Europe tried to copy the Americans by the letter of the text book. But ended up in a very different place, because we were operating with a distinctly different toolset to that of the Americans. Is that a plausible historical analysis from where we are standing in 2011? In any case, I believe many of these issues will become more exposed as we get further away from the time and the place. I find it vaguely interesting also, that little snapshot of history, where Gordon Brown doing laps of the Atlantic ocean in his airplane to compare his notes with Washington. The conclusion he came home with was, my notes are as good or better than their’s. BOH.

@Karl Whelan
Would it be a good idea to open a new thread on the True Finns leaders article in the WSJ?

@Paul

I read it as a acceptance of its mechanics but a rejection of its real utility.

I am simple Dork and consider money merely a symbolic representation of energy yet to be used – where things get a bit more complicated is debt dynamics.
Clearly to many liabilties are chasing a too limited amount of goods and assets.
So it follows something is needed to clear the debts – either devalued goverment money replacing overvalued credit or a upward revaluation of Gold on CB balance sheets – both will probably be accepted on Euro and possibly Dollar balance sheets.
Although Buiter seems to have near epileptic financial fits when someone mentions Gold which I find quite funny
Exchanging the debt chips will perhaps make local trade more effecient again.
@Peter
You are way above my pay grade – even though I was dealing with a complex or perhaps more accuretly a nonsensical topic it does have some interest as understanding the mechanics means that we can learn to game the system more effectively and thus obtain what surplus remains from our masters

If you merely think of money as a energy flow rather then the vaguely autistic view of MMT mechanics you begin to realise that the accounting is wildly variable and dependent on a kind of monetary art rather then science.
Sometimes is best not to do something rather then inflict activity on the unfortunate patient – for example the jobs in the construction sector did not achieve a net gain in output when you factor in the inputs and physical destruction of our shared landscape which I believe inflicted real psychological scars on those of us who need the elemental rather then human landscape.
Will a forceful counterweight to the deflation now via MMT do more damage ?

We should recognize the losses through the assets themselves rather then try to hyper inflate the currency itself – this will be achieved through Gold revaluation upwards (which in my opinion will not reduce the buying power of a note too dramatically but shift the nexus of money deeper into the physical realm of energy units)
But it will kill world trade as it is presently structured – its a joke anyway with too little redundancy and not enough efficiency although it is wildly productive
Things will just have to slow down until real capital is built again.

@Eureka

Default on bank-debt is inevitable. Only a matter of how we are handled, or how we handle it. Simple enough in general terms – specifics remain open.

http://www.irishtimes.com/newspaper/opinion/2011/0510/1224296602550.html

@Paul
Did anybody tell you we have passed the economic event horizon ?

There is no escape now.
Things heat up instead of cool down in this universe – the laws of thermofinancialdynamics are different here.

Our favourite ECB member speaks…

*BINI SMAGHI: INVESTORS INSURED AGAINST DEFAULT WOULD BENEFIT
*BINI SMAGHI SAYS RESTRUCTURING `WRONG’ IN THEORY AND PRACTICE
*BINI SMAGHI SAYS RESTRUCTURING WOULD LEAD MANY INTO POVERTY
*BINI SMAGHI SAYS RESTRUCTURING OR DEFAULT `DRAMATIC’ EVENT
*BINI SMAGHI SAYS RESTRUCTURING WOULD BE `POLITICAL SUICIDE’

Where to even start with this guy…

@ DOCM,

“There is no problem with the role of the euro as a reserve currency if for no other reason that third countries do not want to be dependent on just one.”:

This does not quite seem to address my point that the USA might not like its dollar to be unseated as the reserve currency and may be disposed to act to support the status quo (especially currently when, I should think, many would see it as much less sound than heretofore) while the EZ (and others) might be disposed to act to change it and indeed these latter may be in competition with each other for this role of what may be, as I think DeGaulle categorised it, “outrageous advantage”.

@ Finfacts

Let me challenge some of your crazy claims there:

I’ve listened to the podcast:

http://www.rte.ie/radio1/todaywithpatkenny/#Podcasts

It was rather a good interview with Kenny asking good questions and DmcW giving answers unlike the reverse of that with Kenny giving the answers by himself.

The listener you mention was probably provoked to ask the information by the discussion on the flight of deposits from institutional investors and the shallow discussion of this in the general media, so perhaps this was her first time hearing of this.

So it should be good to listen to the winners and not the losers for a change who got the boom wrong, the ECB/IMF bailout wrong and continue to get it all wrong.

We’re on the brink of a deflationary spiral. And the remedies spoken of by MK and DmcW are vilified?

DmcW and MK have both attacked the guarantee as crazy. In DmcW, there was rationale there to create a window of opportunity, to prevent the flood out of deposits, to assess and deliver a structured and carefully constructed and wise approach to deal with the banks. But space was needed to assess the damage.

Because our mandarins in DoF were useless, incompetent, unprofessional, inexperienced in such matters and under the spell of incompetent and probably corrupt Irish bankers, they did not get best practice from experienced players worldwide, but allowed themselves to be swayed by the likes of Merrill Lynch stakeholder consultants out to protect the ass of bondholders, not the Irish State.

Re “All so easy: switch euros for punts; the cancellation of euro contracts would happen seamlessly — presumably with the Constitution suspended and the right to appeal to the EU Court of Justice not available as we would not be in the EU.”

No, it won’t be easy. But it will be easier than slow suffocation and strangulation of our economy as we are swayed by StockHolm syndrome to hope the ECB which has torpedoed us with the crazy ECB/IMF bailout, will come to our rescue.

RE “The claims on the prospect of a ‘massive’ export boom are laughable.”

Now let’s see, we reduce our costs and our prices through devaluation and this won’t help exports. I would expect a boom in the agri sector and opportunity for the reopening of Donegal Woolen Mills, etc and a great lift to the tourism sector and related service industry, restaurants.

Forget economic denominators, unemployment is the biggest indicator of economic health. The greatest economic stimulus we will get from leaving the EMU will be a stimulus to employment. As a huge supporter of the EU Project, a person who regards the ECB as the greatest threat to the EU, perhaps we can negotiate a way out of the European Monetary Union without leaving the EU.

We need before more damage is done, restructure our debt, leave the EMU, do PuntNua.

We should also seriously look at our relationship with sterling and perhaps examine some form of economic commonwealth union with Britain that could help reunite our island north and south; because, seriously folks, recent economic events and our response to them, has shown we are politically bankrupt as well.

We’ve spent too long in Jotunheim, land of the giants and trolls of the ECB, let’s hear more from MK and DmcW:)

@alexander anderson
“As a point of fact: Timothy Geithner was not responsible for the bail-out of AIG, but his predecessor, Hank Paulson. Nor will US taxpayers assume this burden, as the coming IPO of the company will probably result in the US Treasury reconvering all its funds used for the bail-out.”

Actually the AIG bailout was devised and organised by the Treaury Sec – which was indeed Paulson, but in conjunction with the Fed chairman Ben Bernanke and Tim Geithner who was then NY Fed President.
I am surprised you think the 85bn which the Fed supplied – remember it was not just GS who profited from this largesse at the US taxpayers expense – will be recovered in this re-IPO – where did you get that estimate. It seems to me only another mighty ponzi scheme could result in AIG recovering to that extent in 2 years – so that is another cause to worry!

@Eoin Bond
“Where to even start with this guy”
I would start here
“BINI SMAGHI SAYS RESTRUCTURING OR DEFAULT `DRAMATIC’ EVENT”

A number of people (including JtO) have made the point on this thread that the real reason why the ECB are insisting on us bailing out the banks is because if we don’t we will trigger the “CDS death star” as Greg calls it. Is this what LBS means by “dramatic event”?

@ Michael Hennigan

I see you have been making some very valid critiques of David McWilliams.

For what its worth in my opinion is that he realises he was the brainchild of the worst economic decision ever implemented in any economy and he is trying to get us to default ever since to try and undo at least some of the damage.
His articles have been way more political than economic.
You are correct to pull him up on factual errors but as other economists have said its way more political than economic at this stage.

@ Colm

i think the reason most people question McW’s suggestion of an “exports boom” is that we already have an export boom despite the strong currency we are currently faced with. It’s not the issue, and it would seem heroic for exports, tourism apart, to get any boomier than they currently are. What are exports here as a % of GDP, 100%? Can we reasonably expect them to get much higher in the short term even if we ‘gained’ a currency devaluation? The negative side of that event in terms of import inflation, capital flight, and solvency issues at anyone with non domestic-law covered debt would be enourmous. Add in a collapse in domestic demand from government spending/tax hikes being pushed through to close the deficit in double quick time, and you have all the ingredients of an economic collapse.

@JTO

“It doesn’t take much leap of the imagination to believe that the “large investors”, that Lorenzo is referring to, will actually pay financial journalists and celebrity economists to argue in the media in favour ot the course of action that they “stand to benefit greatly from”.”

Of course this type of thing never happened during the boom when things were on the way up……..
There are two sides to every biscuit.

@Michael Hennigan
I appreciate that Geithner’s vetoing the IMF haircut proposal may not be true but I find it extraordinary that it has not been denigned. We know that the G7 finance ministers conference call took place. Why did it take place? What has a European bailout of a European government got to do with Geithner? The IMF is run by a governing board — supposedly — yet, if the story is true, Geithner simply ignored the IMF board and ordered Europe to do his bidding. If this story is only partially true then it raises questions about who is running Europe. Perhaps a name change is in order. It should be called the United States Monetary Fund.

@Colm

If this analysis holds, then rather than the ECB crowing about how magnanimous it has been to Ireland, it should instead acknowledge that it is only reaping what it initially sowed when it allowed its preferred post-ECB employers to run riot.

Preferred post-ECB employers!!. Nicely phrased.

Now there is moral hazard with a capital H.

@ JTO
I have no doubt that there is an element of truth in what you say. Would be very surprised if there wasn’t some management of information (or misinformation).
This could all be part of a play on the Euro – buying it up and shorting it on the way down – anyway who knows the games that are going on!

@Colm

as I said many times, we all here need much better and interdisciplinary council, as it stands, the mismanagement of EU politicians, and ideological driven Central Bank policies succeeds to push the peripherals back into a quasi 3rd World status.

Prof. Cheru
http://www.nai.uu.se/research/researchers/fantu_cheru/cheru_cv.pdf

The way I see it, what were words of truth by Fantu Cheru (UN Human Rights Commission) describing the former World Bank structural adjustment programs, are equally true words today, describing IMF/EU policies:

“They [are] the expression of a political project, a deliberate strategy of social transformation on a global scale, whose aim is to make the whole planet a playing field in which trans-national corporations will be able to operate with total impunity. In other words, the structural adjustment programmes act as a “transmission belt” to facilitate a globalization process that is based on liberalization, deregulation and diminishment of the State’s role in national development” . In short, they are part of the neo-liberal counter-revolution – a far cry from their claimed objective of eradicating poverty.

@irishmuffin
http://www.nakedcapitalism.com/2011/05/on-the-treasurys-curious-denial-that-geithner-blocked-deal-on-irish-debt.html
quoting the Indo:
” The US government last night rubbished a claim that one of its most senior officials “torpedoed” a plan to allow Ireland to write-off some of its bank debts….

Last night, a senior US official said this report was “inaccurate”.

The official pointed out the ECB and the European Commission (EC) did not want to impose haircuts on bondholders who loaned money to Irish banks.

“The ECB and EC were both dead opposed and they are decisive. The US is not a decision maker on European issues,” the official said.”

And commenting, Yves Smith says:
“Ahem. Notice the statement. It does not say that Geithner was against the restructuring, merely that his opposition made no difference.”

@ Eamonn Moran

Despite the experience of the State banking guarantee, we’ve a great deal of bravehearts proposing consequential remedies from their armchairs.

@ Colm Brazel

‘The export boost we need is that that will generate local employment, a service industry to back up tourism, even to prod the startup of local manufacturing again.’

You are clearly out of your depth on this issue. It’s as vacuous as a line in a political manifesto.

Your’e not alone in assuming markets can be easily won when spoofing on exports.

Even at a punt for 20 euro cent guarantees nothing.

Greetings,

@ JTO

I certainly hope that exports improve further – until the government thinks of how to kick-start the domestic market, it’s all we’ve got!

BTW, regarding your later comment about rumours being funded by those interested in Ireland defaulting (the ubiquitous “short sellers”) … I’d have thought that the smart money would be on Ireland getting a 1% rate reduction on the bailout, since it’s the easiest and most likely option.

In fact, there’s a case for Ireland getting slightly more than 1%, due to the fact that we’re – marginally – not as badly off as Greece.

[I must say that I don’t quite trust the ECB’s impartiality – it’s in their best interests, politically, to ensure that all the members stay together than break up into a collection of states. Otherwise, there’s no hope of their goal: a United States of Europe.]

@ hoganmahew, grumpy, The Alchemist, Overseas commentator (if I’ve left anyone out, forgive me!)

I take it that you’re all against leaving the Euro/EMU, for various reasons.

May I point out that I’m not suggesting that as a means of “sticking it” to the EU/ECB – just that, given the likely default due to near-draconian requirements, if one wishes to honour one’s debts, one may need to give oneself elbow-room whilst urging trust from one’s creditors. I know – with “junk status” bonds, that doesn’t sound possible – but that was due to the size of the bailout/the interest rate … and despite our recently meeting the requirements set by our creditors.

As Colm Brazel says later…

“We need before more damage is done, restructure our debt, leave the EMU, do PuntNua. “

In that order of priority.

Although I agree with you, Overseas commentator, that a better way would be to look at progressive tax reform – as Vincent Browne has suggested – along with addressing the public sector payroll (not to mention, public spending, per se).

Kindest regards,

James

Reading Dani Rodriks latest The Globalization Paradox Chapter 9,

re: the Argentinian solution. We are now Argentina 1999, we want to get to Argentina 2011 (ish) without the worst bits, and by reading the play book, we can. I think this is the angle Kellys article implies, taken to its (il)logical conclusion ?

@JtO

“It doesn’t take much leap of the imagination to believe that the “large investors”, that Lorenzo is referring to, will actually pay financial journalists and celebrity economists to argue in the media in favour ot the course of action that they “stand to benefit greatly from”. I am certainly not accusing any particular individuals. But, if they opened their bank accounts to public inspection, then we’d know if they have any financial stake in the drastic courses of action they advocate. If they have none, then their arguments will carry greater weight, so it is their own interest to do so.”

This is an interesting proposition. Have you ever advanced it before, and if yes, what did you achieve?

Greetings,

@ clintideal

That’s essentially what I was suggesting earlier, reinstating the Punt (Nua) and giving us more room to manoeuvre (ie, get more from the IMF and less from the ECB) – though the consensus appears to be that the cons outweigh the pros.

Kindest regards,

James

Greetings,

@ clintideal

Again, if I’m inferring correctly from the experts here, we should – unless the IMF decide to play hard-ball with us, in which case, we wouldn’t be able to turn back to the ECB for help!

The problem, which is the crux of this, is that we’d have burnt our bridges with any other source of funding, which is why the cons outweigh the pros, it seems.

Kindest regards,

James

@James Burke
No, I am not leaning against the euro. I think leaving it would be a disaster.

@James Burke and clintideal
We have already spent our a good portion of our IMF allotment… what remains wouldn’t fund the state for a year.

Response to AMcGrath:

To date AIG has paid back USD40 billion plus another US6.0 billion in interest and expenses to the USTreasury.
Reliable estimates put the price of the AIG IPO in the upper 20s. A price of US27.80 would provide the USTreasury with the 47.0 billion dls it invested in AIG shares ( breakeven ). Even if the UST does not place all the 1.66 billion shares it bought, but only 850 million, the remaining shares could quite easily be sold at around that price from here to year-end.
So, there you would have US87.0 billion paid back ( plus interest ).
I believe the total drawdown of AIG from TARP funds was around 130 billion. However, if I am not mistaken the remainder is in CMOs which have been sold to the Federal Reserve, or are relatively easy to realize on the markets, especially as the balance-sheet and business prospects of AIG continue to improve.
To provide a more precise breakdown would take me a little time, but I hope the previous info offers sufficient back-up of my assertion that US taxpayers will recover all the funds employed for the bail-out of AIG.

In The Big Short, Michael Lewis recounts how the smart guys who owned the naked CDS bets against sub-prime mortgage were worried that the default woudl have such dire consequences that the Fed and the US state would step in to stop the default, thereby stopping the CDS bets becoming payable.

Perhaps Geithner has decided that in the case of bets against EU banks and sovereign bonds the US does need to step in to prevent another tsunami of CDS losses such as previously his large US institutions.

Of course if you buy a lot of toxic rubbish, and then flood the system with liquidity, then you make a ‘profit’on your investment, as you’ve created the rally. Doesn’t make it a good deal for taxpayers or whoever, once you take the costs of the entire bailout (the totality of which propelled these investments into profit) into account…so these narrow accounting exercise (while favoured by the banks, which like to show how cheap the bailout was and what a good deal for the govt) are entirely misleading.

@Anonymous

Now, one could debate when was the last time any Irish bank was financially sound. But suppose the banks would have gone on and defaulted on their senior bonds. Would there be any way to argue that a “financially sound” institution would default on its bonds? Of course not, and obviously the ECB would have had to stop its lending to a defaulting bank.

When a company which turns an operating profit but has a wrecked balance sheet restructures its debt thoroughly enough to bring its balance sheet under control, it should be fairly unarguable that 1) the company was insolvent, 2) the company is solvent. So if the ECB’s intention is to lend only to companies which are solvent but illiquid (and have banking licenses), then it would 1) refuse to lend to the Irish banks before they fully restructure their debts, and 2) agree to lend to them immediately after they do so. The fact that it has threatened to do more or less the opposite of this strongly indicates that it has other intentions, most likely to 1) give “liquidity” funding to insolvent banks and 2) get away with it.

So far, they have not done that, because everyone else tells them they must stay in Ireland.

To be blunt, I’m astonished by the various people who have suggested that the ECB had to be tricked or cajoled into climbing on the No More Lehmans bandwagon. That would be hard enough to believe even if we didn’t have Dr. Bini Smaghi shouting in public about the unthinkable systemic consequences of losses on Eurozone senior bank debt. Of course the ECB, like everyone else, would rather someone else pay for bailouts – but Frankfurt has demonstrated that it will support insolvent institutions if the alternative is default on systemically-important debt, and work on passing on the hot potato later. Of course this is deeply illegal, for just the reasons you mentioned, but No More Lehmans is of course a higher law.

Of course by now the ECB has a second reason to stay in Ireland: to avoid realising the losses it has made already. Even if that was their only actual reason for staying (and I don’t believe so – I think they’re still nearly as scared of systemic risks as they ever were) it could hardly be described as staying because everyone else demanded them to.

Overall, I can’t see how Morgan Kelly’s account is at all misleading.

A well-respected economist, who requested anonymity, believes there is a “real possibility that the ECB would not continue to support the Irish banks and instead would put everything into supporting the rest of Europe – essentially what the US did with Lehman Brothers. Allowing Lehman’s to collapse was perceived as a mistake, but it also sent an important signal. I really don’t see where Morgan Kelly is coming from.”

http://www.irishtimes.com/newspaper/weekend/2011/0514/1224296917316.html

“Well-respected” ANONYMOUS economists annoy me! “Well-respected” ANONYMOUS economists spinning the Lehman’s Card REALLY annoy me!